China fuel price rise not sign of loosening grip

By Chen Aizhu - Analysis

BEIJING (Reuters) - China's first oil price increase in 17 months should end fuel shortages that were unnerving the country's leaders, but it leaves Beijing no nearer to the market deregulation needed to ensure stable long-term energy supplies.

Beijing had pledged "in principle" to freeze prices of fuel and other items under its control for the rest of the year to keep a lid on inflation, which is near a decade-high.

But ultimately it was forced to react after diesel rationing spread from coastal manufacturing hubs to the capital and to cities further inland.

With global crude oil prices flirting with the $100-a-barrel mark, refiners forced to sell at below-market prices were just not prepared to shoulder ever deepening losses.

Despite the resulting supply squeeze, analysts say meaningful liberalization of prices of gasoline, diesel, natural gas and electricity in the world's second-largest energy consumer remains unlikely given Beijing's craving for stability.

"Its biggest concern is consistency. The government doesn't want direct exposure to global markets," said Sijin Cheng of Eurasia Group, a New York consultancy. "They are worried that full liberalization will lead to boom-and-bust cycles."

History suggests China will not easily relinquish control of such an important price.

The supply crunch is possibly worse than previous ones in 2003 and 2005. Analysts said the most recent two shortages were directly the result of Beijing's price controls.

Late on Wednesday China announced a 10 percent hike to retail gasoline and diesel prices, as it sought to encourage refiners to release supplies. The adjusted diesel prices remained a third below Singapore rates, though petrol is now on par with what American motorists pay.

"To this day, Beijing is all about control. This dilemma, this push-pull, will remain a remnant of the command-and-control economy of old. It is politically sensitive prices that are in the cross hair," said Donald Straszheim of California-based Roth Capital Partners.

AFFORDABLE PRICE

But if without inflationary pressure, Beijing, keen to curb wasteful energy use, may have moved faster and earlier to the surging international oil prices that have rallied 40 percent so far this year, analysts said.

Maintaining economic and political stability and a rapidly rising standard of living have been critical considerations for the ruling Communist Party, which fears social unrest if prices were allowed to rise too quickly.

Inflation was one of the grievances of demonstrators occupying Tiananmen Square in Beijing before the crackdown on June 4, 1989.

But Beijing's determination to keep control means that price adjustments tend to lag, and its policy-setters will need to resort to other administrative measures such as export by quotas to address shortages, contributing to China's erratic buying or selling in the global oil market.