GO
Loading...

China to Freeze Surging Energy Prices

Prime Minister Wen Jiabao responded this week to growing public anxiety about inflation by announcing that China would freeze energy prices in the near term, even as international crude oil futures have continued to surge.

Inflation has hit an 11-year high in China, and a recent nationwide public opinion survey found

Oil Refinery
Oil Refinery

that “rising prices of consumer goods” ranked as the top public concern, followed by income inequality and corruption.

The freezes were announced on the Wednesday government’s main Web site after Mr. Wen presided over a meeting of the State Council to revise policies on price controls. But the controls are unlikely to get at the causes of China’s inflation — a currency policy that keeps the yuan artificially low and an overheated economy in which demand for goods and commodities often outstrips supply.

Under the new edict, prices of oil products, natural gas and electricity will be frozen in the near term. Rates for public water bills will also be frozen, as will the price of public transportation tickets.

The edict also called for stabilizing prices on medical services and for certain agricultural fertilizers. It ordered local governments to monitor prices closely and warned that punishments would be strengthened for those who violate government price-control policies.

Ben Simpfendorfer, an economist with the Royal Bank of Scotland in Hong Kong, said the announcement underscored how seriously the State Council regards public attitudes toward

inflation.

“The State Council is worried about public sentiment,” he said. “They are worried that rising prices will have a negative impact on sentiment.”

Last November, China raised gasoline and diesel prices by almost 10 percent, partly to appease officials at state-owned refineries. Refiners had complained that price controls were forcing them to swallow the difference between higher prices for crude oil on the world market and regulated consumer prices at home for refined products. So refineries cut back production of gasoline and particularly diesel, causing long lines at fuel stations around the country.

But the November price increase fueled inflation. Consumer prices were 6.9 percent higher in November than a year earlier — a figure that represented an 11-year high.

“It was a shock,” said Mr. Simpfendorfer, noting that the price increases surpassed the

market’s expectations.

Oil futures have continued to rise on world markets, briefly surpassing $100, and Chinese refiners are raising the same concerns. With the government unable to suppress market pressures, lines are again forming at service stations, particularly for truckers in southern China.

Even Wednesday’s announcement hinted that domestic price increases might be inevitable later this year in response to world markets — an acknowledgment that might prompt further fuel hoarding in China.

“Prices of crude oil, grains and other primary products are still rising on the international market, and China faces relatively large pressures of further price increases,” the announcement on the government Web site said.

For ordinary Chinese citizens, inflation has emerged as a major concern. Last year, food prices rose about 12 percent, causing an often angry public response. More recently, prices for eggs and pork have fallen, though flooding in farming regions of central China damaged vegetable production and kept those prices high, Mr. Simpfendorfer said.

Last week, the Chinese Academy of Social Sciences released a national survey that found 30.5 percent of respondents considered inflation the country’s top problem. Stories about the urban poor struggling with rising prices have become common in the Chinese media.

China’s rapid economic growth has been fueled by rising demand for oil, coal and other energy sources. This week, China also announced national regulations to help clean up the environment and slow the country’s growing addiction to imported oil by focusing on a ubiquitous but unexpected target: the plastic bag.

On Tuesday, the State Council banned production of ultrathin plastic bags and required store owners to charge customers for thicker plastic bags. The move, which takes effect June 1, is intended not only to fight littering, but also to reduce oil use. Chinese media have reported that China uses about three billion plastic bags every day. Creating this many bags requires 37 million barrels of crude oil every year, according to the Web site of China Trade News.

“Our country consumes a large amount of plastic bags,” stated a circular posted Tuesday on the central government’s main Web site. “While convenient for consumers, the bags also lead to a severe waste of resources and environmental pollution.”

But for all the attention the government has drawn to the bags, their production represents less than a week’s worth of Chinese oil consumption.

Contact Energy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More*