China lifts fuel price, raising inflation concerns

China has raised fuel prices for the second time in three months as it looks to offset a jump in global crude costs.

However, the move has raised questions over government attempts to slow inflation.

China, which subsidies the cost of fuel, increased the price of wholesale petrol and diesel by $53 (£34) per tonne from Sunday.

Further price rises may be needed if the cost of oil keeps rising on the international market, analysts said.

Instability in the Middle East has raised concerns about supply, and the price of oil has climbed to more than $100 per barrel.

Capping demand

China's National Development & Reform Commission (NDRC) said that the price rise was needed to slow demand for oil and fuel in China.

"Excessively fast growth in oil consumption is exceeding the tolerance capacity of our country, economically and environmentally," the NDRC was quoted as saying by the Reuters news agency.

"Therefore there is an urgent need to give play to the role of price levers for adjustment and guidance, constraining the excessively fast growth of oil consumption," it added.

China's latest price increase works out at 4 cents per litre of petrol and 5 cents per litre of diesel.

Inflationary pressures

China like many other countries across Asia and the rest of the world is fighting against a high rate of inflation.

Tight supply of commodities such as food and oil has pushed up prices and it is causing headaches for both governments and consumers.

Earlier this month, China's central bank raised interest rates to 6.06% in an effort to stem price growth.

Some analysts warned that a jump in fuel prices may push up transport costs and impact the price of essential commodities.

According to the latest figures, consumer prices rose 4.9% in January.

Factory output

Meanwhile, Chinese factory output shrank slightly in February.

Qu Hongbin, HSBC's chief China economist, said the contraction was a response to monetary tightening policies.

"The Chinese New Year holiday may be a factor but not the only reason. It also implies that quantitative tightening is starting to filter through, yet more still needs to be done to check inflation," he said.

HSBC's China Manufacturing Purchasing Managers' Index fell to a seven-month low of 51.5, from 54.5 in January.

Any value above 50 indicates expansion in the manufacturing sector.

Feb 21^st, 2011

Source: BBC News