China Taxes Xinjiang Energy

Beijing tries to boost development in China's western region before the anniversary of riots in Urumqi.
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The sun rises over the Tazhong oilfield in China's Xinjiang Uyghur Autonomous Region, Oct. 12, 2006.
The sun rises over the Tazhong oilfield in China's Xinjiang Uyghur Autonomous Region, Oct. 12, 2006.

By Michael Lelyveld

BOSTONChina is tapping its energy industry to fund development plans for Xinjiang while leaving the door open for national reforms, analysts say.

A new resource tax on oil, gas, and coal producers in Xinjiang is expected to raise 2 billion yuan (U.S. $292.8 million) for the western region this year, although state media have estimated the cost to companies such as PetroChina and Sinopec as high as 5 billion yuan.

The switch to a tax based on energy prices rather than volume on June 1 could mark an end to a long-standing break for producers, but it also comes ahead of the one-year anniversary of deadly riots in the Xinjiang capital of Urumqi last July.

Speaking at a Xinjiang work conference in Beijing on May 17-19, President Hu Jintao said that the tax is aimed at addressing Uyghur concerns that China's reliance on Xinjiang's resources has not helped the local population.

"The additional financial resources derived from reform of the resource tax and others must also be used to improve people's livelihood," Hu said.

"The development of resources must benefit the masses of all ethnic groups in Xinjiang more directly."

Revenues to Xinjiang

Mikkal Herberg, research director for energy security at the Seattle-based National Bureau of Asian Research, said the new tax serves at least two purposes.

"To the extent that this provides more revenues to the Xinjiang region, it helps ease the perception that this is simply production and income that goes back to Beijing," Herberg said.

Xinjiang's reserves account for nearly one-sixth of China's oil and more than one-fifth of its gas, according to the National Bureau of Statistics (NBS).

It also provides key transit routes for oil from Kazakhstan and gas from Turkmenistan.

In addition, the tax system for Xinjiang producers may serve as a rollout for a policy that could be applied throughout China.

"That's a long-tested pattern for the government, to move forward on reform on a small scale," Herberg said.

The new rates would at least triple the tax on producers, perhaps ending a hidden subsidy for state-owned energy companies.

The international investment bank Credit Suisse estimates the system could cut PetroChina's profits by 11-12 percent, if introduced nationwide.

Change 'overdue'

Philip Andrews-Speed, a China energy expert at Scotland's University of Dundee in Edinburgh, said the policy change is long overdue.

"China has to be almost the last country in the world to move from royalty by volume or weight to royalty by value for oil and gas," Andrews-Speed said by e-mail.

"It will be a nasty shock for the national oil companies, but they are at last joining the real world," he said.

The new tax rates in Xinjiang are 5 percent for oil and gas, the official Xinhua news agency said, while coal taxes range from 2 to 5 percent.

But so far, the higher costs do not seem to affect the government's goal of improving energy efficiency, since they are not being passed on to consumers.

"It has nothing to do with energy efficiency," said Andrews-Speed.

Mixed message?

China is struggling to meet a five-year target of reducing energy waste by 20 percent before the end of 2010, but efficiency fell 3.2 percent in the first quarter, marking a setback for the campaign.

On June 1, the government sent a mixed message on using prices to promote efficiency as it raised wholesale natural gas rates by 25 percent to reflect higher import costs.

But at the same time, it lowered gasoline prices by 4 percent in line with world market trends.

Officials say the resource tax is part of government efforts to provide incentives for "leapfrog development" in restive Xinjiang.

On May 29, the regional government said that Beijing plans to invest 120-150 billion yuan (U.S. $17.6-22 billion) in roads over the next five years.

Xinjiang's new Communist Party secretary, Zhang Chunxian, also highlighted plans to move 700,000 families to "safer and earthquake resistant houses by 2015," although destruction of old neighborhoods in cities like Kashgar has sparked criticism on cultural grounds.

Obstacles to development

But the government sees more development as the solution to the problem of ethnic tensions between native Uyghurs and China's Han majority.

"Poor economic structure, lack of capital, infrastructure and skills, as well as social instability, all hinder the region's development," said Zhang in a report by the English-language China Daily.

Beijing's larger plans for reform through the tax system remain unclear.

It is believed to be holding back on retail price hikes for energy due to worries about inflation and social stability, although environmental concerns are running high.

On May 31, the People's Bank of China (PBOC) ordered new curbs on loans to energy-intensive industries, but many previous warnings to big power consumers have been ignored.

On June 1, the State Council approved plans to "gradually push" for a property tax to bring the high-flying real estate sector down to earth, China Daily said.

Shanghai has already submitted a draft plan for property taxes to the central government for approval, the China Securities Journal reported May 28.





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