China fuel hike shakes up markets

International oil prices fell, shares of Chinese petroleum-related companies jumped and many of the country’s motorists rushed to fill up their tanks after Beijing’s unexpectedly early decision on Thursday night to raise petrol and diesel prices by upwards of almost 17%.

More price hikes may follow in the next six to nine months as the increased prices still remain below international levels, analysts said. An increase had been expected after the Beijing Summer Olympic Games concluded in August.
The increases could add further to inflationary pressures in the country, which Beijing earlier sought to mitigate by capping as of June 19 the wholesale price of coal, a key fuel for power generation. The government also pledged to subsidize vulnerable groups. That will cost the government an additional 19.8 billion yuan in subsidies, with 12 billion yuan going to the fishing, forestry, public transport and taxi sectors and 7.8 billion yuan given to farmers, Beijing announced on Friday.

A 10% increase in the diesel price should raise China’s headline consumer price index (CPI) by about 0.4 percentage points, Frank Gong, an economist at JP Morgan, said, while “the electricity price hike is expected to influence the CPI by around 0.3-0.5 percentage points”.

Before the price increases, June CPI was expected to show a 7.3% gain this month and in July a 6.4% rise, Gong said. June and July CPI inflation “is still expected to be less than 8% and thereafter it should still trend downward and more price liberalization/hikes should be down the road,” Gong wrote in a note.

The fuel price rise, while adding to pressures to increase energy efficiency, may boost inflation by as much as 1 percentage point this year, Bloomberg reported, citing a survey of seven economists. The survey’s bottom estimate suggested a 0.13 percentage point boost.

Asia Times