VZCZCXRO1829
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4615/01 3562315
ZNR UUUUU ZZH
O 212315Z DEC 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1507
RHMFIUU/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE

UNCLAS SECTION 01 OF 02 BEIJING 004615 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM AND EEB/ESC 
TREASURY FOR OASIA/DOHNER, CUSHMAN 
 
E.O. 12958: N/A 
TAGS: ENRG EINV ECON EPET EFIN CH
 
SUBJECT: CHINA/ENERGY:  CHINA CUTS FUEL PRICES 
 
SUMMARY 
------- 
 
¶1. (SBU) The Chinese government announced significant 
energy price cuts December 18, marking the first change 
in domestic fuel prices since international crude prices 
began to fall from their mid-summer peak.  As of December 
19, refinery gate prices for gasoline, diesel, and 
aviation fuel were reduced by 13.9 percent, 18.1 percent, 
and 32.2 percent respectively.  The price cuts took place 
in the midst of a broader pricing policy reform and 
arrived ahead of fuel tax increases, which are scheduled 
to take effect on January 1.  While China's energy prices 
remain government controlled, the moves are part of a 
broader effort to shift toward a more market-driven 
energy pricing system that will allow state-owned 
refineries to better minimize losses when global oil 
prices surge.  Although government statements also assert 
the fuel pricing and tax reforms aim to help reduce 
greenhouse gas emissions by making consumers more 
sensitive to market price fluctuations, it is unclear how 
lower fuel prices will discourage vehicle use.  END 
SUMMARY. 
 
FUEL PRICE REDUCTION PART OF BROADER PRICING REFORM 
--------------------------------------------- ------ 
 
¶2. (SBU) China's National Development and Reform 
Commission (NDRC)Pricing Bureau announced significant 
energy price cuts on December 18.  As of December 19, 
refinery-gate prices for gasoline were reduced by 13.9 
percent from RMB 6,480 to RMB 5,580 per metric ton; 
diesel prices were reduced by 18.1 percent from RMB 6,070 
to RMB 4,970 per ton; and aviation fuel prices went down 
by 32.2 percent from RMB 7,450 to RMB 5,050 per ton.  The 
price cuts took place in the midst of a broader pricing 
policy reform and arrived ahead of fuel tax increases, 
which are scheduled to take effect on January 1. 
Consumers had been expecting fuel prices to decrease in 
the coming weeks, as the government had ensured consumers 
on December 5 that fuel tax reforms would not result in 
increased prices at the pump. 
 
¶3. (SBU) Current fuel price reforms reflect government 
efforts to move toward a more market-driven pricing 
system that will reduce losses by state-owned refineries 
when global oil prices rise.  The reforms also intend to 
reduce greenhouse gas emissions by making consumers more 
sensitive to price fluctuations.  According to government 
announcements, under the new pricing system domestic 
retail fuel prices will be based on international crude 
prices, ex-factory prices of gasoline and diesel, average 
domestic processing costs, taxes, and a "reasonable 
margin" for refineries. 
 
¶4. (SBU) This week's price reductions mark the first 
changes in domestic fuel prices since global crude prices 
began to fall from their mid-summer peak.  China last 
adjusted fuel prices on June 20, when it raised gasoline 
and diesel prices by approximately 17-18 percent in order 
to reduce shortages caused by refiners, which found it 
unprofitable to place fuel on the market as a result of 
rising global oil prices.  Despite the fall in global 
crude prices over the last several months, Chinese 
regulators refrained from lowering domestic prices to 
allow state-owned oil companies to restore profitability 
following significant losses on refining operations 
earlier this year.  China's two largest refiners, Sinopec 
and CNPC/PetroChina, rely heavily on oil imports and 
reported refining losses in the first half of 2008 
despite receiving government subsidies to address the gap 
between international oil prices and domestic refined 
product prices. 
 
FUEL TAX WILL TAKE EFFECT JANUARY 1 
----------------------------------- 
¶5.  (SBU) The pricing changes come ten days ahead of 
significant fuel tax reforms, scheduled to take effect on 
January 1, 2009.  Under the new tax system, six types of 
transportation fees will be eliminated, including a road 
maintenance fee paid by all vehicle owners.   Toll 
collection on secondary roads will also gradually be 
phased out.  Most importantly, tax on gasoline will 
increase fivefold from RMB .2 (USD .03) per liter to RMB 
 
BEIJING 00004615  002 OF 002 
 
 
1.0 (USD .15) per liter and diesel tax will increase from 
RMB .1 (USD .01)per liter to RMB .8 (USD .12)per liter. 
 
¶6. (SBU) An increase in gasoline and diesel consumption 
tax has been the most controversial aspect of the 
proposed tax reforms.  During the period for public 
comment following the December 5 announcement of the 
reforms, more than 48,000 citizens (58.6 percent of them 
vehicle owners) submitted their views on the proposed 
taxes via a government-established web-based site.  A 
government-affiliated Chinese academic told econoff this 
week that a large percentage of the respondents opposed 
the fuel tax.  She pointed out, however, that vehicle 
owners generally have higher incomes and could more 
readily absorb higher taxes than people who do not own 
cars. 
 
COMMENT: REDUCED EMISSIONS UNLIKELY 
----------------------------------- 
¶7. (SBU) According to econ contacts, one of the main 
goals of the planned fuel pricing and tax reforms is to 
reduce greenhouse gas emissions by making consumers more 
sensitive to prices through a "pay for what you use" 
system.  However, even taking into consideration the 
scheduled tax increases, fuel costs are now lower than 
they have been for the past six months.  It is unclear 
how this will discourage vehicle use.  With a backdrop of 
high oil inventories, a struggling domestic auto market, 
and general uncertainty about the economy, a policy 
intended to curb energy consumption could stimulate it. 
End Comment.