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China cuts fuel prices to fight slowdown

Publication Date : 09-06-2012

 

Gasoline and diesel prices have been cut for the second time in a month amid growing Chinese government efforts to reverse a sharp slowdown in the economy.

The reduction came after an interest rate cut on Thursday - the country's first in nearly four years - prompting analysts to suggest that data due this weekend will show May trade and industrial activity was even weaker than pessimistic forecasts had suggested.

"Markets are bracing for a potentially bad set of May economic data for China," said Moody's Analytics economist Alaistair Chan in a report.

Beijing is unveiling new measures almost daily to shore up growth that slowed to 8.1 per cent in the first quarter and is expected to decline further.

The National Development and Reform Commission said on Friday the country will cut its retail fuel prices by more than 5.5 per cent on Saturday, the deepest since December 2008, in tandem with the global slump crude oil prices.

It lowered retail gasoline prices by 530 yuan (US$84) a metric tonne, or 0.38 yuan a litre, to be capped at 8,320 yuan a tonne.

Diesel prices were down by 510 yuan a ton, or 0.43 yuan a litre, to 7,510 yuan a tonne.

Gasoline prices were down 5.5 per cent, while diesel dropped by 5.8 per cent, down from a previous cut on May 10 when prices were reduced about 4 per cent.

China had raised fuel prices in February and March.

The moving average price of Brent, Dubai and Cinta, a basket of oil prices that China refers to for fuel price adjustments, has dropped by more than 9 per cent so far since the last reduction.

The move is the second cut this year, indicating the country's determination to have domestic fuel prices more closely linked to global oil prices, even though the latest cuts were narrower than market expectations by at least 600 yuan a tonne.

The cut may help lower transport and storage costs for operators in key industry sectors such as agriculture, forestry and fisheries, said Han Jingyuan, an analyst with JYD Commodities Hub, a petrochemical e-trade platform.

Both Brent crude oil prices and crude futures at the New York Mercantile Exchange registered their biggest drops since 2008 in May, dampened by the bleak global economies, in particular the deteriorating debt crises in Europe.

The oil price plunge, however, raised hopes that China may start its fuel pricing reforms.

Under the current mechanism, started in 2008, the government may adjust fuel prices if the average movement of the three reference markets' oil prices change 4 per cent.

The current pricing program remains complex and not nimble enough to reflect global crude oil prices, said Zhou Dadi, former director of the NDRC's energy research institute, adding that further reform to reflect supply and demand is a must.

The government may take the opportunity of global price drops to narrow the gap between international and domestic crude charges, and then introduce reforms to avoid volatility and market speculation, JYD's Han said.

The revamp of the current pricing programme is now just a matter of time, said Han Wenke, director of the NDRC's energy research institute, and a guest China Daily economist.

 

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