China may soon cut fuel prices for a third time this year, but more importantly, it may also change the pricing formula, a move that would take Asia's largest economy further along the transparency road.

The current system allows for oil product prices to drop if a basket of three crudes declines by more than four percent over a 22-day period, a condition that has been met since the last adjustment on June 9.

If prices fall by a similar margin to June's 5.5 percent cut, it will take the retail price of gasoline below $1 a litre for the first time since December 2010, no doubt boosting economic growth prospects.

But more significant would be a change in the formula, which could make pricing more transparent and market-driven.

China Oil, Gas & Petrochemicals (OGP), a publication of the state news agency Xinhua, said in its July 1 edition that the "time is ripe" for a new mechanism.

It suggested that the basket of three crudes would be changed, with the Cinta grade dropping out and West Texas Intermediate joining Brent and Dubai.

The period for adjustment would drop from the current 22 days to 10, the publication said.

If changes are implemented along the lines mooted by the newsletter, it would be a boost for major Chinese oil and gas companies, especially refiners such as Sinopec and PetroChina as it would allow them to adjust prices far more rapidly in response to movements in crude costs.

Under current regulations refiners are also allowed to make "normal" profits when crude is below $80 a barrel, while between $80 and $130 their profits gradually erode to zero and above $130 the government will take steps to ensure adequate supplies.

The type of crude isn't specified, according to OGP, but the publication believes it is WTI, which recently dropped below the $80 level and is currently around $84.60 a barrel.

With WTI close to the $80 level, the implication is that the government will allow companies such as Sinopec to restore refining margins, which may give a boost to the refiner's share price, which at 6.28 yuan in Shanghai is down 20 percent from its 2012 high.

While lower oil prices make it easier for the government to change regulations, the ultimate aim should be to provide better price signals to fuel consumers, both businesses and households.

China is far from Asia's worst offender when it comes to controlling or subsidising fuel prices, but any move to allow changes in crude costs through to end users faster and more transparently will allow market forces to work more efficiently.

In the run up to crude's record high above $147 a barrel in 2008, part of the problem was that the majority of consumers in Asia, the fastest region for demand growth, were insulated from the rapid escalation in prices.

Asian governments have tried to roll back from subsidies and regulation since then, realising the pressures they place on budgets and the distortions they give to demand.

China's current gasoline price of 106 cents a litre is higher than the 88 cents in the United States, and well above prices around 53 and 61 cents in Indonesia and Malaysia, Asia's biggest subsidisers.

But it also below the $1.30 to $1.40 a litre level in Singapore and Australia, two Asia-Pacific nations that not only have free-floating fuel prices but also level excise taxes on fuels.

If China does move more towards transparent fuel pricing, it may encourage other Asian nations to do the same.

This would ultimately help to smooth volatility in oil prices, as higher prices would far more rapidly cause pain to consumers, thereby crunching demand, with the opposite effect when prices drop.