BEIJING - China raised the ceiling for retail gasoline and diesel prices for the first time this year on Wednesday in tandem with international crude oil hikes.

Average fuel prices increased as much as 3.65 percent, with gasoline and diesel rising by 300 yuan ($47.55) a metric ton each. That equals 0.22 yuan a liter for gasoline and 0.26 yuan a liter for diesel, the National Development and Reform Commission (NDRC), the country's top economic planner, said on Tuesday.

After the increase, domestic gasoline prices on average will be capped at 9,380 yuan a ton, while diesel will reach 8,530 yuan a ton. It's the first time retail gasoline and diesel prices have been adjusted since Oct 9, when the NDRC cut prices by about 3 percent, following two hikes earlier in 2011.

The hike, on the back of volatile surging international oil prices, will motivate refineries to process more oil, guarantee domestic supply as well as propel the pace of cutting emissions, the NDRC said on its website.

The hikes, however, will not stop domestic demand for gasoline and diesel from entering into a growth trajectory as a result of the re-opening of factories and resumption of infrastructure construction after a short break during Chinese New Year, said Han Jingyuan, an energy analyst with JYD Online Co, a bulk commodity consultant based in Beijing.

Industry experts had widely expected the fuel hike in anticipation of moderating domestic inflation.

"Given that China's inflation appears to be confirmed on a downward trend, we expect that policymakers will feel more comfortable allowing upward fuel price adjustments," Deutsche Bank AG said in a recent research note.

Analysts said that more fuel price hikes are expected to occur this year owing to tensions between Iran and the West as well as the expected easing of inflation in China.

Global crude oil prices may increase as much as 30 percent because of sanctions by the United States and Europe on Iran, the International Monetary Fund warned. The authority also said that China is considering reforming the pricing mechanism for the fuel by reducing adjustment period and frequency.

China should adopt more flexible and market-oriented measures to ward off the volatility of global oil markets, said Zhu Fang, vice-director of the information and marketing department at the China Petroleum and Chemical Industry Federation.

It currently measures a standard basket of oil and adjusts prices if the average moves more than 4 percent in 22 working days.

Zhu said that period could be reduced to as short as 10 days. NDRC said China may also consider adjusting the three types in the country's existing pricing basket of Brent, Dubai and Indonesia's Cinta, without elaborating.

The current fuel pricing mechanism was introduced in December 2008 and does not fully fit the ever-changing global oil markets, Zhu said, but the government may take gradual and cautious steps to reform the scheme.

Han Wenke, director for the Energy Research Institute of NDRC, said that the government is considering allowing China's top oil companies, including China National Petroleum Corp and China Petrochemical Corp, to set retail fuel prices instead of the NDRC to better reflect market conditions.

China Daily

(China Daily 02/08/2012 page2)