Prices of domestic refined oil products may have been cut in line with lower global prices, but the era of real flexibility in the country's pricing system is still some way off.

The National Development and Reform Commission (NDRC), the ministry-level body that plans the economy, announced on Saturday that it would cut the wholesale price of gasoline by 220 yuan ($28.21) per ton and the price of kerosene by 90 yuan ($11.54) per ton from yesterday.

An employee works at a gas station in Shanghai January 14, 2007. China has cut the retail price of gasoline for the first time in nearly 19 months, a surprise populist move that will hit refiners in the short-term but could set the stage for more market-based prices, analysts say. [Reuters]

The move marked the first price-cut for refined oil products sold on the Chinese mainland since May 2005. The price of oil products had gone up 12 times since 2003, including twice last year, in line with soaring global oil prices, Xinhua News Agency reported.

"The local price cut that took effect (on Sunday) was necessary and well-founded because crude prices have declined and the new oil-pricing mechanism is not yet available for public review," Han Wenke, director of the NDRC's Energy Research Institute, told China Daily yesterday.

He said that because the wholesale market for oil products is still dominated by State-owned giants mainly the China National Petroleum Corporation (CNPC) and China Petroleum and Chemical Corporation (Sinopec ) it is natural for the government to keep a tight grip on pricing.

No new pricing system

He added that the government would not adopt the new pricing system in the foreseeable future.

"Although lower global oil prices will help pave the way for a new pricing system that is expected to track international crude prices more closely, the recent drop in (domestic) prices may not necessarily have been connected to that system," Han said.

Zhou Dadi, the retired former director of the Energy Research Institute, echoed his successor's comments.

"Even if a new pricing mechanism is adopted, State intervention in pricing will still apply in China, where the wholesale market is mainly controlled by Sinopec and CNPC," Zhou said.

The government adjusts oil prices only when the international price changes by more than 8 per cent. For refiners, this can lead to major losses as they pay large export bills when international crude prices are high, but cannot raise prices of the products they produce, such as gasoline for automobiles.

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