As predicted in my earlier post, China anti-market pricing policy is running into crisis. Gas stations in Guangdong refuse to sell and Sinopec/CNPC are not supplying the retail stations. Long lines make fueling wait into hour-long ordeal, or sold out when you reach the pump. Even People's Daily is admitting it now. WSJ also run a good report on "China's Fuel Shortages Add to Pressure to End Central Planning".
A few thoughts
- The phenomenon in Guangdong showed that the oil oligarchs, although state owned, are rebelling by hoarding the gasoline. This is good evidence to rebuff China bashers in the CNOOC/Unocal incidence. Yes, the GM is indirectly appointed by the government, but P&L is definitely becoming a higher priority. This will likely set precedence as one of the crucial baby steps for the SOEs (state owned enterprises) to break free from state control.
- Chinese gov't will eventually have to give in to market force, by liberating gas price soon. Can't think of other option
- Well, there is a bad solution to the current mess. It could work in short term, provided oil price moves down in the international market. Not a good option. Anyway, this is the bad solution: subsidize the oil companies on a per-liter-sold base (sort of a negative sales tax). This is bad because it is easy to circumvent. And when it comes to finding loopholes against unsound policies, Chinese are genetically adapted and practically trained. e.g. a) parallel export /smuggling oil out of China (HK trucks have always been filling as much as they could before return to the border - now the risk is for regions outside HK and in a more organized scale); b) oil oligarchs can fraud higher sales # for more rebate from government; to name but a few. I am sure they are more creative than me
- The better and easiest option is, of cource, to let RMB appreciate a bit more (thanks Brad for reminding me the obvious). There are pros and cons, the oil price has risen by a percentage much larger than any feasible RMB appreciation could counter, but by feeding all numbers into a formula, there must be a solution as to what is the best percentage RMB should appreciate vs subsidy needed. (Even if one includes the macro-GDP growth target in the calculation) Still this doesn't solve the artificial price issue.
updates: FT said Oil in many Asian countries are subsidized, it noted "China, the second biggest oil user after the US, is one of the offenders. Retail prices of most fuels are controlled and the domestic refined oil price has risen only 15 per cent this year, against 30 per cent for crude oil." Well, yes, China's oil price is not following international market price. But one has to note that price at the pump should always rise slower than crude. Because the cost include that of refining, additives (basically the difference between PON 87 and 93, or RON 90-95), and operating (transportation, rent, labor). That is true also in the US, although it maybe 20% instead of 15%.
and China Daily is bolder than People's Daily, saying, "it is time for pricing reform!"
see follow-up here.