SHANGHAI, CHINA - CHINA'S sudden move to raise fuel prices will prevent shortages before the Olympics, but it is unlikely to bring down world oil prices or slow down the country's manufacturers, analysts said.

The Chinese government announced it would make petrol and diesel up to 18 per cent more expensive just days before sending Vice President Xi Jinping to Sunday's gathering of oil producers and consumers in Jeddah, Saudi Arabia.

The Chinese price hike also came right after Beijing signed a 10-year energy cooperation agreement with Washington.

However, rather than an olive branch for the Americans, who argue Beijing's price controls are an unfair subsidy for Chinese industries, the move likely had more to do with releasing a pressure valve to keep the economy growing.

Beijing has been grappling with record oil prices, the worst inflation in a decade and a volatile stock market that has lost more than half its value since October.

In this situation, it could not afford fuel shortages as it hosts the August Olympics, according to analysts.

'The energy shortage has become a bigger threat to stability ahead of the Olympics,' Deutsche Bank's chief Greater China economist Ma Jun wrote in a report.

It had reached the point where China's oil giants, who dominate the stock market, saw no incentive to increase production only to sell products at a loss.

'It should have been raised much earlier. The government knew it and was just waiting for a good time,' said Ms Wang Jing, a Shanghai-based oil analyst with Orient Securities.

It saw an opening as inflation showed signs of easing in the coming months, she said.

At the same time other Asian governments were also curbing their subsidies.

US Treasury Secretary Henry Paulson, who represented Washington in talks with Chinese officials last week, had urged Beijing to let the market set prices and supply.

He argued fuel prices in China - which before the hike had only risen 9 per cent since the beginning of 2007 - had unfairly shielded Chinese companies from the shock of oil prices nearing US$140 (S$190.80) a barrel.

But economists said the price hike was unlikely to give China's foreign competitors a boost by dramatically increasing the price of Chinese-made goods.

'Some of the claims about subsidies in energy are exaggerated,' said Mr Stephen Green, a Shanghai-based China economist at Standard Chartered.

'It's clear Chinese companies benefit in many ways from the tax code, they benefit from free land, they benefit from some from the looser environmental regulations, but I don't think energy is a key issue.'

Inflation in China is actually expected to slow to around 6 per cent in the second half of the year after hitting a 12-year high of 8.7 per cent in February, Deutsche Bank's Mr Ma said. -- AFP