China Raises Tax on Fuel Consumption

After months of building up expectations, China officially launched its fuel tax reform this week. Effective next January, China will raise consumption tax on gasoline fivefold to CNY 1 from CNY 0.2 per liter and the tax on diesel eightfold to CNY 0.8 from CNY 0.1 per liter. The taxes will be included in the fuel prices published periodically by the energy regulator. Meanwhile, the government will scrap highway and waterway maintenance and management fees levied on vehicles owners. It also pledges to gradually remove tolls on highways financed by the government.

We believe the reform is a major step toward reducing the distortions in fuel pricing and making sure consumption taxes are proportional to actual usage. Previously, the flat maintenance fees and artificially lower consumption taxes did not encourage efficient use of fuel. The next step in the reform would be to increase transparency in fuel pricing, so that prices on the domestic market are more responsive to global market conditions as well as the local supply and demand balance. However, as energy pricing touches numerous aspects of a Chinese economy hungry for growth and progress, we think the Chinese government has plenty to straighten out before it can move forward with a more transparent pricing system.

Market Recap
Favorable new policies for the real estate sector and speculations of tax cuts for the banking industry buoyed the Chinese stock market for the past week. The Shanghai Composite Index increased 3.3% to close at 2,018 points on Friday, while the Shenzhen Composite Index increased 4.9% to 7,439.

Financial
China Announced Favorable Real Estate Policies
The policies include lower mortgage rates to first-time and qualified second-time homebuyers, and sales tax waiver for properties sold after at least two years of ownership. The government has also pledged to help developers with financing and increase lending to those that focus on affordable housing for lower-income families.

China Mulling Deposit Insurance Starting 2009
A draft plan has been submitted to the government for approval, according to central bank officials. Some analysts estimate that deposits eligible for the insurance may be capped at CNY 200,000 ($29,000) per account.

 Bank of America (BAC) Abandons Plan to Reduce Stakes in China Construction Bank (CCB)
According to Chinese law, if Bank of America were to press ahead with the planned sale, it would have the profits from such a sale forfeited by the Chinese authorities. China does not allow investors holding more than 5% of a public company to sell shares within six months of the stock purchase, but Bank of America just bought additional shares in CCB this November.

Industrial
Chinese Automaker BYD Produces Plug-In Hybrid Electric Cars
Shenzhen-based BYD, in which Warren Buffett bought a 10% stake this September, said the new hybrid car can run up to 60 miles on electricity before having to use gasoline. The car battery takes nine hours to charge from a regular plug, or one hour at BYD's special charging station, and it can be recharged 4,000 times. This new hybrid car will likely cost less than CNY 150,000, or $22,000.

China Lost WTO Appeal on Tariff for Imported Auto Parts
Top judges at the World Trade Organization (WTO) confirmed that China has violated trade rules by requiring automakers operating in China to source most components from local vendors or face higher taxes. This is the first time that China has lost a trade dispute since it joined the WTO in 2001.

Major Shipper COSCO Reports Huge Loss From Derivatives Contracts
The ship liner this week said it has lost about $600 million in freight forward agreements intended to lock in bulk shipping rates. The index to which the contracts are linked has declined sharply this year.

Lun Lu, Iris Tan, Peter Liu, and Feliz Li contributed to this article.