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Written by: Staff

SINGAPORE, Mar 29 (Reuters) China has revised its jet fuel pricing scheme to allow prices to float more freely, the country's top fuel importer said on Wednesday, the first step toward a bigger overhaul of the country's fuel price system.

Analysts are expecting China to push through reforms this year that would link refiners selling prices to global crude oil costs, putting ailing refiners' profits back in the black and lifting low retail diesel and gasoline prices substantially.

The new jet fuel system, taking effect April 1, will allow domestic airlines and distributors to negotiate selling prices within an 8 per cent-band of an outright price that includes a set margin for distributors, China Aviation (Singapore) Corp.

said in a statement to the stock exchange. Airlines used to pay a fixed price set by the sector regulator.

''The pricing system for sales of aviation kerosene for domestic flights in China... will be changed from the present system controlled by CAAC (the Civil Aviation Administration of China) to a system under which only guidance is provided,'' CAO said.

''Going forward, CAAC will set a base gross margin.

Interested parties may negotiate the sales price within a plus/minus 8 per cent-range of such base gross margin,'' it added.

Within two years, prices for domestic airlines flying on international routes should be fully liberalised, it said, removing a measure of price protection for airlines such as Air China Ltd Foreign carriers already pay market prices.

Moving to a more flexible set-margin system ensures that jet fuel distributors continue making a profit even if their purchase costs go up, as most analysts expect, although the trading band gives airlines the chance to argue for lower prices.

''It's part of the oil-price reform. And jet fuel is the easiest one to start with as its impact is much smaller compared to gasoline and diesel,'' said a Beijing-based official with dominant distributor China Aviation Oil Supply Company.

MORE SAY ON PRICES Singapore's CAO, which resumed trading in its shares in Singapore on Wednesday after a 16-month halt due to massive oil trading losses, imports jet fuel on behalf of its parent.

''The reform gives airliners a bigger say in prices as they will definitely want an 8 per cent lower,'' the official said.

CAO said it was monitoring the situation closely.

The 8 per cent-band is similar to the theoretical range applied to the petrol and diesel retail markets, although most have been charging the maximum rate as Beijing has raised fuel prices by 40-46 per cent since 2003 while global oil prices have doubled.

China's reluctance to raise prices quickly has aided rapid demand growth in the world's number-two consumer.

Beijing raised its domestic gasoline and diesel prices for the first time in eight months at the weekend but did not mention reforms to the way it sets prices.

Ex-refinery jet fuel prices were also increased by about 6 per cent to 5,040 yuan ($628.50) a tonne, industry officials have said.

Despite the weekend increase, Chinese airlines remained shielded from the global markets. The average wholesale prices they are paying now at around 5,520 yuan per tonne were some 18 per cent below import costs based on benchmark Singapore prices.

China, the world's fastest-growing major aviation market, expects to see passenger traffic grow 15 per cent and cargo volumes grow 10 per cent this year, the CAAC has said.

Jet fuel, though accounting for only 4 per cent of China's total fuel demand, is one of the fastest-growing products and is set for another double-digit growth this year.

A third of China's jet fuel consumption is imported, while the rest is supplied by state refiner Sinopec Corp. and PetroChina, which lost billions of dollars on refining operations last year.

($1=8.018 Yuan) REUTERS SD ht1915

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