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Price Hike Won't Hurt Growth
The recent oil price hike driven by the Middle East tension is unlikely to undermine China's goal of achieving a 7 percent GDP growth this year, even though the country must pay more for oil imports.

"We have not seen any noticeable impact of the international oil price rise on the national economy," said Niu Li, an economist with the State Information Centre. "The economy is maintaining its strong momentum."

But Niu warned if the price continues to rise, the economy could be hurt, as production costs would rise.

The international oil price has risen 14 percent since the middle of June on concerns that a possible United States' strike on Iraq would disrupt oil supplies from the Middle East, the world's oil basin.

The price tumbled almost 5 percent yesterday after Iraq agreed to allow the return of weapons inspectors without conditions, easing the fears of an attack.

While some worry the oil price hikes might slow the recovery of the staggering world economy, China International Capital Corp said in a report that rising oil prices would affect China's economy less than the more developed economies, because of "China's relatively low dependence on crude oil and the low inflationary pressure."

Oil consumption constitutes only 20 percent of the nation's total energy mix, as compared with 55 percent in Japan and 40 percent in the United States, the report said.

A benefit the oil price spike may bring is that it helps alleviate the lingering domestic deflation, as production costs rise, it added.

Although the country will have to pay more for oil imports, Zhou Dadi, director of the Energy Research Institution under the State Development Planning Commission, said the price rise will not cut significantly into China's foreign exchange reserves.

"China will have to pay an additional US$500 million for every US$1 price/barrel rise. Still, this is nothing for China's US$250 billion in foreign exchange reserves," said Zhou.

China's two largest oil companies, PetroChina and Sinopec, must be happy to see the oil price pick up, which will help turn their profit decline around.

PetroChina, the country's No 1 oil producer, posted a 28 percent fall in first-half-year profits, while Sinopec, the second largest producer, registered a 45.5 percent drop. They have blamed the profit loss on an 18 percent year-on-year decline in oil prices.

In the second half of the year, they expect to fetch an average price for their oil of US$23-24 per barrel, against the US$20 per barrel price in the first half.

"There will be a very, very big turnaround in their profits," said an oil energy analyst.

The analyst said a US$1 a barrel rise in oil prices will increase profits by 9 percent for both companies.

For the aviation industry, the high prices may be a nightmare. "What we pay for fuel takes up 35 percent of our profits," said an official with East China Airline. "Although the government allows us to peg a premium on flight charges, it does not always cover the increase in fuel costs."

The official said he hopes the government would allow them to trade oil futures in the overseas market to fix the cost of fuel supplies.

But government officials said they would be very cautious about allowing more trading in the overseas futures market for fear of the huge financial risk.

(China Daily September 18, 2002)

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