Saturday, March 25, 2006

Latest news, oil price restrictions have been lifted. A, this means the government is not overly worried about inflation at this point. B. this shows another classic central government trick to push the cost of reform down to the local governments. If the cabbies go on strike, the local government will have to pay for subsidies to them. I wouldn't be surprised that subsidies to sub-national level SOEs will come from local governments as well. Here, the State Development Bank might step in with a few loans.

I wonder if this will increase or decrease Chinese import of oil. On the face of it, the answer of course is that Chinese demand for oil will decline due to higher prices, but the refineries are now more eager to process oil than before, so that might neutralize some of the effect of higher prices. But I doubt that would be greater than the effect of increasing prices for consumers, so China's balance of trade will improve even more, unless they revaluate the currency to increase the buying power of domestic oil consumers.

Govt raises retail prices of processed oil
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China announced Sunday its decision to lift the prices of processed oil as of March 26 while setting up a mechanism to offer some subsidies to disadvantaged communities and public service sectors.

In a circular made public Sunday, the State Development and Reform Commission, which regulates energy prices, said the producer prices of gasoline will be raised by 300 yuan (37.5 U.S. dollars) per ton while that of diesel oil will be up by 200 yuan per ton.

To offset the impact of the price hikes to communities sensitive to higher prices, the commission said China's State Council has decided to launch a mechanism to subsidize some of the communities and public service sectors.

The recipients of the subsidies include grain growers, fishermen and fishing firms operating and farming offshore or in inland areas, using oil-driven fishing boats, state-owned forestry enterprises and nurseries of forestry centers, urban public transportation firms, said the commission.

It said the government will pay the unspecified amount of subsidies directly to grain growers to mitigate the impact of the price hikes of diesel oil and chemical fertilizers and other agricultural production materials.

For operators of rural passenger shipping business, the commission said the government will reduce the impact mainly through such measures as adjusting the charges of transportation, and offer proper amount of subsidies to those in difficulty.

The commission said local governments will offset the increased financial burden on taxi drivers in the urban areas mainly through readjusting the charges of transportation and imposing surcharge on fuel oil.

It said local governments may offer provisional subsidies to taxi drivers in the urban areas if they are unable to readjust the charges in the immediate future.

The Chinese Government has ordered various localities and government departments to implement the measures on subsides while price regulators at various levels should improve inspection and supervision of prices of processed oil to maintain the stability of the oil prices.

Energy sector is one of the very few areas that Chinese Government has yet liberalize price control since China began to build a market economy.

The commission said China's current prices of processed oil are far below that on the international market, which is not helpful to oil refineries in China, to ensuring adequate supplies and to improving energy efficiencies, thus having negative impact on the stable operation of the economy.

Prior to the price hikes, the retail prices of domestically processed oil is about 43 U.S. dollars, while that of crude oil on the international market stands at around 60 U.S. dollars, an official with the commission said in an interview with the press.

The artificially lower prices have resulted in heavy losses of domestic refineries and made it difficult for the oil sector to ensure domestic supplies.

The central government has been slow in raising processed oil prices in the past two years to reduce the impact of higher oil prices on the disadvantaged communities and public service sectors, said the official.

The official said imported oil accounts for over 40 percent of the country's oil consumption, and changing oil prices on the international market are having growing impact on domestic oil market and prices.

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