WRAPUP 2-China stocks rise, as do tempers, with fuel hike

Fri Jun 20, 2008 2:17am EDT

Related Topics

* China's main stock index jumps 3 percent, refiners up

* Economists says inflation pressure will be muted

* Car owners angry, but Beijing aims subsidies at poor (Adds bullet points, links to graphics)

By Chen Aizhu and Simon Rabinovitch

BEIJING, June 20 (Reuters) - Chinese stocks soared, oil fell, then steadied and some motorists threw up their hands in despair on Friday after Beijing announced a rise in fuel prices which had not been expected until after the Olympics.

China raised retail gasoline and diesel prices by up to 18 percent on Thursday to rein in demand at the risk of stoking inflation which is within striking distance of 12-year highs. Economists however said inflationary pressures would be muted.

While neighbours from India to Indonesia had already bowed to the pressures of near $140 oil by scaling back subsidies and raising fuel prices, most analysts had expected Beijing to hold out until after the Olympics in August as policymakers focused on battling inflation and avoiding any hint of social unrest.

The higher resource prices will feed into inflation, but in a nation where consumers spend little on fuel products, the impact is expected to be relatively small. Most economists expect that an extra percentage point, or even less, will be added to consumer inflation over the rest of the year.

Nevertheless, the yuan rose against the dollar in offshore non-deliverable forwards CNYNDFOR=, as traders said the fuel price increase would prod Beijing to tighten monetary policy to tackle inflation.

The Shanghai Composite Index .SSEC climbed 4.7 percent by midday, suggesting its months-long slide may finally be ending. PetroChina (601857.SS), the biggest stock in the index, surged 5.1 percent, as its refining margins will be aided by the price hike.

The largest oil refiner, Sinopec (600028.SS), was up only 2.31 percent to 12.88 yuan, but it had already risen 11.6 percent this week in anticipation of the fuel price adjustment.

Oil steadied to around $132 in Asian trade after falling sharply on the Chinese move, which could depress demand for crude there. The dollar held steady against the yen, hovering within sight of a four-month high after rising the previous day due to the drop in oil prices.

After making little progress in recent years toward its long-stated goal of raising energy prices to reflect higher costs and to encourage greater efficiency, China also increased power tariffs by nearly 5 percent, while freezing thermal coal prices to revive generators' profits.

China's first hike in eight months and its sharpest ever one-off rise comes at a time of mounting international pressure for some kind of action to tame soaring global prices, which have spurred protests worldwide and threaten to cut economic growth.

HIGH SUBSIDIES

On Sunday the world's biggest oil producers and consumers will convene a crisis meeting in Jeddah, Saudi Arabia, to try to halt oil's six-year rally -- blamed by some, including the U.S. Energy Secretary just weeks ago, on subsidies in countries like China that shield consumers from soaring costs.

"This is very significant, a watershed move which suggests the Chinese government is prepared to risk unpopularity to curb the growth in domestic fuel demand," said John Kemp, commodities economist at RBS Sempra in London."

"We've already seen other Asian economies cut subsidies and the one big hold out, until now, was China."

Fearful of stirring popular resentment, Beijing also pledged subsidies to lower-income groups such as farmers, fishermen and cab drivers, similar to the targeted payouts that countries like Malaysia are now adopting as they reduce fuel subsidies that distort markets and benefit the rich more than the poor.

But that did not stop some car owners, part of a burgeoning new middle class flush with money and Mercedes, to vent their anger.

At least one gas station told customers on Thursday that it would shut for repairs until the price hike took effect at midnight, prompting an altercation between staff and angry motorists.

"You guys make a huge profit and get high prices. We consumers are pitiful," said a Shanghainese waiting to fill his Volkswagen Santana.

"It's crazy," said another Shanghai man driving a Passat. "Inflation is becoming serious and harming my ordinary life -- I won't be able to stand it for long if prices continue to rise."

Analysts also ruled out the possibility of protests, although inflation was a key factor behind the 1989 demonstrations on Beijing's Tiananmen Square.

"People are more able to tolerate price rises today than they were in 1989," Liu Xubuo, a dissident writer, said. "There won't be chaos."

And food prices, the dominant source of inflationary pressure in China over the past year, have dipped over the past two months, allowing headline inflation to slow to 7.7 percent in May from 8.5 percent in April.

"That is a significant decline and that also gave them a window of opportunity to make the price hike," said Qing Wang, Morgan Stanley's chief China economist.

Although unpopular with drivers, who at least will now be able to fill up without rationing or queues, the petrol price hike would not spark social unrest ahead of the Olympics, mused one Beijing businessman surnamed Xu as he wiped his dusty van down with a cloth.

"Common people don't have cars," he said. "They'll welcome the decision as it hurts the rich."

For a graphic on retail prices in Asian countries, click on: here

For a graphic on how China's retail fuel prices have lagged crude oil, click on: here (Additional reporting by George Chen in SHANGHAI; Writing by Nick Macfie; Editing by Sambit Mohanty)

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