The Green Leap Forward has a great rundown on yesterday’s announcement that China will increase fuel and electricity prices. This would certainly appear to be welcome news from an environmental, energy conservation, and (apparently) investor perspective, but not everyone is convinced.
China’s decision to raise fuel prices is unlikely to have much of an impact on demand, which is the fundamental cause of inflation, Morgan Stanley said in a note.
‘It seems to us that the government is trying to cope with the near-term financial difficulties of refiners and IPPs (independent power producers) rather than trying to depress demand,’ the note said.
Morgan Stanley said the price hikes will also add more inflationary pressure to China’s economy, making it less likely that the government will permit more significant power tariff rises in the next few months.
I share The Green Leap Forward’s take that this is good news (whatever the rationale for the price move), but also share its caveat that “[i]t is not a complete liberalization of energy prices.” The price increases were imposed by the National Development and Reform Commission (NDRC), not the market. They were undoubtedly prompted by market forces, and demonstrate that China can not live in an energy cocoon, but they do not introduce any structural changes in China’s electricity (or fuel) pricing mechanisms.
In fact, on the electricity side of things, the NDRC actually introduced new “anti-market” price caps.
More than 80 percent of all the power generation companies suffered losses in the January-May period due to power-coal price rises.
Official statistics showed that power coal prices went up by more than 80 yuan per tonne in the past two years. The prices had gone up by 60 yuan since the beginning of the year.
The commission also announced the country would exercise temporary price intervention on power coal as of Dec. 31, and power coal prices are capped below the price on June 19.
These caps will only cause other market distortions (presumably decreased domestic coal supplies) that will need to be combated by additional governmental tinkering down the road.
So what we have is a necessary price move in response to market forces; now, if we could just cut out the middle man (except as a price regualtor for the monopoly grid entities) and let the market set the prices we would all be better off.
2 responses so far ↓
1 Adam Minter // Jun 21, 2008 at 12:09 am
That’s the thing: raising the regulated price is a reaction to the market, but it’s by no means a market-oriented solution. Especially because - and nobody is much talking about this - the price hike exempts Sichuan, two other provinces, farmers, public transit, and men who wear green ties and black suits on Thursdays (well, maybe not the last one). In other words, it’s a selective hike, not applicable to vast segments of the Chinese economy. Arguably, such a situation could drive consumption even harder as people and companies figure out how to take advantage of the distortions. I don’t know about you, but I sure wish that I owned a tanker truck in a province bordering towns in Sichuan with lots of gas stations.
2 cmcelwee // Jun 21, 2008 at 1:44 pm
Good point Adam. The possibilities for arbitrage are endless. You know what’s going to happen: someone is going to blow themselves up hauling gas from Sichuan or the farm in a makeshift “tanker truck.”
Leave a Comment