June 20, 2008

China unexpectedly raises fuel and power prices, exerting pressure on PPI

The Chinese government unexpectedly announced to raise energy-related prices, which are currently subject to price controls, from 20 June 2008. Gasoline and diesel prices will be both up by about 17-18% to reach 6,980 yuan per tonne and 6,520 yuan per tonne respectively while jet fuel prices will be raised to 7,450 yuan per tonne, up by 25%.

Electricity prices for commercial units will be hiked by an average 5% from 1 July 2008. Meanwhile, coal prices will be kept fixed until the end of 2008.

Recently, both fuel and power supplies have been tight in China. Domestic refiners and power companies have incurred huge losses in providing products or services at a substantial discount to international prices. The price adjustments will encourage supply and rationalize the demand.

Some analysts predicted that the price adjustments will result in 2 ppt. increase in China's producer price index (PPI). The corporate profitability of downstream industries is likely to decline if the cost increase cannot be passed on to retailers or consumers.

On the other hand, the direct impacts of the price hikes on China's consumer price index (CPI) will be limited for the following reasons: 1) The weight of refined oil in the CPI basket is only around 0.5%; 2) The electricity charges for urban and rural residents, fares for rail travel, urban and rural public transport, and taxis will remain unchanged.