China will start a more flexible system for pricing domestic fuel from Wednesday, the first major revamp for four years, to help avoid shortages and tame consumption.
 
The new scheme should reverse years of losses for China's oil refiners, analysts said, by increasing the link with world crude prices and scrapping a rigid formula for altering prices for oil products such as gasoline and diesel.

"This is a big milestone for the energy industry and big win for the refiners as the new scheme should lead to more market-driven prices which will lead to improved profitability in the sector," said Gordon Kwan, head of energy research at Mirae Aseet Securities in Hong Kong.

State oil companies like Sinopec Corp and PetroChina have suffered losses at their refining segments as domestic fuel prices often lagged the gains in costs of crude oil.

Top refiner Sinopec should benefit most from the reform and should see the operating margin for its refining improve to 10-12 yuan (US$1.6-US$1.9) per barrel from 7 yuan in 2012, according to a Bernstein Research note.

The government also wants to use the more market-linked scheme to curb wasteful fuel consumptions, as China, the world's second-largest oil user, is set to double its fuel use by 2030.

"After the adjustments the mechanism has taken a further step towards market liberalization, and will more flexibly reflect changes in the international market and help guarantee domestic market supplies," China's top economic planner, the National Development & Planning Commission, said on its website.

Under the new scheme, prices will be changed every 10 working days versus the previous window of 22, it added.

An automatic change to fuel prices if crude prices move more than 4 percent, will also be scrapped.

The basket of reference crude oils would also be altered, the agency said, without elaborating.