"Prices go up at midnight." Michael Dunne - Detroit News - Auto Insider - April 02, 2006 Shanghai - Last Saturday evening Li Ningsheng, a 47 year-old engineer, received a phone call from a close friend: "Get over to the gas station in a hurry,” he said. “Prices go up at midnight." Mr. Li drove his Volkswagen Jetta to the closest China Oil station on the outskirts of Beijing. He got stuck behind a long line of cars, but was able to fill-up before the clock struck twelve. When Saturday turned to Sunday, gas prices climbed 10 percent to $2.19 a gallon. Li said later: "Prices were high to begin with. It's getting scary." Now that China has become the world's largest importer of oil after the United States, regulators in Beijing are finding it necessary to pass more of the cost onto consumers. China’s first move was to raise fuel prices, a process that began in the first quarter of last year. In the twelve months since the initial hike, gasoline prices have increased twenty-two percent. For most Chinese, even a ten percent increase is a shock. That is because a typical car owner’s fuel bill as a share of total income is many times higher than his counterpart in America would experience. China Gas and Diesel Prices Per Gallon Code: Fuel Type/Period Q1 2005 March 25, 2006 Today Gasoline #93 $1.79 $2.01 $2.19 Diesel $1.74 $1.90 $2.05 Source: Chinese Government Statistics. Mandarins in the central government set the fuel prices. Many of them would have liked to raise gasoline and diesel prices even higher. But China’s top leadership feels that a hasty price increase could generate unrest in the hardscrabble countryside. Farmers use copious amounts of diesel fuel to power tractors and to run generator sets. A sharp increase in diesel prices would cut directly into the family budget for basic necessities like clothes and food. Mao Zedong was only the most recent of a long line of Chinese peasants to lead revolutions when conditions in the rural areas grew unbearable. A second tool to control demand for oil is taxes. On April 1st, 2006 China will enforce a new set of excise tariffs on cars. Rates will range from three percent for cars powered by engines of less than 1.5 liters to twenty percent for cars with 4-liter engines. (The current top excise tax is eight percent). Clearly, the new tax schedule is designed to encourage people to buy smaller cars. In fact, the April-effective three percent excise tax on cars with engines between 1.0 and 1.5 liters is two percentage points lower than the current rate. All things being equal, Chinese consumers prefer large cars. Big sedans project clout and prestige. Nonetheless, the phenomenon of drivers like Mr. Li lining up at the station to beat a 10 percent price hike is a good indicator of Chinese cultural priorities: Face is important. But money is king. China’s policy-makers understand those priorities. In the months ahead, look for Chinese consumers to keep their innate desire for big cars -- but to purchase more of the smaller, gas-sipping variety.