The Chinese government announced it would make petrol and diesel up to 18 percent more expensive just days before sending Vice President Xi Jinping to Sunday's gathering of oil producers and consumers in Jeddah, Saudi Arabia.

The Chinese price hike also came right after Beijing signed a 10-year energy cooperation agreement with Washington.

However, rather than an olive branch for the Americans, who argue Beijing's price controls are an unfair subsidy for Chinese industries, the move likely had more to do with releasing a pressure valve to keep the economy growing.

Beijing has been grappling with record oil prices, the worst inflation in a decade and a volatile stock market that has lost more than half its value since October.

In this situation, it could not afford fuel shortages as it hosts the August Olympics, according to analysts.

"The energy shortage has become a bigger threat to stability ahead of the Olympics," Deutsche Bank's chief Greater China economist Ma Jun wrote in a report.

It had reached the point where China's oil giants, who dominate the stock market, saw no incentive to increase production only to sell products at a loss.

"It should have been raised much earlier. The government knew it and was just waiting for a good time," said Wang Jing, a Shanghai-based oil analyst with Orient Securities.

It saw an opening as inflation showed signs of easing in the coming months, she said.

At the same time other Asian governments were also curbing their subsidies.

US Treasury Secretary Henry Paulson, who represented Washington in talks with Chinese officials last week, had urged Beijing to let the market set prices and supply.

He argued fuel prices in China -- which before the hike had only risen 9 percent since the beginning of 2007 -- had unfairly shielded Chinese companies from the shock of oil prices nearing 140 dollars a barrel.

But economists said the price hike was unlikely to give China's foreign competitors a boost by dramatically increasing the price of Chinese-made goods.

"Some of the claims about subsidies in energy are exaggerated," said Stephen Green, a Shanghai-based China economist at Standard Chartered.

"It's clear Chinese companies benefit in many ways from the tax code, they benefit from free land, they benefit from some from the looser environmental regulations, but I don't think energy is a key issue."

Inflation in China is actually expected to slow to around 6 percent in the second half of the year after hitting a 12-year high of 8.7 percent in February, Deutsche Bank's Ma said.

Chinese manufacturers were not expected to pass the rise in increased energy costs on to customers -- instead taking a hit in their profits, Goldman Sachs said in a research note.

"It will definitely increase our operating costs, mainly transportation costs," said a planning executive at Yamaha Motor's Chinese joint venture in the southwestern city of Chongqing, who identified himself by his surname Ge.

He said the company had no immediate plans to raise the price of the motorcycles it makes in Chongqing and transports long distances by road, mostly for domestic customers and in smaller numbers for export to North and South America.

"I guess it will not be a big change," he said. "It's not a big shock, we all knew this would be the future trend."

The increase in fuel price is expected to help unblock China's economy by encouraging it to satisfy pent-up demand left after the growing gap between rising energy prices and artificial price caps stifled supply from refiners.

"Normally, a price increase will have a negative impact on demand," UBS economist Wang Tao wrote in a report.

"However, since China's oil product (and hence overall crude oil) consumption has been effectively rationed because of the widespread shortages, the price hike may actually result in an increase in oil consumption in China."

Oil prices rose in Asian trade on Friday after China's announcement with the benchmark oil futures contract, New York's light sweet crude for July delivery, climbing 78 cents higher to 132.71 dollars per barrel.

"The impact (on global oil markets) cannot be overstated," said Gideon Lo, a Hong Kong-based analyst with DBS Vickers.

"The China factor certainly has some influence on international oil prices as its crude demand sees the largest growth in the world," he said.

earlier related report
Chinese cut fuel subsidies but demand fears remain
China's decision to hike prices for petrol, diesel and electricity has won praise from the United States despite fears it could spark increased demand, analysts say.

China became the latest Asian nation to curb energy subsidies last week after hiking retail petrol and diesel prices as much as 18 percent.

Oil prices, which hit a record near 140 dollars per barrel on Monday, had swung lower on Thursday after China revealed the subsidy cuts. But they bounced higher Friday as traders grew sceptical over the full market impact.

"Crude oil prices fell immediately following the announcement, on the prospect of lower demand from China, but the impact of the price increase is ambiguous," said Standard Chartered analyst Helen Henton.

"In improving the profitability of importing and refining, higher retail prices may actually stimulate further demand by relieving shortages.

"Overall, however, the extent of the price jump suggests some softening of oil demand growth is likely."

Western nations led by the United States argue that many emerging Asian economies are artificially propping up record high oil prices with subsidies.

The move by China could therefore dampen global demand in the long run as Chinese cut back their energy usage, and lead to lower prices, according to Cameron Hanover analyst Peter Beutel.

"This is good news because it means that Chinese consumers will start to feel more of the pain so evident in the United States," Beutel said.

"Some frivolous use by Chinese consumers could come to an end through higher prices."

He added: "The closer to real prices that are experienced worldwide, the more the pain is apparent -- giving consumers the information they need to make informed choices that will allow real demand to be met by scarce, available supplies."

Saudi Arabia hosted a high-profile Jeddah oil summit on Sunday which was aimed at combatting runaway oil prices.

The one-day event also featured US Energy Secretary Samuel Bodman, Chinese Vice President Xi Jinping and other representatives from leading consumers and producers of black gold.

The United States and China are the first and second biggest oil consumers in the world.

Bodman, addressing reporters in Jeddah, has welcomed Beijing's decision to cut subsidies on fuel and said it would help calm the red-hot market.

"The steps that the Chinese took, although viewed by some as courageous, were exactly the right sort of steps to take," Bodman told a press briefing in the run-up to the Jeddah summit.

He added: "The world has to move away from market-distorting, untargeted fuel subsidies that in my judgment make matters worse."

China's move was aimed at reducing the gap with the soaring cost of crude oil on international markets.

Industry experts say China's voracious appetite for oil to power its record-breaking economic growth has been a crucial factor behind sky-high prices.

"China has joined the growing line of Asian economies scaling back domestic subsidies in the face of persistently high oil prices," said Henton.

Elsewhere in Asia, Malaysia has hiked fuel prices by 41 percent and Indonesia by around 29 percent, while Taiwan and India have also raised their energy costs.

Beijing had not been predicted to alter its fuel subsidy system until after the Chinese capital stages the Olympics this summer, Henton added.

"The move surprised the market in both its timing and magnitude. Many expected the move to be delayed until after the Olympics," she said.

According to Bodman, around 30 million barrels per day of oil was consumed in nations that subsidise gasoline.

"That's simply too much. If there is anything that is clear, the world needs help in this regard," Bodman said.

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