China announced on Saturday its first fuel price cuts in 16 months, a move that will bring down domestic prices from record highs and is expected to ease stubbornly high domestic inflation.

The National Development and Reform Commission (NDRC), the country's top economic planner, will reduce retail prices for gasoline and diesel by 300 yuan ($47) per ton starting October 9.

As a result, the benchmark retail price of gasoline will be cut by 0.22 yuan per liter, while diesel's price will decline 0.26 yuan per liter.

The decrease marks the first fuel-price reduction since June 1, 2010. Over the past 16 months, the NDRC has raised fuel prices four times following escalating global crude prices.

However, the price of crude has fallen remarkably since August amid the worsening debt crisis in Europe and United States, and fears of a double-dip recession of the global economy that sapped oil demand.

The slump has accelerated since the end of September. Prices for West Texas Intermediate (WTI) crude oil dropped to $75.7 from $86.8 per barrel in early August. While Brent crude slumped to $99.8 per barrel from $107.3 per barrel.

Despite that, China's domestic fuel prices have long remained intact and that has aroused public complaints.

Liu Xin, a taxi driver in Shanghai, fussed over his daily fuel costs of 300 yuan. Despite working 18 hours a day, he can only earn a little more than 3,000 yuan a month. "Why do domestic prices remain unchanged while global prices fall?" he asked.

Cao Changqing, director of the pricing department of the NDRC, explained that although the spot prices slumped, the prices did not meet the existent mechanism that emphasizes the average changes over 22 straight working days.

China's current oil pricing system was introduced in May 2009. The system gives the NDRC the right to adjust domestic fuel, diesel and gas prices when average prices for Brent, Cinta, and Dubai crude oil move by 4 percent within 22 consecutive working days.

Cao noted that until recently the price cut standard had been met. According to www.chem99.com, a petrochemical consultancy, crude prices under the current mechanism have fallen 4.07 percent as of October 7.

In response to criticism that the NDRC was unresponsive to price cuts but overly reactive to price increases, the ministry said it was an invalid criticism.

The NDRC has been very cautious in raising prices as it postponed such moves several times and intentionally moderated the price hike margins to minimize its impact on fuel inflation, it noted in the statement.

Since the current pricing mechanism was put into place, there have been ten increases and six reductions. In general, prices are going up following the global trend.

New mechanism in the cards

Although the current pricing mechanism helps curb drastic price fluctuations, the NDRC admits it lacks transparency. And the prolonged monitoring period gives rise to hoarding and other speculative activities.

Dong Xiucheng, a professor with the China University of Petroleum, said the current pricing system only considers global market and domestic inflation, but neglects domestic demand.

He stressed the domestic fuel market system remains incomplete, therefore the government's price regulation is still necessary.

To make the system truly market oriented is a must and should consider the domestic consumer more, Dong noted.

"Within the current framework, we will shorten the adjustment period, accelerate the changes, improve the pricing mechanism, and adjust the targeted crude categories," a statement on the NDRC website said.

The mechanism reform is still under way and will be made public after a consensus is reached, the statement said.

Guo Haitao, also a professor with the China University of Petroleum, said that cutting the 22-day period will make it harder for speculators to hoard.

Experts also called for breaking the state-owned oil company's monopoly to revitalize the system with the fresh market forces.

The government should create a more open environment for private oil companies and gradually loosen price controls, said Han Xiaoping, an energy analyst with China5e.com, an energy information website.

Refiners suffer

China's Consumer Price Index (CPI), a major gauge of inflation, hit a three-year high of 6.4 percent in June. After that, the index has been staying above 6 percent despite the government's intensified cooling measures.

The cut "will work to lower social operational costs, reduce price hike pressures and promote steady and relatively fast economic development," the NDRC said.

However, analysts said the latest cut is too mild to tame CPI and will exacerbate the nation's refinery's losses.

China's refiners have long complained about rigid oil product prices and volatile crude prices creating uncertainties for their businesses. The government gives handsome subsidies to major refiners such as Sinopec and PetroChina in compensation for their annual losses, as oil prices have a strong bearing on social stability in China.

By the end of last year, China's annual oil refinery capacity stood at 560 million tons, of which Sinopec and PetroChina account for 75 percent.

In the NDRC's latest statement, it asked the nation's top three oil companies, including CNOOC, to step up production and logistics to ensure adequate fuel supply, especially for agricultural use.

(Xinhua News Agency October 8, 2011)