Oil slump offers reform opportunity for China

As the world's biggest net oil importer, China benefits from the latest price slump and has even more to gain if it can seize this rare opportunity to push ahead pricing reforms.

U.S. crude for February delivery crashed below 50 U.S. dollars a barrel for the first time since April 2009 in Monday's trading session, before settling at 50.23 U.S. dollars. Brent crude also dipped to its lowest level in more than five and a half years.

The slump, sparked by a supply glut and sluggish demand, is expected to remain for a while as there are "no near-term catalysts to change the supply/demand equation," a Moody's report noted.

The development came as positive news to China, where some 58 percent of oil consumption comes from overseas supplies. According to data from the National Bureau of Statistics, China imported 281.92 million tonnes of crude oil in 2013 worth 219.6 billion dollars.

UBS chief China economist Wang Tao estimated that the oil price decline would slash about 17 billion U.S. dollars from China's import bill in 2014.

At the micro-level, the filtering through of sharply lower oil prices will put downward pressure on inflation and provide policymakers with more room to ease monetary policy if needed, analysts pointed out.

All combined, the global oil price shock is likely to boost China's growth, which was struggling with a housing slowdown, softening domestic demand and unsteady exports. In the first three quarters, China's gross domestic output expanded by 7.4 percent, slightly below the government target of around 7.5 percent.

CITIC Securities forecast that if crude prices fall 20 to 50 percent, it will drive up the country's economic growth by 0.14 to 0.36 percentage points this year.

Along with the economic boost, the real potential gain for China is that lower oil prices will open the window for the government to proceed with its long-planned pricing reforms in the energy sector.

The country has sometimes intentionally kept prices of oil and gas lower than those on the international markets for the sake of economic development and consumers' buying power. However, given the severe energy outlook, the government has decided to let the market play a more important role in guiding consumers in their fuel use.

Chinese authorities have reiterated their pledge to promote reforms in the energy and resource pricing system, but progress has been slow for fear of public complaints and broader economic implications.

Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, said the latest oil drop and slowing domestic demand created the "basic conditions" to improve the pricing mechanism.

China's oil price adjustment mechanism calls for changes when international crude prices change by more than 50 yuan (8.14 dollars) per tonne within 10 working days.

Retail fuel prices have been cut for the tenth consecutive time since July as the government reacts to lower crude prices. But the system is still at the discretion of the government, Lin said, suggesting the government should hand over power to a third-party agency to improve transparency and make it more responsive to market swings.

"A more transparent mechanism will also help create a stable environment to encourage social capital to enter the energy sector," Lin said.

In China, the oil market is largely monopolized by state-owned companies such as Sinopec, PetroChina and CNOOC, whose inefficiency and widespread corruption have long been a source of public complaints.

In times of high oil prices, the giants may feel reluctant to reform themselves, but when lower global prices squeeze their profits, they have to make changes, creating an opportunity for social capital in the sector, Lin said.