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With all the great economic strides China has made, it is sometimes easy to forget that China is still a communist country and is controlled by the Communist Party of China.
Part of that Communist control is over prices. The National Development and Reform Commission (NDRC) controls the prices on thousands of items: Drugs, grain, edible oils, pork, noodles, milk, eggs, cigarettes, cloth, steel, train and bus fares, cement, fertilizer, college tuition … and fuel.
Last week, the NDRC raised the price of gasoline and diesel by 17% and 18% respectively.
If rising fuel prices are bad for the U.S. economy, they must be just as bad for the Chinese economy, right? At least that is the popular advice being delivered by many of the so-called experts and financial shrills on Wall Street.
Wrong!
It would be a huge mistake to think this fuel price increase
will somehow derail the Chinese economy!
Here are three reasons why:
Reason #1: Gas prices are not nearly as important to the typical Chinese citizen, who doesn’t even own a vehicle, let alone drive a gas-guzzling SUV. Most people walk, ride a bike or scooter that gets 100 MPG, or use public transportation (buses, rail, or subway) to get around.
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| The first mention of bicycles in China was in 1860, when a European official wrote of seeing a velocipede, an early version of the bicycle, newly-arrived from Paris. Nowadays, China is known as the world’s bicycle kingdom. |
The result is that transportation costs are a very minor monthly expense for Chinese consumers. In other words, higher fuel costs are not hitting disposable incomes in China like here in the U.S. The most recent retail sales numbers in China showed a 21% jump in May compared to the same period 12 months ago!
Reason #2: Gas is still cheap in China. Prices are still under those in the free market. Even after this increase, a gallon of gas costs about $3. That’s 25% less than what we pay in the U.S. The result is that Beijing is still subsidizing the cost of fuel across China … just not as much as before.
Reason #3: The last price hike did not slow China’s economy. There seems to be no correlation between higher fuel prices and an economic slowdown in China. The NDRC raised fuel prices by 10% last November when oil was $90 a barrel but the Chinese economy didn’t miss a beat. China’s GDP grew by 11.9% in 2007 and the World Bank just upped its 2008 forecast to 9.8%. All statistics indicate that China is still growing like a weed.
Look, China consumed an average 7.86 million barrels of oil per day in 2007 — 9.3% of the world’s total. Meanwhile, the United States went through 20.7 million barrels of oil per day or 24% of the world total last year.
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