TO THE POINT: The Chinese Government raised refined oil prices for the first time in 10 months after shortages of gasoline and diesel were exposed. The Chinese over-the-counter derivatives trade bloomed in the first three quarters and the debut of forward rate agreement trading starting on November 1 is likely to add fuel to the market. Following HSBC, the London-based Standard Chartered Bank decided to set up its first village bank in rural China with Inner Mongolia as its first choice. The Bank of Communications became the first Chinese commercial bank in history to invest in a trust company, and much more such alliances are expected in the future. Meanwhile, by the end of October, all listed companies in the mainland yuan-denominated A-share market had issued their quarterly reports. Finally, we also look at the iron and steel sector in this issue with highlights from the top three steel companies' reports.

By LIU YUNYUN

Solving the Oil Puzzle

Chinese oil producers and processors have been haunted by the surge in international oil prices as well as the "fixed and lower-than-the-cost" domestic oil prices.

After months of waiting, the oil refiners can finally raise prices on their products by 8 percent from November 1 with the approval of the National Development and Reform Commission (NDRC).

NDRC, the country's top economic planner, announced at the end of October that the benchmark prices of gasoline, diesel oil and aviation kerosene would be raised by 500 yuan per ton. The previous prices of gasoline and diesel oil were 5,480 yuan and 5,020 yuan per ton, respectively. On the basis of the rise in prices, retail costs will increase 8 percent meaning that drivers will have to pay 0.4 yuan or 0.46 yuan more per liter of gasoline or diesel.

Chinese fuel prices have not been set by the market but by the government. The revision in prices is meant to narrow the gap between soaring global crude oil prices and domestic fuel prices.

"The gap between the prices of global crude and domestic oil products is widening, leading to heavy losses for refiners," the NDRC reported in a statement. "For quite some time, certain regions have faced a shortage of oil products or tight supplies. The price increase is expected to reduce losses to refiners and ensure supplies."

In recent months, international crude oil prices have soared, leading to a shortage of fuel in many provinces. China Petroleum & Chemical Corp. (Sinopec), China's biggest oil refiner, stated that in the company's third quarter report that its refining business lost 5.3 billion yuan in the third quarter. Small refineries have reportedly taken advantage of this time and raised fuel prices themselves.

The NDRC has required oil companies such as Sinopec and PetroChina to raise refining output, increase diesel imports and strictly control diesel exports.

The price hike will boost the monthly consumer price index (CPI) by 0.05 percentage points, the NDRC said.

Tapping Into the Villages

According to news from the Inner Mongolian Autonomous Region Government, the London-based Standard Chartered Bank plans to launch its first village bank in China in the Inner Mongolia Autonomous Region in early 2008.

In August, HSBC, a rival of the Standard Chartered Bank, launched a village bank in the central Chinese province of Hubei after winning the first such operation license for a foreign bank.

Inner Mongolia is well-known for its ample supply of dairy products, farming and mining. Local residents and businesses there have had difficulty accessing credit and loans from banks.

China's rural population accounts for 56 percent of its total and is reported to have huge consumption and development potential.

Soaring OTC Derivatives Trading

Statistics from the People's Bank of China, the central bank, show that the trading volume of over-the-counter (OTC) derivatives saw a substantial increase in the first nine months of the year.

In the yuan derivatives market, trade volume of forward contracts rose 138.2 percent to reach 158 billion yuan. The trade volume of yuan interest rate swaps rocketed 365.3 percent over the same period of last year, now up to 165.5 billion yuan.

In September, the central bank issued a document allowing forward rate agreement trades to start on November 1. The trading volume for this is as of now undetermined.

In the foreign exchange (forex) derivatives market, the volume of yuan-forex forward trades was about $15 billion in the first nine months, with daily trade volume rising 32.4 percent to $82 million.