China fuel price hike as much politics as policy

BEIJING (Reuters) - China's surprise fuel price rise on Friday may look an inevitable domestic measure, but analysts say it also reveals Beijing's desire to be seen joining world powers in a desperate bid to tame global oil prices.

In a week that began with the resolution of a gas field dispute with Japan and will conclude with China's vice president at a global oil summit in Jeddah, the unexpected 17-18 percent increase in diesel and gasoline prices could be the most important for Beijing's international standing.

"It's reasonable to speculate that China's fuel price increase hits a few targets, the secondary one being an answer to the U.S. call and a gesture of cooperation with friendly Saudi Arabia," said Shi Yinhong, professor of international relations at People's University.

All agree that an increase in domestic fuel prices was inevitable. They had only risen once in the past two years, a 10 percent increase last November.

But most analysts had expected Beijing to hold off a price hike, especially as big as this one, until after the August Olympics in order to check inflation.

Unlike countries like Indonesia and India that were forced to raise prices over the past month due to soaring subsidy bills, the world's second-largest oil consumer has ample funds to maintain subsidies to its oil refiners, analysts said.

Policymakers had repeatedly ruled out any short-term price increase, pointing to inflation at a near 12-year high as their top economic priority for the moment.

So why increase prices now? And why so sharply, nearly double its usual price rise in recent years?

For one, its subsidies had come under increasing scrutiny in recent weeks as major Asian neighbors finally raised domestic prices in the face of near $140 crude.

The U.S.-China Stategic Economic Dialogue earlier this week, during which Washington urged Beijing to cut its fuel subsidy to tame its runaway demand, may have driven home to Beijing its growing influence as a major oil user, said Niu Jun, professor of international relations of Peking University.

"It is not necessarily bowing to American pressure. It's a change of attitude, realizing its growing role in the global economy," Niu said. "It's a major shift."

That is a marked change from the past year, when Chinese industry executives and energy officials routinely dismissed the notion that the country's fast-growing consumption was contributing to soaring oil prices, despite all evidence to the contrary.

JEDDAH SUMMIT

For another, China may have felt pressured to pitch in on the global effort to tame prices after Saudi Arabia promised to raise oil production for a second time in two months, and as U.S. market regulators sought measures to temper the feverish speculation that many blame for soaring prices.

The same evening China raised its fuel price, which sent global crude down as much as $5 dollars, its foreign ministry announced that Chinese Vice President, Xi Jinping, will attend an emergency summit of major oil consumers, producers and corporate leaders in Jeddah on Sunday to discuss record prices.

He is the highest-level Chinese official ever to attend a global oil gathering, and can now say that China is addressing its cheap-fuel policies that have been blamed by some, including the United States, for helping stoke oil's six-year rally.

"The attendance by Xi Jinping is a very important signal," said Peking University's Niu Jun.

China's price rise -- the sharpest ever one-off hike -- was certainly also driven by the need at domestic front to solve recent fuel shortages, as much a risk to stability as higher pump rates.

"Shortages are the predominant factor," says Niu Li, of State Information Centre, a government think-tank.

The shortages have been caused in a large part by low prices that discourage independent refiners from refining costly crude to sell fuels at a loss.

But Beijing has become increasingly aware that, although an emerging economy, it is closer to big consumers like the U.S. and Japan in terms of energy consumption.

The pact reached between China and Japan earlier this week to jointly develop disputed gas beds under the East China Sea was another example of Beijing taking a proactive role to form a closer tie with the world's third-largest oil consumer, said Niu Jun.

"China is taking a more active role in the face-off between oil consumers and producers," he said.

(editing by Jonathan Leff)