China Reforms Fuel Pricing

Image PreviewAs expected, China announced the much-awaited reforms to its fuel pricing policies.  Under the new system, “You pay as you fill up the tank.”  As China Daily put it, “the more you drive, the more it costs you — and the planet. This is a simple market rule but it has taken nearly two decades for the government to pick a ‘proper time’ to implement it amid the sharp fluctuation of global oil prices.”

 

The rapid run-up in oil prices in the first half of 2008, combined with their precipitous decline beginning in July, created the necessary cover for China to usher in the reforms. When oil prices declined, China didn’t bother to reduce retail gasoline and diesel prices. As a result, Chinese car owners have been paying more than twice as much for gasoline as their American counterparts over the past six months. That is one of the reasons why car and vehicle sales slumped in China in the second half of the year.

 

With one stroke of the pen, however, China was able to reduce the price that motorists pay for gasoline, eliminate six categories of road toll and administration fees and put in place a hefty consumption tax on fuel. Beginning January 1, ex-factory prices for both gasoline and diesel were reduced by 35 percent. For example, the retail price (before taxes) of number 90 gasoline, the most common type used in China, dropped from 4.56 yuan (US$0.67) to 3.03 per liter. After the new consumption tax of 1 yuan per liter (increased from 0.20 yuan) and value added tax of 0.69 yuan are added, the new retail price is 4.72 yuan per liter ($2.61 per gallon), 15.3 percent lower than the amount paid by the motorist before the reforms. Taking into account the road toll and maintenance fees that were eliminated, Kate Zhu, executive director of research at Morgan Stanley, estimates that annual end-user vehicle maintenance costs will be reduced by 13.5 percent for family cars, 22.3 percent for large buses and 27.5 percent for heavy-duty trucks.

 

In implementing its new fuel policies, China achieved three major objectives:

 

1.    It moved towards market pricing of fuel. Previously, the government set prices.

 

2.    It reduced significantly the annual cost of operating a vehicle in China. This should provide a much needed boost to car, bus and truck sales in the months ahead.

 

3.    It put in place a consumption tax which will keep fuel prices relatively high. This will encourage the development and sale of more energy efficient vehicles.

 

Right policy, right time. Perhaps it was worth two decades of waiting?

 

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