From Cover, issue no. 349, Jan 7 2008

With international crude oil futures hitting the ＄100 mark, China is facing more pressure over whether to raise domestic oil prices or maintain the current price lock via administrative measures.

In November of last year, the Chinese government raised processed oil prices in the wake of prices jumping from ＄60 to ＄100 per barrel.

Chinese have already felt the pressure of an increasing consumer price index, which last year surpassed the government’s target of three percent. As a result, anti-inflation has become a priority of the central government. If it raises processed oil prices again, the CPI will likely rise further-- something the central bank would prefer to avoid, and something that policymakers are showing caution against.

Many economists believe that a price rise will benefit Chinese oil giants most. On the pretext of suffering significant losses, those firms claim the government must raise oil prices as well as subsidize their losses.

But there are other consequences to keeping the price below a certain level. A price lower than costs doesn't reflect how scarce resources are, and will give false signals to the market. This is the very reason why China still clings to a high-energy-consumption development model, and why administrative measures have failed to calm overheating investment.

More problems are in the pipeline. Any price adjustment would just be a re-allocation of interests. Monopolies would rather have the market set prices for them, as they would be higher than if set by regulators. As a result, Chinese monopolies oftentimes use this to argue that in order to assume certain social responsibilities that befit their weight in the market, they require certain privileges and compensation that the market cannot provide.

The existence of such monopolies can only lead to unfair distribution of resources and benefits. Oil product price reform aims to find a price that represents the scarcity of resources, a market-based one in the spirit of environmental protection and sustainable development. When a price adjustment benefits the minor monopolies more than the majority, it will likely be opposed. When policy makers choose to care more about the majority, however, reasonable prices can hardly be realized.

Yet to delay things means only higher stakes down the line. With prices that keep giving false signals, it will be harder to develop an energy-saving society. In this vein, accelerating export trade volume would mean that China is satisfying consumers in the rest of the world at the cost of exhausting itself. Though such high-energy-consuming industries should have been dealt with from the start-- unfortunately, price policies have been encouraging manufacturers and investors to pursue this model of development all along.

To break the deadlock, we have to clarify the role of those large companies assuming several roles. We hope that policymakers will not waver between their appeals and the interests of society. We don’t want to see that those companies win financial subsidies under the banner of suffering policy-based losses.

We believe that those companies should not enjoy both the fruits of the market and the commonwealth. If they belong to the market, they can’t enjoy non-market benefits in the name of undertaking social responsibility. If they are truly state-owned businesses working for the public interest, we must strip away their their commercial engagements.

Whether reforming oil prices or those of other resource, in carrying out thorough market reform we must eliminate the conflict of interests that drive these many-faced state-owned monopolies.