The current price scheme is unable to cushion the impact of price fluctuations, which dampens the stability of the national economy, said Han Huifang, deputy director of the Pricing Department of the State Development and Planning Commission.

"The government should use the tax to keep the price for refined oil products relatively stable and drop the tax when the crude oil prices get high, and raise it when it tailspins," said Han in a speech at China's Petroleum Distribution and Retail Summit in Beijing Tuesday.

But she said the commission has not set a specific time for such a tax system.

At present, the government levies a fixed 17 percent value-added tax for retailed gasoline and diesel. As part of the tax reform plan, the government has said it was mulling over imposing a similar fuel tax on all gasoline and diesel, which could raise the current price by half. But the scheme was repeatedly delayed, partly due to international oil price fluctuations.

Han also said the government should impose different tax standards for gasoline and diesel, to adjust for market consumption.

China now consumes almost two times more diesel than gasoline. To meet the diesel demand, it has to produce more gasoline, which analysts said will eventually deteriorate the already excessive supply of refined oil products in the market.

Apart from the market glut, Lu Youqing, deputy director of Trade and Market Bureau of the the State Economic and Trade Commission, admitted that PetroChina and Sinopec, China's two largest oil companies, also face the challenge of losing control over the retail market. To date, the two companies control half of the nation's fuel stations. Private companies and local governments take up the other half.

To restore the market, the government has launched a campaign to crack down on illegal and unauthorized fuel stations since March, and many have been forced to close, Lu said.

"The development of illegal stations have been restrained," said Lu. "Local governments have reinforced the supervision over the market."

Lu called on the two biggest companies to strengthen the management of existing petrol stations while at the same time enlarging their retail networks.

The two companies have been expanding their oil products retail businesses by acquiring assets of gasoline stations owned by local authorities in an attempt to fend off the competition when foreign companies are allowed to enter the country in two years.

Ren Chuanjun, vice-president of PetroChina, admitted some of its 2,000 franchised gasoline stations aren't well managed. Some even sell oil products of poor quality and evade taxes.

"We have been examing these franchised stations," said Ren. "We have to terminate the franchise agreements with those stations that fail to meet our requirements."

Out of a total of 75,000 gasoline stations in China, PetroChina owns 12,253. Sinopec owns 27,749 stations. Reports said Sinopec has also terminated franchise agreements with hundreds of stations this year.

Ren said PetroChina is also focusing on reforming its marketing strategy to reduce distribution costs.

"We are dismissing county-level sales companies, to reduce the distribution layers and costs," said Ren. "We will also set up large distribution centers according to the local markets, instead of administrative regions like before. It is a revolution for PetroChina."

(China Daily August 28, 2002)