China Energy Industry

Businesses to confront resources price hikes

China Daily
August 14, 2006

A top National Development and Reform Commission official says liberalizing the price of raw materials and energy will increase costs in the long run, but the government is determined to make prices more dependent on market forces.

Chinese businesses will have to cope with continuously rising resources costs as pricing liberalization is sped up. Despite concerns, the nation’s top policy-making body, the National Development and Reform Commission, has vowed to push ahead with its liberalization campaign. “We will allow the scarcity of resources to determine their price,” said Bi Jingquan, the commission’s vice-minister in charge of price reform, at a national forum last week. “That’s the basic principle of the price reforms.” His words were echoed by a think-tank report released over the weekend, which called for price reforms to encourage more efficient economic growth. Bi said liberalizing the pricing of raw materials and energy will definitely increase costs in the long run, but the government is determined to make prices more dependent on market forces. Industry insiders said his speech was the first time the government has formally expressed its determination for pricing reform.

The major concern over the liberalization was possible consumer price hikes, which may cause financial difficulty for farmers and other disadvantaged people. Bi said the government is considering further measures to liberalize the price of coal, electricity, oil, natural gas and water. “And related social policies, such as offering subsidies, are being considered to lessen the impact on disadvantaged groups.” Over the weekend, the government’s top think-tank, the Development Research Centre (DRC) under the State Council, also called for reforms on resource prices to promote more efficient economic growth. “The price reforms should increase the costs of resource products for businesses with low efficiency,” said the DRC report, cited by Xinhua News Agency yesterday. The DRC attributed China’s current high energy-consuming growth mode to a price system that fails to reflect the scarcity of resources. Statistics from the centre show that water is China’s most precious resource, yet the water price is only one third the international average. The low price has led to over consumption and water being wasted, said the report. The same problems have affected rural land and other resources.

Government statistics show that China’s energy consumption per unit of gross domestic product (GDP) rose slightly by 0.8 per cent in the first half of this year. The rise represents a major challenge for economic planners, who envisaged a 4-per-cent cut in the country’s energy consumption per unit of GDP in 2006. Possible measures to deregulate prices include levying a resource tax, a windfall-profit tax or higher land-utilization fees to encourage companies to reduce their projects’ environmental impact and solve the difficulties posed for people with low incomes. The government should also increase resource utilization fees, said Huang Shengchu, president of the China Coal Information Institute. For example, mine owners are charged only 1,000 yuan (US$125) annually per square kilometre of coalmine. “The government should raise that by a big margin,” said Huang. “Low fees have caused a lot of waste.”

The reckless exploitation of resources has led to shocking waste. As an example the DRC report cited northwestern Shaanxi Province, where mines on average extract only 30 per cent of the coal in a seam, leaving the other 70 per cent underground forever. Amid recent requests from cabinet departments to speed up the liberation of the pricing regime, the Ministry of Commerce ruled out the possibility of rapid price hikes for major resources and energy during the second half this year. But the commerce ministry forecasted further price increases for oil-related products because of a shortage in supply. For other production materials, the prices may remain “stable” or “lowering” due to the balance of supply and demand. The ministry released the survey results after questioning companies in China and abroad on the price trends of nearly 300 production materials.

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