China announced a 25 percent increase in onshore natural gas prices Tuesday, which will bring the country's natural gas prices closer to a market-based pricing mechanism.

The National Development and Reform Commission (NDRC) said on its website that onshore prices would increase 0.23 yuan ($0.03) per cubic meter, which would add an average of 4.6 yuan ($0.67) to the monthly household budget.

China's natural gas pricing system is controlled by the NDRC. In November 2007, China raised both wellhead gas prices and wholesale prices to industrial users. Tuesday's rise was the first hike in two and half years and only the third in five years.

The move will benefit the margins of the country's leading onshore gas producers PetroChina and Sinopec in the long term. Their natural gas sectors have suffered financial losses in recent years. But the impact on CNOOC, China's third-largest oil and gas company, should be relatively limited as it has no onshore gas reserves.

According to the Economic Observer, China may raise natural gas prices by 10-20 percent in the third quarter this year, the publication cited an unnamed official with the natural gas office of the National Energy Administration as saying.

Fitch Rating, an international credit rating agency, believes the price increase will take the Chinese government one step closer to establishing a market-based natural gas pricing mechanism in the foreseeable future.

"It's impossible in China to implement an absolute market-based pricing mechanism as natural gas is an important national resource. The government shoulders responsibility to take part in the pricing process," said Lu Ying, an analyst with Shanghai based Toprise Information & Technology Company.

But in most Chinese cities, including Beijing, Changsha, Hefei and Lanzhou, natural gas prices remain unchanged as local public hearings are needed to set final retail prices.