Currently, the issues of natural resources and the environment are of urgent concern to the Chinese central government. The rapid development of the country's economy has given rise to unlimited demand for energy. However, under the present system of national economy management, it is not easy to increase the prices of energy products. Control over the pricing rights of major energy products such as oil, electricity and natural gas still remains with the government.
It is a well-known fact that
China's average price level for energy products is lower than that of most other countries, including many developing countries. In order to save natural resources and energy supplies, many countries in the world impose high tax on energy products, thus leading to high price levels. However, such a high price level for energy products is not suitable in
China, or at least it wasn't in the past. The Low costs are the most important factor in
China's ability to attract foreign direct investment (FDI). The low cost not only refers to the manpower, but also refers to costs of energy, materials, and so on.
At present, the state still controls the price level of major energy products. Whether it be oil, electricity, natural gas or other energy products, the situation is similar. The state fears a disordered price hike and resulting bad effects in the near future if the energy prices are decided by the market alone. Take oil for example. In 2006, the world's oil price increased sharply. However, the oil price in
China didn't increase by a corresponding margin, due to the intervention of the state. To compensate the local big oil companies for the losses they incurred, the state offered RMB 10 billion (USD 1.28 billion) and 5 billion (USD 0.64 billion) to the biggest local oil company Sinopec, in early and late 2006 respectively.
However, changes in the current situation continue to be seen. At the end of 2006, the state moved to relinquish its control over the price of coal, which is to be determined by market forces in 2007. While this is just a beginning, it is a clear indication of the seriousness of the state's intention. As regards oil, the state has moved forward the first step.
China's local oil market is opening up with the
production and sale of oil products now ready for investment. In the past, only three top state-owned oil companies had oil operation rights. It is expected that the state's next steps will be the reformof the current oil pricing system. The new market prices of oil products must follow the international prices. Furthermore, the state's financial compensation of the local big state-owned companies will be cancelled in future due to strong domestic opposition.
Because the domestic prices of energy products are generally low, once the pricing is returned to the market, the average price level of energy products will inevitably increase. Currently, as an initial response of the market, the share prices of some listed energy companies have started to increase in the stock market in
China.