China's top economic planner is working to fine-tune the country's fuel pricing regime to potentially make price changes more frequent and more reflective of global crude markets, a government official said on Wednesday. China put in place a new fuel pricing regime early this year, allowing authorities to adjust retail fuel prices if a 22-day moving average of global crude prices rises or falls more than 4 percent.
"The government is working to tweak the regime. Many things are likely to be changed. One thing is that the 22 working days might be shortened," the government official told Reuters. The official didn't elaborate and declined to be identified because he was not authorised to speak to the media.
Oil companies have largely welcomed the new price regime since it offers them more stable refining margins. But some have complained that the 22 working days trigger was too long to reflect changes in refining costs in a timely manner. "Some are asking to shorten it to 10 or 15 days," said Liu Bo, an analyst with Guojin Securities.
The National Development & Reform Commission said on Wednesday that China will further perfect the current fuel price regime and make it more market-oriented. "In the next step, we will carefully evaluate the refined oil products price mechanism and perfect it in line with the domestic as well as international oil market changes," the top economic planner said in a statement to sum up the price regime, without elaborating.
If price adjustments happen more often, then the change each time will become smaller, and presumably the government will also set a limit on the frequency or overall range of changes for a certain period, analysts said. "For example, it could be that a 2 percent change over a 10-day working average will trigger a price adjustment," a Shanghai-based oil trader said.
Given that issues such as consumer inflation, corporate profits and household incomes are often on the minds of policy makers when deciding oil price changes, frequent but small tweaks in the regime might make price changes easier than before, analysts said.
Besides reflecting more of the production costs, a shorter period will also help dampen speculation. China raised retail fuel prices five times and cut them three times this year. Authorities sometimes procrastinate in deciding on price moves, giving independent oil firms and end-users time to build or release stocks to beat official price changes.
"It will become more difficult for speculators to build up stocks or destock before official price changes due to the short notice. And the smaller possible speculative margin will also dampen their incentive," Qiu Xiaofeng, an oil analyst of China Merchant Securities based in Shanghai, said. "I think overall, this is a neutral to positive signal. But for China's oil price issue, the core is what the government should do when global crude moves to a higher level," Qiu said.
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