Identifier
Created
Classification
Origin
08BEIJING2331
2008-06-13 08:50:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Beijing
Cable title:
CHINA/ENERGY: NEAR-TERM FUEL PRICE HIKES UNLIKELY
how-toVZCZCXRO8487 PP RUEHCN RUEHGH RUEHVC DE RUEHBJ #2331/01 1650850 ZNR UUUUU ZZH P 130850Z JUN 08 FM AMEMBASSY BEIJING TO RUEHC/SECSTATE WASHDC PRIORITY 7963 RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY RUEATRS/DEPT OF TREASURY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY RHEHNSC/NSC WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 BEIJING 002331
SIPDIS
SENSITIVE
STATE FOR EAP/CM AND EB/ESC
TREASURY FOR OASIA/DOHNER
USDOC FOR 4420
STATE PLEASE PASS USTR FOR STRATFORD
E.O. 12958: N/A
TAGS: ECON ENRG EINV EPET EFIN PREL CH
SUBJECT: CHINA/ENERGY: NEAR-TERM FUEL PRICE HIKES UNLIKELY
SUMMARY
-------
UNCLAS SECTION 01 OF 02 BEIJING 002331
SIPDIS
SENSITIVE
STATE FOR EAP/CM AND EB/ESC
TREASURY FOR OASIA/DOHNER
USDOC FOR 4420
STATE PLEASE PASS USTR FOR STRATFORD
E.O. 12958: N/A
TAGS: ECON ENRG EINV EPET EFIN PREL CH
SUBJECT: CHINA/ENERGY: NEAR-TERM FUEL PRICE HIKES UNLIKELY
SUMMARY
--------------
1. (SBU) Beijing appears unlikely to raise retail fuel prices
significantly in the near-term amidst policymakers' ongoing concerns
about CPI inflation and social stability. The most commonly
purchased blend of gasoline is held at USD 2.92/gallon, while diesel
is USD 2.89/gallon. Against the backdrop of rising global oil
prices and recent retail fuel price hike announcements in Malaysia,
India, Taiwan, and Indonesia, NDRC Vice Chairman and Director
General of the National Energy Bureau Zhang Guobao stated on June 8
that China's current finished oil prices are conducive to the
country's social and economic stability. Economists argue that
China's sound fiscal situation will enable the government to
maintain domestic retail fuel prices through subsidies for the
foreseeable future. Domestic gasoline and diesel shortages could
eventually force regulators to raise prices, but it appears that
concerns about CPI inflation will continue to wield greater
influence on pricing policy through the Olympic Games in August.
END SUMMARY
TOP ENERGY POLICY MAKER DEFENDS SUBSIDIES
--------------
2. (SBU) Following the Five Party Energy Ministerial in Japan on
June 8, NDRC Vice Chairman and Director General of the National
Energy Bureau Zhang Guobao stated to media that China's current
finished oil prices are conducive to the countryQs social and
economic stability. China last raised domestic retail fuel prices
in November 2007, by 8-9 percent. Zhang expressed concern about the
economic consequences of aligning too quickly with international
prices, especially for the agricultural sector. China therefore has
to defer finished oil price reform in order to promote policies that
are favorable to social and economic stability. Zhang dismissed the
idea that rising demand in developing countries such as China and
India should be blamed for the surge of global oil prices, arguing
that investments by hedge funds and other speculators have played a
key role in recent trends.
GRADUALISM
--------------
3. (SBU) Zhang's comments reflect China's longstanding efforts to
keep oil price volatility from harming consumers and threatening
social stability, in particular in rural areas where farmers depend
heavily on diesel fuel. Dr. Zhao Jianping, a Beijing-based World
Bank energy analyst told us that there is a general consensus among
Chinese leaders that domestic retail fuel prices should reflect the
real costs of production, but domestic inflationary pressures and
the rapid rise in international oil prices have deterred regulators
from implementing market-derived pricing formulas that have been
proposed over the past several years. Zhao noted that CPI, which
was up 8.5 percent yoy in April and 7.7 percent yoy in May, will
continue to make it challenging for the government to raise retail
fuel prices. He projected that even if the State Council approves
an upward price adjustment later this year, the new domestic prices
would still be well below international prices. Meanwhile, the
government will continue to offer subsidies to its national oil
companies to offset refining losses.
STRONG FISCAL POSITION MEANS SUBSIDIES AFFORDABLE
-------------- --------------
4. (SBU) Economists argue that China's sound fiscal situation will
enable it to continue to finance subsidies and further delay retail
price hikes. According to a recent report by Morgan Stanley
economist Qing Wang, China is in a relatively favorable position to
maintain subsidies compared to its peers in the region due to its
low government debt levels, which reflect consistently low fiscal
deficits. In Wang's view, China's fiscal strength suggests that if
the government continues to maintain domestic retail fuel prices
through subsidies, it can afford to do so at least for the
foreseeable future without running into a debt sustainability
problem. Moreover, if the government decides to increase prices, it
can afford to do so incrementally. HSBC economist Hongbin Qu's
research echoes Wang's conclusions. According to Qu, 20 percent yoy
growth in tax revenues over the past five years has made China
well-positioned to cover the explicit costs of the estimated USD 40
billion in annual subsidies, assuming international oil prices
remain steady and the government continues its policy of subsidizing
approximately 40 percent of refiners' losses from imported crude
oil.
BEIJING 00002331 002 OF 002
SHORTAGES
--------------
5. (SBU) Beijing has the fiscal means to sustain subsidies, but
retail fuel shortages may ultimately force regulators to raise
prices according to a June 9 article in a well-informed local
Chinese economic weekly, Caijing magazine, by economist Andy Xie.
Domestic media has reported gasoline and diesel shortages in rural
areas, and emboffs have observed long lines and limited diesel
supplies both at fueling stations in Beijing's suburbs and during
travel to interior provinces. Diesel shortages are expected to be
especially acute during the summer months, as farming activities
reach a peak and reconstruction begins in earthquake stricken areas.
Beijing has taken steps to encourage Sinopec and Petrochina to
increase finished fuels production, including by offering rebates on
value-added taxes on gasoline and diesel fuels. Despite such
incentives, both companies continue to report refining losses.
COMMENT: NOT FOLLOWING NEIGHBORS' FOOTSTEPS
--------------
6. (SBU) Comment: Policy makers in Beijing are well aware of the
distortions caused by fuel price subsidies, especially with regard
to energy consumption and environmental degradation. At the same
time, top officials have declared inflation to be the top near-term
economic challenge. Further, social stability is extremely
important in the lead up to the August 8-24 Olympic Games. Given
China's strong fiscal situation and its current economic priorities,
the government appears to have both the motivation and ability to
maintain fuel price subsidies at minimum until later this year, and
it is likely to do away with those subsidies only gradually.
SIPDIS
SENSITIVE
STATE FOR EAP/CM AND EB/ESC
TREASURY FOR OASIA/DOHNER
USDOC FOR 4420
STATE PLEASE PASS USTR FOR STRATFORD
E.O. 12958: N/A
TAGS: ECON ENRG EINV EPET EFIN PREL CH
SUBJECT: CHINA/ENERGY: NEAR-TERM FUEL PRICE HIKES UNLIKELY
SUMMARY
--------------
1. (SBU) Beijing appears unlikely to raise retail fuel prices
significantly in the near-term amidst policymakers' ongoing concerns
about CPI inflation and social stability. The most commonly
purchased blend of gasoline is held at USD 2.92/gallon, while diesel
is USD 2.89/gallon. Against the backdrop of rising global oil
prices and recent retail fuel price hike announcements in Malaysia,
India, Taiwan, and Indonesia, NDRC Vice Chairman and Director
General of the National Energy Bureau Zhang Guobao stated on June 8
that China's current finished oil prices are conducive to the
country's social and economic stability. Economists argue that
China's sound fiscal situation will enable the government to
maintain domestic retail fuel prices through subsidies for the
foreseeable future. Domestic gasoline and diesel shortages could
eventually force regulators to raise prices, but it appears that
concerns about CPI inflation will continue to wield greater
influence on pricing policy through the Olympic Games in August.
END SUMMARY
TOP ENERGY POLICY MAKER DEFENDS SUBSIDIES
--------------
2. (SBU) Following the Five Party Energy Ministerial in Japan on
June 8, NDRC Vice Chairman and Director General of the National
Energy Bureau Zhang Guobao stated to media that China's current
finished oil prices are conducive to the countryQs social and
economic stability. China last raised domestic retail fuel prices
in November 2007, by 8-9 percent. Zhang expressed concern about the
economic consequences of aligning too quickly with international
prices, especially for the agricultural sector. China therefore has
to defer finished oil price reform in order to promote policies that
are favorable to social and economic stability. Zhang dismissed the
idea that rising demand in developing countries such as China and
India should be blamed for the surge of global oil prices, arguing
that investments by hedge funds and other speculators have played a
key role in recent trends.
GRADUALISM
--------------
3. (SBU) Zhang's comments reflect China's longstanding efforts to
keep oil price volatility from harming consumers and threatening
social stability, in particular in rural areas where farmers depend
heavily on diesel fuel. Dr. Zhao Jianping, a Beijing-based World
Bank energy analyst told us that there is a general consensus among
Chinese leaders that domestic retail fuel prices should reflect the
real costs of production, but domestic inflationary pressures and
the rapid rise in international oil prices have deterred regulators
from implementing market-derived pricing formulas that have been
proposed over the past several years. Zhao noted that CPI, which
was up 8.5 percent yoy in April and 7.7 percent yoy in May, will
continue to make it challenging for the government to raise retail
fuel prices. He projected that even if the State Council approves
an upward price adjustment later this year, the new domestic prices
would still be well below international prices. Meanwhile, the
government will continue to offer subsidies to its national oil
companies to offset refining losses.
STRONG FISCAL POSITION MEANS SUBSIDIES AFFORDABLE
-------------- --------------
4. (SBU) Economists argue that China's sound fiscal situation will
enable it to continue to finance subsidies and further delay retail
price hikes. According to a recent report by Morgan Stanley
economist Qing Wang, China is in a relatively favorable position to
maintain subsidies compared to its peers in the region due to its
low government debt levels, which reflect consistently low fiscal
deficits. In Wang's view, China's fiscal strength suggests that if
the government continues to maintain domestic retail fuel prices
through subsidies, it can afford to do so at least for the
foreseeable future without running into a debt sustainability
problem. Moreover, if the government decides to increase prices, it
can afford to do so incrementally. HSBC economist Hongbin Qu's
research echoes Wang's conclusions. According to Qu, 20 percent yoy
growth in tax revenues over the past five years has made China
well-positioned to cover the explicit costs of the estimated USD 40
billion in annual subsidies, assuming international oil prices
remain steady and the government continues its policy of subsidizing
approximately 40 percent of refiners' losses from imported crude
oil.
BEIJING 00002331 002 OF 002
SHORTAGES
--------------
5. (SBU) Beijing has the fiscal means to sustain subsidies, but
retail fuel shortages may ultimately force regulators to raise
prices according to a June 9 article in a well-informed local
Chinese economic weekly, Caijing magazine, by economist Andy Xie.
Domestic media has reported gasoline and diesel shortages in rural
areas, and emboffs have observed long lines and limited diesel
supplies both at fueling stations in Beijing's suburbs and during
travel to interior provinces. Diesel shortages are expected to be
especially acute during the summer months, as farming activities
reach a peak and reconstruction begins in earthquake stricken areas.
Beijing has taken steps to encourage Sinopec and Petrochina to
increase finished fuels production, including by offering rebates on
value-added taxes on gasoline and diesel fuels. Despite such
incentives, both companies continue to report refining losses.
COMMENT: NOT FOLLOWING NEIGHBORS' FOOTSTEPS
--------------
6. (SBU) Comment: Policy makers in Beijing are well aware of the
distortions caused by fuel price subsidies, especially with regard
to energy consumption and environmental degradation. At the same
time, top officials have declared inflation to be the top near-term
economic challenge. Further, social stability is extremely
important in the lead up to the August 8-24 Olympic Games. Given
China's strong fiscal situation and its current economic priorities,
the government appears to have both the motivation and ability to
maintain fuel price subsidies at minimum until later this year, and
it is likely to do away with those subsidies only gradually.