China's latest fuel-tax reform may help spur demand for more fuel-efficient vehicles, according to analysts.

"Vehicle sales won't be damaged as the higher fuel tax will fail to lead to higher pump prices immediately, said Jia Xinguang, former chief analyst with the China Association of Automobile Manufacturers.

"Consumers tend to buy vehicles that have better fuel economy as future retail prices are widely anticipated to go up with their link to the international crude oil prices," Jia added.

China plans to raise the fuel tax on gasoline to 1 yuan (14 US cents) per liter from current 0.2 yuan per liter from January 1 while the diesel levy will increase to 0.8 yuan from 0.1 yuan.

Along with the scrapping of road maintenance fees and five other fixed charges, the fuel tax increase is mainly aimed at encouraging motorists to drive less, with the cost of fuel becoming a larger part of the cost of car ownership.

Market demand for fuel-efficient vehicles and small cars has grown in China amid rising fuel prices.

With crude oil prices plunging on international markets, this is considered the best time to unveil the long-awaited pricing reforms in China, first proposed in 1994, in attempt to offset higher costs.

Crude oil has fallen nearly 70 percent since its peak of US$147.27 a barrel in July as the global recession cuts energy demand.

But the National Development and Reform Commission said future prices would be set by a more market-oriented mechanism, hinting there will be room for further increases.

Analysts also said the implementation of the fuel tax would prompt car makers to pay more attention to eco-friendly and energy-saving technologies to catch up with growing demand.

"New energy vehicles including hybrids and electric cars will be developed and commercialized much more quickly," said Zhong Shi, an independent vehicle analyst.

Wang Jianjun, deputy director of China's BYD Automobile Co Ltd, said fuel-efficient vehicles would be very competitive in the future. BYD is due to launch its first electric vehicle, the F3 dual-mode sedan, next week, ahead of General Motors' Volt electric car that is designed to be mass produced in the United States in 2010.

A report from China Securities Co Ltd said the implementation of the fuel tax would be likely to restrain vehicle purchases as driving costs increase in the long term.

(Shanghai Daily December 9, 2008)