Oil Pricing Reform Spearheads China's Marketization Push

China's latest oil pricing reform brought the country one step closer to the full marketization of energy pricing and signaled the government's determination to veer toward a more market-oriented economy.

The National Development and Reform Commission (NDRC) on Tuesday announced a new pricing mechanism for refined oil products in an effort to better reflect changes in the global oil market.

The new system shortened the price adjustment cycle from 22 working days to 10 working days, canceled a 4-percent floating band for oil price changes and adjusted the varieties of crude used to calculate price changes for domestic oil products.

"Just a few days after the new cabinet took office, the government's quick action showed its determination to give full play to the role of the market," said Shi Dan, an expert with the financial strategy institute under the China Academy of Social Sciences.

Prior to the reform, domestic fuel prices were adjusted when prices for Brent, Dubai and Cinta crude changed by more than 4 percent over 22 working days.

The long adjustment cycle has been taken advantage of by distributors and consumers, who have profited by hoarding oil products when international oil prices register large rises and selling them after government price adjustments.

The new pricing rule is a giant step toward the marketization of domestic oil products, as it can reflect changes in international crude oil prices in a more timely manner than before, said Shi.

Due to its lack of a full-fledged market mechanism, the time has not come yet for China to fully marketize the pricing of resource products.

"However, the government is gradually loosening its control to let the market to play a bigger role," Shi said, describing this as the "general trend."

On Wednesday, an executive meeting of the State Council chaired by Premier Li Keqiang specified key tasks for the government to accomplish this year, saying the priority of the country's price reform will be on improving the pricing mechanism for resource products.

The government work report released earlier this month also said the country will promote price reform this year and leave room for resource pricing reforms while setting its target for inflation control.

Analysts say the market-oriented reforms for the pricing of coal, natural gas and electricity are also likely to make progress this year.

Further pushing forward price reforms is a pressing task for China, because a poorly functioning pricing mechanism will impede China's drive to steer its economy toward a green and sustainable growth pattern, said Zhu Junsheng, vice president of the China Renewable Energy Society.

Zhu cited the thermal power sector as a good example of what can happen when a pricing mechanism fails to function. Government-led pricing in the sector contributed to severe pollution in past years, as companies lacked incentives to upgrade facilities to reduce pollution.

The energy sector must follow the general direction and requirements of the country's economic restructuring, as it is an integral part of the market economy, said Shi Dan.

"The government should intensify supervision over the pricing of sectors with natural monopolies and gradually loosen market accessions, but give full play to the market in competitive sectors," she said.