China will stop tax rebates for exports of gasoline and naphtha for the rest of this year to ensure domestic demand is met.

The country will scrap the preferential tax policy for exporters of motor and aviation gasoline and naphtha from tomorrow to December 31, the State Administration of Taxation said in a statement published on its website yesterday.

Gasoline exporters in China now enjoy an 11 percent tax rebate and a tax deduction of 13 percent for exports of naphtha, a raw material for the production of ethylene.

Industry analysts said the move aims to secure domestic supply of refined oil, which in previous weeks fell short in certain areas of south China such as Guangdong Province.

"The gap between domestic and international prices of refined oil has driven some of the country's smaller oil dealers to focus on the overseas market, where they can earn more," Zhu Hongren, deputy general director of the Bureau of Economic Operations under the National Development and Reform Commission (NDRC), said.

In previous years, China enjoyed a surplus in refined oil and naphtha production and encouraged their export. But the cap on prices for refined oil has changed things. Also, the rapid expansion in ethylene production by oil giants such as PetroChina and Sinopec has pushed domestic demand beyond supply, Gong Jinshuan, a senior analyst with China Petroleum Corp (CNPC), the parent company of PetroChina, said.

The Chinese government imposed controls on domestic refined oil prices to stave off inflation.

China exported 3.34 million tons of gasoline in the first half of this year, up 31.6 percent, but refined oil imports dropped 20.9 percent for the six-month period, according to statistics from China Customs.

Meanwhile, the country exported some 1.2 million tons of naphtha from January to June, a rise of more than 200 percent year-on-year.

Although the NDRC raised domestic prices three times this year to keep in line with rising international prices, the lack of a market pricing mechanism in the country's refined oil sector has led to artificially lower gasoline and diesel prices when compared to international prices.

Crude oil surged to a record high of US$70.80 a barrel on Monday in after-hours electronic trading on the New York Mercantile Exchange. Prices are 61 percent higher than a year ago.

Cao Xianghong, senior vice- president of Asia's largest oil refiner Sinopec, told reporters on Monday at a petrochemical conference that the government-controlled refined oil prices are some 1,700 yuan (US$209) less per ton than the global average.

"A reformed pricing mechanism for refined oil to close the gap with the world crude prices is imperative," Cao said.

Echoing Cao's view, Deng Yusong, a deputy division chief at the Development Research Center of the State Council, added that subsidies should be given to economically disadvantaged groups such as farmers and the public transportation sector.

(China Daily August 31, 2005)