If China curbs the growth in its oil demand, the speculation in oil price could be checked and the country could also save a lot of money. If the oil price dropped by $50 to about $90 per barrel, where it was in early 2008, China could save nearly $100 billion, which could be used to subsidize the life of common people or the businesses.
The oil price hike would not intensify the inflation because the energy price takes a minor portion in the CPI basket. The food price, which takes about 35 percent in the CPI figures, is going to drop, so there is more room for the decision-makers to raise the oil price.
If the oil price could be raised to the ideal point decided by the demand and supply on the market, it would help restore the investor confidence on the stock market. One of the biggest ills in the stock market is the price control by the government to the products of some listed companies. On the one hand, the government required oil refiners and electricity generators to ensure the supply of their products despite their financial losses. On the other hand, it maintained relatively strict control over the prices of these products.
It is against the law of the market economy that the listed companies keep operating on losses. So most investors would refuse putting their money in these companies or even quit the market. The continuous slump on the stock market stems from the destroyed confidence of investors. Such a slump hurts the market mood and poses challenges to the long-term development of the Chinese economy.
It would relieve many economic headaches if the refined oil is priced by the demand and supply in the market. And the influence of the price rise could be contained if the government takes necessary measures to safeguard it.
The author is a researcher with the Institute of Finance and Banking under Chinese Academy of Social Sciences.
(China Daily July 3, 2008)
