Mon, Sep 12, 2005 - Page 10 News List

High oil prices put brakes on China's soaring economy

AFP , SHANGHAI

Rocketing global oil prices are eating away at the high-flying Chinese economy, provoking a slowdown that officials and analysts warn could lead to inflation and even social unrest.

"I have to admit that the rise in oil prices is having an impact on the Chinese economy," Zhu Zhixin (朱之鑫), vice chairman of the National Development and Reform Commission, said at a business forum in Beijing last week.

Although Zhu did not give concrete estimates, analysts say that China's gross domestic product growth next year will easily drop off by one percentage point.

They also estimate the consumer price index (CPI), its main measure of inflation, will jump two percentage points from around two percent now.

While China is not as vulnerable as other oil-reliant Asian economies, the prospect of high prices over a sustained period is a serious concern to economic planners in Beijing, analysts said.

China is the world's second biggest oil consumer. It relies on imports for about 3.7 million barrels per day, or 40 percent of its oil needs.

Demand in China is currently at 6.4 million barrels per day and though demand growth has slowed this year, consumption is expected to continue to expand, driven by strong economics and the low domestic retail fuel prices.

Beijing fixes oil prices by using a basket of the previous month's global trading levels in London, New York and Singapore and then allows the price to fluctuate eight percent.

The two-tiered system is meant to protect consumers against the discrepancy between pricing and suppliers, but sparked shortages of fuel this summer in southern China, pressuring the government to liberalize prices.

Overhauling the system would act as a brake on the economy, analysts said.

Morgan Stanley has revised its 2006 GDP growth forecast down to 9.3 percent from 9.5 percent and to 6.7 percent for 2007 as a result of higher oil prices.

The Asian Development Bank and the International Monetary Fund estimate a loss of about one percentage point next year.

Carl Weinberg, of High Frequency Economics, said that the cost would be significantly higher -- and it would raise China's import bill by US$47 billion over one year.

"We view this as a gross transfer of income to foreign oil producers, money that otherwise would have been spent at home," he said.

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