CHINA MARKET COMMENTARY: AS MARKETS REBALANCE WILL POLICY REFOCUS?

China's energy markets remain tight overall, but continue to move toward balance. Over the past several years, rapid demand growth and high commodity prices have exposed shortcomings in current pricing mechanisms along the energy value chain. With a return to more stable markets, long-deferred policy issues are commanding more attention:

- For oil, apparent demand is now at zero growth, as declining demand for heavy fuels offsets healthy growth in light products. Significant changes in pricing policy are expected in 2006.
- In power, a return to balance is now on the horizon, allowing long-deferred competition and structural reforms to advance, if slowly.
- Coal market tightness is easing, allowing regulators to address industry safety and resolve long-standing pricing problems.

For natural gas, the adequacy of supply remains a pressing challenge, motivating new incentives for investments upstream and downstream.

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