Higher domestic fuel prices do not, for the moment, appear to have had much of an impact on surging oil demand in China.

Analysts noted that while the hikes could take a bite out of industry profits, fuel prices still remain considerably lower than those on international markets, and consumers have in any case been protected to a large extent by a generous package of subsidies provided by the Ministry of Finance.

"In China there is no question that the government can continue to subsidize products if it chooses to do so," said James McCormack, Asia-Pacific sovereign analyst with Fitch Ratings.

"Other countries that are facing more distressed fiscal situations - India, Indonesia, Malaysia - are rolling back their subsidies, not because they want to, but because they have to. China's public finance position has never been stronger," he said.

China's state planner, the National Development and Reform Commission, announced on June 19 that it would raise the prices of gasoline and diesel by 1,000 yuan per ton, or 16-18 pct.

Over the next few days, oil traders seemed to believe that higher fuel costs in China would lead to a fall in demand, and the global price of crude dropped accordingly.

But the optimism has waned somewhat in recent weeks, with the majority of analysts now suggesting that the impact of China's price rises would be marginal, and counterintuitively, could in fact create more demand over the next few months.

Shortly after the NDRC announced the price rises, China's Ministry of Finance said that it would provide 7.8 bln yuan in fuel subsidies to farmers, and a further 12 bln yuan to the urban transport, fishing and forestry sectors.

"Despite the (price) increases, continuing subsidies keep China's fuel prices low by world standards and prevent the demand destruction necessary to foster more rational consumer behavior," said Jing Ulrich, chairman of China equities at JPMorgan Securities, in an emailed note.

Traditional supply and demand curves have also been distorted somewhat by China's long-standing energy price caps.

In peak seasons, artificially low gasoline and diesel prices have tended to inhibit consumption because the country's refineries - mostly owned by the two oil majors, Sinopec and PetroChina - have simply not had the incentive to supply their product to the market.

And that was the primary motivation for the Chinese government when it made its decision to raise prices, said Sun Mingchun, economist with Lehman Brothers.

"The main reason was to make sure China has enough fuel supplies during the Olympic Games," he said, "because the price controls have distorted profit margins."

In a note published shortly after the price rise was announced, Goldman Sachs also said that "the price hike could lead to normalization of supply versus the recent rationing of sales at the pump."

Other analysts agreed.

Because demand was being artificially restrained by shortages and rationing, especially in peak consumption periods, the price rises could now lead to an increase in consumption, said Kim Eng analyst Larry Grace.

The price rise could "spur refineries to process even more crude" as well as boost imports because "the economics have improved."

And more imports could contribute to even further rises in the international crude price and make it necessary for the government to raise domestic benchmarks once again, probably after the Olympic Games.

So far, preliminary statistics from regional refiners and wholesalers suggest that demand has remained more or less constant since the NDRC announced the price hikes on June 19.

Demand for oil tends to be inelastic, and industrial enterprises, which are by far the biggest consumers, are certainly capable of weathering the higher costs, said Fitch's McCormack.

"There will be a margin squeeze, but they do have margins to squeeze," he said.

"Industry is generally profitable in China. Higher oil prices will reduce corporate profitability to the extent that they are not going to be able to pass the prices on, but their starting position is reasonably good."

As far as individual consumers are concerned, the price increases might squeeze purchasing power, but they won't reduce demand, McCormack added.

"It is definitely going to scale back demand for other products rather than for oil," he said.

China's long-term intention to restrain demand growth might not have been served by the latest round of price increases, but at least they are a start.

Niu Li, analyst with the economic forecasting department of China's State Information Center, said that the increases would at least send a signal to the market and help to encourage energy conservation "by a small degree."

But if the government is serious about changing the way the country consumes oil, its only option is to liberalize the pricing system. That is likely to happen soon, but not too soon.

"They realize that it is the right thing to do to reduce demand for products that are highly priced," said McCormack of Fitch Ratings.

"But they can afford to wait it out more than most other countries can."

Lehman Brothers' Sun agreed, noting that the government was likely to keep hold of its pricing levers for at least another year.

"I think they will continue to raise fuel prices, including electricity prices, and may do so once more before the end of the year," he said.

"But I don't see a full liberalization. They may be able to do so before the end of next year, if the (global crude) oil price comes down, but I think because of the big gap between the global price and China's domestic price, I don't think the the government will take the risk of liberalizing pricing."

(1 usd = 6.9 yuan)