Tony Sagami discusses how China is still controlled by the Communist Party of China and part of that control is over prices. Mr. Sagami also discusses how the rising prices of fuel has no affect on the Chinese economy.
With all the great economic strides China has made, it is sometimes easy to forget that China is still a communist country and is controlled by the Communist Party of China. Part of that Communist control is over prices. The National Development and Reform Commission (NDRC) controls the prices on thousands of items: drugs, grain, edible oils, pork, noodles, milk, eggs, cigarettes, cloth, steel, train and bus fares, cement, fertilizer, college tuition and fuel. Recently, the NDRC raised the price of gasoline and diesel by 17% and 18% respectively.
Rising fuel prices are bad for the U.S. economy; however this is not the case in China. Gas prices are not as important to the typical Chinese citizen since they don't usually own a vehicle. The result is that higher fuel costs are not hitting disposable incomes in China like they are in the U.S.
Gas is still inexpensive in China. Prices are still under those in the free market. Even after this recent increase, a gallon of gas costs about $ 3, 25% less than what is paid in the U.S. Beijing is still subsidizing the cost of fuel across China, just not as much as before.
The last price hike did not slow China's economy. There seems to be no correlation between higher fuel prices and an economic slowdown in China. The NDRC raised fuel prices by 10% last November when oil was $ 90 a barrel but the Chinese economy didn't miss a beat. China's GDP grew by 11.9% in 2007 and the World Bank just upped its 2008 forecast to 9.8%. All statistics indicate that China is still growing every day.
China consumed an average 7.86 million barrels of oil per day in 2007, 9.3% of the world's total. Meanwhile, the United States went through 20.7 million barrels of oil per day or 24% of the world total last year. Many parts of China have been suffering from moderate to severe fuel shortages because fuel retailers Sinopec and Petro China simply shut down many of their gas stations. Fuel prices were being kept too low; they couldn't make money and it was easier to just not run the pumps. However, it should become easier for gas retailers to turn a profit again. Stations that have been dry will soon have plentiful supplies of fuel. Motorists and truckers that were left stranded or paying high black market prices can get back on the road. Long waiting lines and fuel shortages will be a thing of the past. And as a result, the economy will pick up.
"Against that fuel shortage backdrop, Chinese stocks have taken it on the chin. As measured by the Shanghai Composite Index, Chinese stocks have dropped 46% so far this year, and are down by more than 50% from their November 2007 highs," Sagami states.