China will refund value-added tax on some diesel and gasoline imported by its top two oil firms during the second quarter, the Finance Ministry said, a limited extension of a scheme to end fuel shortages by spurring imports.
The 17 per cent tax rebate aims to encourage refiners to boost domestic supplies ahead of the summer Olympic Games, without forcing Beijing to raise low state-set fuel prices at a time when inflation is running at its highest level in over a decade.
But by making imports cheaper, the move could strain international markets at a time of robust global demand for middle distillates such as diesel, and ahead of the summer driving season in the United States when gasoline consumption usually soars.
As China's oil firms trim back loss-making refining operations, it is increasingly reliant on overseas supplies to prevent lingering shortages escalating into a supply crisis.
The rebate was revealed the day customs data showed March diesel imports rebounding to nearly 500,000 tonnes, the fourth highest on record, while fuel oil imports topped 2 million tonnes for the first time since July 2007.
"Our understanding is they want the companies to provide the (imported) fuel to the market, they can't just stockpile it," said Wu Jun, analyst at futures firm CIFCO in Shanghai
"Perhaps they are thinking of the Olympics but there are also supply problems at the moment," he added.
Sinopec Group and China National Petroleum Corporation (CNPC) will get a refund on up to 500,000 tonnes of gasoline imports each, the Ministry said in a statement dated April 8 but posted on its website on Tuesday.
Sinopec, parent of listed Sinopec Corp, will get back the tax from 1.5 million tonnes of diesel shipments while CNPC, parent of listed PetroChina, will only get a free pass for 1 million tonnes, the notice added.
However, based on import rates during the first quarter, the allowances will likely cover the majority of shipments by the two firms, which are China's only major importers. Independents fighting to secure a foothold have yet to make a serious impact.
With crude oil trading well above $100 (Dh368) a barrel the companies had petitioned the government to extend the rebate scheme to help them stem massive downstream losses, and traders had expected Beijing to agree.
If prices are not adjusted by June the indirect subsidy will likely be extended for another three months, particularly with the Olympic Games due in August.
"There is a strong possibility they will continue it or even make it larger, as the Olympics are a big concern, and oil supplies are sensitive for all sectors of the economy," Wu said.
"But it's not really a proper solution. It's only when you raise the retail price that the refineries are really going to be willing to produce."
Chinese refinery managers have told Reuters that with current domestic price levels they can only break even if they can buy crude oil for prices around $60 to $80 barrel, depending on their equipment.
But with data expected to show March inflation at over 8 per cent, Beijing is desperate to avoid raising fuel prices.
It has agreed to grant a hefty tax rebate on crude imports that would reduce government takings to just 4.25 per cent from 17 per cent and could take effect as early as this month, a government source told Reuters earlier this month.
The tax on product imports has been on hold since December, after a November pump price hike – the first in 17 months – did not tempt plants and wholesalers back to the market in force.
The rebate helped China to rack up diesel imports to record-high levels of in December and January. Although they dropped off in February, a key holiday month, they revived to near 500,000 tonnes in March, preliminary data showed.
Gasoline exports slipped to 100,000 tonnes in March, from February's 131,716 tonnes, implying Beijing was keeping more at home, although customs gave no figure for imports which had also been high in recent months. (Reuters)
China extends oil tariff rebate