The government may consider further oil price hikes and pricing deregulation early next year following its oil price rise in June, analysts and industry insiders say.

"With the successful conclusion of the 2008 Beijing Olympic Games, Chinese policymakers will refocus on macroeconomic management, so energy price normalization will likely feature prominently in the post-Olympic policy package," Morgan Stanley analyst Wang Qing tells China Business Weekly.

Chinese oil refiners have suffered huge losses due to the gap between international crude oil prices and domestic prices of refined petroleum products, which are still controlled by the government.

The government raised gasoline and diesel prices by 17-18 percent in June, while electricity charges for commercial units went up by 0.025 yuan per kWh from July 1.

But refined oil prices are still lower than the international market level. For example, diesel in China is sold 25 percent cheaper than in the United States and 50 percent cheaper than in Japan and Singapore.

Jin Sanlin from the Development Research Center of the State Council says refined oil prices are likely to surge 5 to 10 percent, which might cause CPI to increase by 0.1 percent, even taking higher raw material costs into account. "So the oil price hikes will not have a big impact," he says.

Although all experts and industry insiders agreed that China's leadership had achieved the consensus on putting refined oil prices into market operation, they still thought the government might not consider further price hikes until early next year.

Tong Lixia, a researcher from the Ministry of Commerce, says before the consensus turns into reality, the government will gradually boost refined oil prices to bridge the gap with the international market.

That's because the main problem the government faces now is about how to prevent an economic slump, while oil prices hikes will restrict consumption and increase inflation. "Raising oil prices is contradictory to the stimulation of economic growth, so it is not a good moment for price deregulation now," she says.

Jin Sanlin agreed. He says although it is possible that there will be further boosting of energy prices this year, it is not the best time to put the prices in the hands of the market. "Next year will be more reasonable," he says.

But chief economist with Galaxy Securities Zuo Xiaolei says price reform should be put into place promptly. "China hasn't suffered double-digit inflation like its neighbor Vietnam, so it has the capacity to bear the energy price restructuring," she says.

Morgan Stanley's Wang Qing also says CPI inflation may have dropped from 6.3 percent in July to 5.5 percent in August, paving the way for another round of energy price hikes in the coming months.

Morgan Stanley suggests if the prices of refined products, electricity power and coal are raised by 10 percent for the second round, it will cause PPI inflation to increase by 0.88 percent, 0.44 percent and 0.23 percent respectively, while CPI inflation will increase by 0.35 percent, 0.52 percent and 0.03 percent respectively.

Morgan Stanley employed a 62-sector model to quantify the impact of energy price hikes. The sectors that are most negatively affected by refined fuel price hikes include gas production, coking, chemicals, and transportation, while the sectors that are most negatively affected by power tariff and coal price hikes include coking, non-metal minerals, and chemical fertilizers.

"Although the impact of energy price normalization on CPI inflation seems affordable, the energy price will not be raised by 10 percent. Refiners have been under less pressure recently due to a sharp fall in the price of crude oil," says Wei Weixian, an economist from the University of International Business and Economics. The international crude oil price recently tumbled below $108 a barrel from $147 per barrel in July.

"And many industries have suffered from rising prices of raw material costs and labor costs, so I predict the energy prices will not surge to 10 percent in a short period, probably up to 5 percent," he adds.

Economist Cai Zhizhou from Peking University disagreed.

"Energy prices rising by 10 percent is normal and will not have a big impact on CPI inflation," he says. "And energy price hikes are a crucial method to optimize the industry structure, so that hi-tech and environmentally friendly industries will distinguish themselves."

(China Daily September 15, 2008)