Mainland fuel costs still far below world average Beijing's increase in energy prices is not expected to be the last, even though it risks fuelling inflation and slowing economic growth. Economists said the mainland's state-set fuel prices were still considerably lower than the world average and Beijing may have to increase prices again sooner rather than later if global oil continues to skyrocket. The increases are expected to exacerbate already problematic inflation, adding to the likelihood Beijing will lift interest rates for the first time in six months. Inflation eased to 7.7 per cent last month from 8.5 per cent in April and February's 12 year high of 8.7 per cent. In the first price rise in eight months, Beijing raised the retail price of petrol by 16.7 per cent to 6,980 yuan per tonne and of diesel by 18.1 per cent to 6,520 yuan per tonne, effective yesterday. China joined India, Indonesia, Malaysia and Sri Lanka in raising fuel prices, as record crude prices made government price controls increasingly unsustainable. The price of mainland jet fuel for wholesalers was raised by 25.2 per cent to 7,450 yuan a tonne, while retail electricity prices were raised by 2.5 fen per kilowatt-hour, or an average 4.7 per cent. The mainland stock market climbed 3 per cent yesterday on expectations earnings would be increased at oil refiners such as China Petroleum and Chemical Corp. The increases announced on Thursday night by the National Development and Reform Commission (NDRC) were not expected by many economists and analysts, who believed Beijing would not act before the Olympics because of fears higher costs would fan social unrest. The increase in retail fuel prices would have only a limited impact on consumer price inflation, an NDRC official said on state radio yesterday. 'The impact will be only less than one percentage point,' said Xu Kunlin, vice-head of the pricing department at the NDRC. Chris Lafakis, an associate economist at Moody's Economy.com, said that in recent weeks the mainland had cautioned against altering market-based prices too quickly, arguing this could trigger an unwanted acceleration in inflation. 'While we had anticipated that this announcement might come, the magnitude of the price increase and the swiftness of the announcement came as a surprise,' Mr Lafakis said. The mainland, like other developing nations in Asia, caps fuel and energy prices to protect the poor. Even after the hikes, domestic petrol, diesel and jet fuel prices are 31 per cent, 38 per cent and 30 per cent below international import parity prices respectively. To help offset the rising cost of crude oil for state refiners, Beijing grants billions of yuan in subsidies to them. While this subsidy system works when oil prices trade below a certain level, the surge in recent months has meant refiners are suffering heavy losses. Some small refiners have stopped production, exacerbating major fuel shortages. UBS Securities economist Wang Tao said the larger-than-expected increase in fuel prices did not mean the government had become less concerned about inflation. 'More likely, it may reflect the increasing concerns about the negative impact on real economic activity from the serious oil product shortages that was spreading nationwide,' Mr Wang said. The mainland, the world's second-largest oil consumer, has been named a major contributor to skyrocketing international oil prices. Earlier this month, the International Energy Agency partly blamed demand from China and India for pushing prices up to US$136 a barrel. Economists said the increases would have a direct impact on factory-door prices, also known as producer prices. The Producer Price Index, reflecting manufacturers' costs, rose 8.2 per cent year on year last month, the fastest pace in three years. Higher costs to industry are expected to be passed onto consumers, said Huang Yiping, Citibank Global Markets managing director.