The latest hike in oil prices will test the resilience of the Chinese economy. Whether or not the country can maintain its growth momentum in the face of higher oil prices will be an important test.

For a large oil consumer like China, however, perhaps a more important test is how promptly and adequately the government can cushion the impact higher oil prices have on disadvantaged groups.

The National Development and Reform Commission (NDRC), the country's pricing authority, announced on Sunday the first price hike of gasoline and diesel oil in eight months. The decision was meant to offset refinery losses and bring domestic prices closer to international levels.

As a national consensus has been built on the necessity to raise the country's energy efficiency to pursue sustainable development, introduction of a market-driven pricing mechanism for key energy resources becomes a matter of urgency.

Narrowing the price gap between the international oil market and the domestic market is a necessary step to control consumption growth.

Before the price hikes, the retail price of domestically processed oil was only about US$43 per barrel, while crude oil was sold at about US$60 per barrel on the international market.

The oil price hike will certainly please domestic oil companies, though not as much as they might have expected. In spite of huge profits from their crude oil business, China's oil giants appeared quite dissatisfied with refinery losses resulting from low domestic retail prices.

The latest move does not shed much new light on the trade-off between the profits of State-owned companies and the public's interests.

However, it does distinguish itself from previous price hikes due to the unprecedented efforts to subsidize disadvantaged communities and public service sectors.

After all, how well lower-income users are shielded against rising fuel costs will set the pace of the pricing reform.

The NDRC's decision made clear that the State Council has decided to offer subsidies to communities such as fishermen, farmers, State-owned forestry enterprises and urban public transportation firms.

Any upward price adjustment that comes without immediate and appropriate compensation for groups sensitive to higher prices will not be sustainable, and will be no help to narrowing the widening income gap in the country.

Higher oil prices and other energy and natural resource prices are badly needed to encourage efficient usage. But if that means a heavier burden for the poor in terms of proportion of their income, it will create more problems than it answers.

It is the government that should assume the lead in easing the price shock with transfer payments. Only when fiscal funds are delivered in a timely way to help low-income users can the pricing reform be accelerated to raise energy and resource efficiency.

Sooner or later the country will introduce a fuel tax to replace the much-criticized road tolls, not only to standardize public finance but also to effectively adjust oil consumption.

A primary argument against this tax-for-fee reform has long been worries about how low-income groups will be properly compensated if discretionary road tolls are replaced by a uniform fuel tax.

Now, the current subsidy efforts show that the Chinese Government is prepared to take due responsibility in facilitating market-oriented pricing reform.

(China Daily 03/28/2006 page4)