China Tinkers with Fuel Price Formula

China's new government is trying to deal with complaints about fuel prices by easing, but not abandoning, state price controls.

The delicate maneuver announced by the National Development and Reform Commission (NDRC) on March 26 would shorten the time period for price adjustments to "better reflect changes in the global oil market," the official Xinhua news agency reported.

Under the system in place since 2009, retail fuel prices were raised or lowered only after 22 working days if international oil costs varied by at least 4 percent.

The rule was designed to stem steep losses to China's refiners from selling fuel at state-controlled rates, while protecting the public from sudden shocks from soaring oil costs.

But like all half-market measures, the system had its pitfalls.

Distributors and dealers had plenty of time to read the signals and keep fuel off the market before expected price hikes, giving rise to hoarding and shortages.

The new rules shorten the waiting period to 10 days and do away with thresholds for making price changes, unless oil costs vary by less than 50 yuan per metric ton (U.S. $1.10 per barrel).

The revision could make China's consumption more responsive to market forces of supply and demand, but it also reflects the government's reluctance to abandon the safety of state price controls.

Further reforms needed

The policy is seen as a work in progress.

"I believe the pricing mechanism will need further reform in the future," said Kevin Jianjun Tu, senior associate in the energy and climate program at the Carnegie Endowment for International Peace in Washington.

The effect of the latest half-measure has yet to be seen, but it suggests a cautious approach on the part of the new government that took office last month.

"The price of energy is considered to be tied to social stability, so it's very difficult for the government to entirely give up its pricing power," said Tu.

The move may also signal that China's new leaders will be sensitive to public complaints.

The last time the NDRC announced a fuel price rise in February under the old 22-day rule, consumers responded angrily on social networks after learning that prices had just been lowered in Taiwan.

"At a time when the mainland public are increasingly sensitive about price hikes, news of such an outright contrast immediately landed like a torpedo in cyberspace," Xinhua commented.

This time, the NDRC made sure to announce that fuel prices would be reduced again as it launched its new 10-day rule.

Gasoline prices were cut by 310 yuan per ton (US $0.16 per gallon), a fraction more than they were raised in February, suggesting a political component to the calculation.

Response to new raises

One question is whether consumers will be as pleased with the new policy if prices are raised again after the next 10-day period.

"I suspect most people will still complain when prices go up," Tu said.

In that case, the government may intervene and override the pricing mechanism, as it has in the past to control inflation and fears of social unrest.

Price hikes "may be suspended, postponed or downsized in special cases, such as sharp rises in domestic inflation, emergencies or dramatic swings in global oil prices," Xinhua reported, quoting the NDRC.

Under those conditions, it is unclear how much the new formula will differ in practice from the old system of price controls, or how much it will help to reduce excess fuel consumption, energy waste and smog.

Anticipation of price changes for energy has recently shown its power over consumer behavior.

On March 27, the NDRC issued a statement calling reports of a rise in natural gas prices "groundless" and "entirely untrue," Dow Jones reported.

The agency moved quickly to quash rumors after China Business Times reported that natural gas prices would jump 30 percent, prompting panic buying and long lines at gas filling stations in some provinces, according to state media.

Expectation has grown that the new government will raise prices to cover losses from selling high-priced imported gas at fixed domestic rates.

The NDRC stressed that any price hikes would have to be preceded by public hearings.

China's Global Times reported on April 1 that the Changchun Development and Reform Commission in northeast Jilin province planned to boost household gas prices by 40 percent, but the increase followed a public hearing on Feb. 25, the paper said.