IT is difficult to have sympathy for an ailing patient who refuses to take the medicine that could cure him, and the analogy could be applied to China over the state of its oil industry. The announcement last Friday that many refineries in China's oil-producing regions have had to cut their activities by 50 per cent because there is no more storage space for the finished product, coupled with the news on July 25 that restrictions on imports of oil and products are to be tightened, highlights the fact that the problems that have plagued the industry since it was liberalised have not gone away. A two-month blanket ban on imports was introduced in March because high inventories in the northeast were about to cause a reduction in production - a situation that has already come about. The ban was also aimed at stopping the rise in imports brought about by the 300 to 400 independent traders who sprang up when the economy was first liberalised. This highly profitable, but essentially speculative, business was simultaneously fuelling inflation, contributing to a spectacular balance of trade deficit and draining the country of foreign currency. Last year, China became a net importer of oil for the first time, and the fact that the government imported 10 per cent of the 1.1 billion barrels processed contributed substantially to the US$12.25 billion trade deficit. The ban succeeded in accomplishing the first, but not the second objective, so a second two-month ban was imposed in May. This one was partially successful, but largely because it was coupled with a price cap for oil and products. This restricted the profits of the independent traders and forced the smaller ones to close down entirely. With the partial success of the second ban, the government was set to impose new restrictions on imports that would ostensibly enable more central control. Beijing announced that from this month imports would only be permitted with licences granted by the State Planning Commission and which could then only be bought on the spot market by Sinochem or Unipec. The only exception is Chinaoil, which lobbied successfully for the right to import its own supplies for its refineries. No licences under the new regulations were due to be issued until September, and, at present, it looks like this might take even longer. Furthermore, on July 31 a news agency reported rumours that even imports under existing licences would not be permitted. The new regulations are a refinement of the total ban, yet their only real success (as far as can be ascertained) was a halt in the rise of imports brought in by independent traders. When the flouting of the import ban was examined in May, it was estimated that about 500,000 tonnes of diesel and 200,000 tonnes of oil had been imported during that month. Similar figures seemed to apply for June and July. It is likely that these levels are the ones that satisfy the requirements of industry in the special economic zones and that the government bans have largely had no effect, but at least the level has stabilised. This limited success aside, the bans have not had a long-term effect. Furthermore the new regulations - when they come into force - will be so bureaucratic as to be almost unworkable. End-users try to calculate their requirements as far into the future as possible but in circumstances where they need extra product at short notice, the new regulations will be an onerous, if not totally insurmountable, obstacle. Both problems - a glut in production and the uncontrollable activities of independent trading companies - are the result of inadequate storage space. It is true the glut can be attributed to the inadequate infrastructure that hampers delivery to the big end-users in the south, but this would not have such a drastic impact on the industry if there was additional storage space in the northeast or the south. The independent traders are presently necessary for the industries in the south to maintain production, because there is insufficient storage space for these industries to build up sufficient inventories. Oil and products have to be imported on a regular basis because a constant inflow is needed, and end-users will buy supplies from any source they can. The obvious solution to the problem would be the construction of more storage space. Unfortunately the government is unable to undertake such a programme because of a lack of funds. Private companies are reluctant to undertake such a programme because it would be a considerable time before their investments could be recouped. There remains one more way to solve the problem: allow the big foreign oil companies to set up unfettered activities in China. Building storage facilities would figure in any projects they undertook and such companies have a business approach that entails massive investments which will not pay back for several years. This brings us to the root of the storage problem; a desire to maintain government control as far as possible, combined with a reluctance to allow the big oil companies to share in the development of the industry. When the government began liberalising the economy, it wanted the change to be as least disruptive as possible, and it naturally left the oil industry until last. But critics argue that it does not make sense to permit a little private enterprise, yet not encourage the most efficient firms in the business to take significant part. In fact, they could say that the import bans are like trying to put the free market genie back into the bottle, rather than allowing it free rein. There is no doubt that allowing the big companies to participate would alleviate the present problems. Beijing acknowledges that off-shore exploration and production will not be possible for long time without outside finance and expertise. To this end, officials from the relevant department went cap in hand to Houston, Texas, in June to invite bids for 13 blocks covering 40,000 square kilometres in the South China Sea at the mouth of the Pearl River. And buying China's imports on the spot market has become more efficient because the task has been largely entrusted to Fortune Oil, a recently-formed company which has access to the expertise of Vitol, a 20 per cent shareholder. It is difficult to see why Beijing is reluctant to allow the big companies a free hand when they could solve not only the acute problems in the industry, but the chronic ones too. In May, to boost production further, Beijing announced it had set aside 24 blocks of land totalling 294,000 sq km for oil exploration by domestic companies. However, the domestic companies cannot possibly be expected to find and produce oil as quickly as the big international companies who have been engaged in such activities since oil was first discovered. Leaving aside the new wells for the moment, until recently it was costing marginally more money to produce slightly less oil. There are three ways of dealing with this. First, stop running unproductive wells constantly. Since the end of May 21 inefficient wells have been shut down and a further 34 wells are being run only intermittently at the Huabei oilfield near Beijing. A second way of coping is to increase efficiency. In the oilfield region east of the Taihang mountains, an official plan is in place to increase recovery rates from the oldest wells by five per cent by drilling more wells and streamlining production. Thirdly, because no refineries have so far been privatised, the best example of what would happen under free market conditions is supplied by Shanghai Petrochemical. The company announced a 97 per cent increase in profits to December 1993, its first year as a private company. The profit would have been even greater had there not be an effort to cool the economy last summer. Shanghai Petrochemical's example was due to be followed by Zhenhai Refinery and Petrochemical Shareholding Co in Ningbo. Late in July, it was announced that the company was to soon offer shares in Hong Kong. But at the end of that week, Beijing announced that all new listings would be suspended until next year because of the weakness of China's stock market. Clearly, government attempts to cool the economy are inhibiting the oil and products industry, but that is not the only hindrance. More efficient methods of production and refining will only be possible if the multinationals are allowed to take part in China's oil development, and quickly.