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Fuel tax unlikely to hike inflation
By Xin Zhiming (China Daily)
Updated: 2008-11-28 11:21

China's impending fuel tax reforms would not lead to a substantial hike in the country's inflation level as consumer prices are softening and the global and domestic economies are slowing, analysts said.

The National Development and Reform Commission is expected to publish the long-anticipated fuel tax plan after suitable revisions soon, Zhang Ping, head of the commission, said yesterday. "Our reforms will convert various tolls and fees for water and road transport into fuel consumption tax," he said, without giving any further details on the changes in the fuel pricing mechanism.

He said the reforms would contribute to energy saving and also reduce oil users' costs.

"At the present international oil price level, the fuel tax will certainly reduce users' costs compared with the current charges for road maintenance and management, as international prices are lower than domestic prices," he said.

Zhang, however, did not mention the potential impact of the fuel tax reforms on China's inflation, an issue that has been overshadowed by the global meltdown now.

Gasoline costs account for only 3 percent of China's consumer inflation basket, said Zhu Baoliang, senior economist of the State Information Center. Therefore, the fuel tax would not lead to an obvious change in inflation.

"Although we do not know the exact rate of the upcoming fuel tax, it would not significantly push up the inflation as it is expected to continue its recent downward movement into the next year also," said He Jun, senior analyst of Beijing-based Anbound Group.

Economists said that China is unlikely to maintain the annual growth of 12 percent it achieved last year.

But prices will continue to fall, they said. According to the World Bank, China's consumer price index (CPI), the major gauge of inflation, may fall to 2 percent next year from more than 6 percent this year. A Renmin University of China report expects the CPI next year to be around 2.3 percent, while others forecast it would be around 3 percent.

As Zhang pledged, the new fuel tax would not be designed in a way that would increase costs for oil users substantially, analysts said.

"The authorities would take into consideration various interests and therefore would not set the tax rate too high initially," said He.

Indications are that the tax rate could be around 30 percent or 50 percent. There are also suggestions that domestic oil prices need to be cut before imposing the fuel tax as fuel prices in some developed countries are lower than domestic prices.

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