China raised prices of gasoline, diesel, aviation fuel and electricity by as much as 25 percent from June 20.

The price of gasoline rose by 15 percent to 6,980 yuan per ton, diesel by 18 percent to 6,520 yuan per ton, jet fuel by 25 percent to 7,450 yuan per ton, and electricity was raised 0.025 yuan per 1kwh an average 4.7 percent.

China is the fifth economy in the region to raise fuel prices - Malaysia (47.8 percent on June 4), India (10-15 percent on June 4), Indonesia (25-33 percent on May 24) and Taiwan (13-16 percent on May 28).

Most analysts expected this hike to come after the Olympic fearing its unpopularity. And despite China's eagerness to narrow the gap between the international and domestic prices, its government has been reluctant to do so because of the potential impact on the inflationary expectations and financial market.

It is a relatively low "hike" compared with other Asian economies, given that the Chinese government subsidizes about 50 percent of the price sold domestically compared with international energy prices.

It is estimated that the total cost of the implied subsidy to fuel consumers on refining imported oil in 2008 would be around 218 billion yuan, or 0.8 percent of GDP, with the cost shared between the oil companies and the government.

China produces around half of its oil consumption which brings down the average fuel cost. However, even if the financial consequences of the price controls are minimal, there is strong reason to adjust prices for reasons of income inequality.

Fuel prices are kept low for low and middle income people. However, such low prices can benefit everyone, including the rich who can afford high prices.

Keeping prices artificially low not only distorts demand behavior but also subsidizes those more well-off.

A more effective way to protect people's purchasing power would be to let prices increase and introduce direct subsidies for a particular income group.

Hence, after this price hike, we expect to see more indirect fiscal policies to help the low to middle income people.

Besides high energy costs, some economists believe, soaring food prices are also hitting the low-income groups.

However, as most low-income people in China are farmers and sellers of food, they can benefit from the higher food cost. Since the food cost is rising faster, their income growth is expected to be high enough to cover the current inflation.

However, if food cost goes higher, it can stimulate the industry.

We believe China can fare a lot better from the global inflation than other emerging markets.

The author is director of Convoy Asset Management Limited.

(HK Edition 07/01/2008 page3)