Going up and up

By Fu Chenghao  |   2008-6-21  |     NEWSPAPER EDITION

CHINA takes the bold step of reforming energy prices by raising fuel and power costs

The government's move to raise fuel and power prices, even at the risk of stoking an already decade-high inflation rate, marks a key step forward for China in reforming energy prices and improving resource allocation.

The rise of up to 18 percent in gasoline and diesel prices was the sharpest ever, although most analysts had expected the government would hold back on the increase until after the Beijing Olympics.

"This shows the government resolution in marketing the energy sector and should affect long-term economic development positively," China International Capital Corp economist Ha Jiming said in a report.

CICC added this underscores the state's effort for better energy conservation and efficiency and could benefit sectors such as new energy technologies and environment protection.

The rise, announced late on Thursday, came ahead of a key meeting of major oil producing and consuming countries tomorrow in Saudi Arabia and following similar moves in some other Asian nations. And it immediately sent global oil prices lower on expectation this would depress China's demand.

The capped, regulated energy prices have formed a distorted market, where fuel shortages have been repeatedly seen as unprofitable refineries reduce production. Critics say the state subsidy to refiners actually end up subsidizing other parts of the world given China's role as a main manufacturing-export base.

Ha said low fuel prices are not in line with China's own interests as soaring crude prices could eventually hurt its financial health. Prices still lag crude costs.

Some economists said the direct impact of the price rises on inflation should be small as refined oil only accounts for about 0.5 percent in China's consumer price index basket, according to Goldman Sachs' Liang Hong.