Fuel Tax Is Coming To China

Fuel Tax Is Coming To China

Paul Maidment, 11.21.08, 12:05 PM EST

China joins other Asian nations that are feeling the growing fiscal pressure of paying subsidies.

Paul Maidment

China is readying the introduction of a fuel tax, replacing the price controls it now imposed on refined petroleum products such as gasoline and diesel.

A steady drip of leaks quoting unnamed sources has been coming out over the past month, suggesting first that the new tax was coming, then that it was coming soon, and, earlier this week, that it was coming within the next 20 days.

On Thursday, the National Development and Reform Commission, the country's top economic planning agency, announced that it and the finance and transport ministries has held discussions on the subject, the clearest signal yet that the new tax is close at hand.

The new tax would replace road tolls as a way of funding highway building, and put market-based pricing into China's fuel market. The tolls would be abolished at the same time the new tax was imposed, to ease the impact on drivers.

China is not alone in subsidizing energy and gasoline in particular. Half the world's population benefits from energy subsidies, which translates into a quarter of the world's gasoline production, two fixed-income analysts at Morgan Stanley, Stephen Jen and Luca Bindelli, pointed out earlier this year.

Such subsidies distort the market by preventing rising prices from lowering world demand to the extent that the textbooks say they should when prices rise. Energy-hungry China was a case in point, as crude oil prices reached record levels in the middle of this year.

Like several other Asian countries from India to Indonesia that have cut their fuel subsidies this year, China is feeling the growing fiscal pressure of paying them. The central government will have to pay an estimated $40 billion this year to the state-owned refiners PetroChina (nyse: PTR - news -people ) and Sinopec, which buy crude from China National Offshore Oil (nyse: CEO - news - people ) or on world markets at global prices but sell their refined products at controlled prices.