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Cablegate: China/Energy: China Cuts Fuel Prices

VZCZCXRO1829
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4615/01 3562315
ZNR UUUUU ZZH
O 212315Z DEC 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1507
RHMFIUU/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE

UNCLAS SECTION 01 OF 02 BEIJING 004615

SIPDIS
SENSITIVE

STATE FOR EAP/CM AND EEB/ESC
TREASURY FOR OASIA/DOHNER, CUSHMAN

E.O. 12958: N/A
TAGS: ENRG EINV ECON EPET EFIN CH

SUBJECT: CHINA/ENERGY: CHINA CUTS FUEL PRICES

SUMMARY
-------

1. (SBU) The Chinese government announced significant
energy price cuts December 18, marking the first change
in domestic fuel prices since international crude prices
began to fall from their mid-summer peak. As of December
19, refinery gate prices for gasoline, diesel, and
aviation fuel were reduced by 13.9 percent, 18.1 percent,
and 32.2 percent respectively. The price cuts took place
in the midst of a broader pricing policy reform and
arrived ahead of fuel tax increases, which are scheduled
to take effect on January 1. While China's energy prices
remain government controlled, the moves are part of a
broader effort to shift toward a more market-driven
energy pricing system that will allow state-owned
refineries to better minimize losses when global oil
prices surge. Although government statements also assert
the fuel pricing and tax reforms aim to help reduce
greenhouse gas emissions by making consumers more
sensitive to market price fluctuations, it is unclear how
lower fuel prices will discourage vehicle use. END
SUMMARY.

FUEL PRICE REDUCTION PART OF BROADER PRICING REFORM
--------------------------------------------- ------

2. (SBU) China's National Development and Reform
Commission (NDRC)Pricing Bureau announced significant
energy price cuts on December 18. As of December 19,
refinery-gate prices for gasoline were reduced by 13.9
percent from RMB 6,480 to RMB 5,580 per metric ton;
diesel prices were reduced by 18.1 percent from RMB 6,070
to RMB 4,970 per ton; and aviation fuel prices went down
by 32.2 percent from RMB 7,450 to RMB 5,050 per ton. The
price cuts took place in the midst of a broader pricing
policy reform and arrived ahead of fuel tax increases,
which are scheduled to take effect on January 1.
Consumers had been expecting fuel prices to decrease in
the coming weeks, as the government had ensured consumers
on December 5 that fuel tax reforms would not result in
increased prices at the pump.

3. (SBU) Current fuel price reforms reflect government
efforts to move toward a more market-driven pricing
system that will reduce losses by state-owned refineries
when global oil prices rise. The reforms also intend to
reduce greenhouse gas emissions by making consumers more
sensitive to price fluctuations. According to government
announcements, under the new pricing system domestic
retail fuel prices will be based on international crude
prices, ex-factory prices of gasoline and diesel, average
domestic processing costs, taxes, and a "reasonable
margin" for refineries.

4. (SBU) This week's price reductions mark the first
changes in domestic fuel prices since global crude prices
began to fall from their mid-summer peak. China last
adjusted fuel prices on June 20, when it raised gasoline
and diesel prices by approximately 17-18 percent in order
to reduce shortages caused by refiners, which found it
unprofitable to place fuel on the market as a result of
rising global oil prices. Despite the fall in global
crude prices over the last several months, Chinese
regulators refrained from lowering domestic prices to
allow state-owned oil companies to restore profitability
following significant losses on refining operations
earlier this year. China's two largest refiners, Sinopec
and CNPC/PetroChina, rely heavily on oil imports and
reported refining losses in the first half of 2008
despite receiving government subsidies to address the gap
between international oil prices and domestic refined
product prices.

FUEL TAX WILL TAKE EFFECT JANUARY 1
-----------------------------------
5. (SBU) The pricing changes come ten days ahead of
significant fuel tax reforms, scheduled to take effect on
January 1, 2009. Under the new tax system, six types of
transportation fees will be eliminated, including a road
maintenance fee paid by all vehicle owners. Toll
collection on secondary roads will also gradually be
phased out. Most importantly, tax on gasoline will
increase fivefold from RMB .2 (USD .03) per liter to RMB

BEIJING 00004615 002 OF 002


1.0 (USD .15) per liter and diesel tax will increase from
RMB .1 (USD .01)per liter to RMB .8 (USD .12)per liter.

6. (SBU) An increase in gasoline and diesel consumption
tax has been the most controversial aspect of the
proposed tax reforms. During the period for public
comment following the December 5 announcement of the
reforms, more than 48,000 citizens (58.6 percent of them
vehicle owners) submitted their views on the proposed
taxes via a government-established web-based site. A
government-affiliated Chinese academic told econoff this
week that a large percentage of the respondents opposed
the fuel tax. She pointed out, however, that vehicle
owners generally have higher incomes and could more
readily absorb higher taxes than people who do not own
cars.

COMMENT: REDUCED EMISSIONS UNLIKELY
-----------------------------------
7. (SBU) According to econ contacts, one of the main
goals of the planned fuel pricing and tax reforms is to
reduce greenhouse gas emissions by making consumers more
sensitive to prices through a "pay for what you use"
system. However, even taking into consideration the
scheduled tax increases, fuel costs are now lower than
they have been for the past six months. It is unclear
how this will discourage vehicle use. With a backdrop of
high oil inventories, a struggling domestic auto market,
and general uncertainty about the economy, a policy
intended to curb energy consumption could stimulate it.
End Comment.

© Scoop Media

 
 
 
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