(Recasts, adds details)
By Jim Bai
BEIJING, Dec 19 (Reuters) - China slashed retail fuel prices and unveiled a long-awaited fuel reform on Friday but analysts said it looked like more of the same -- a state-controlled market vulnerable to price shocks and shortages.
China's cabinet, the State Council, said its package of reforms had "perfected" the fuel pricing mechanism, which was expected to bring an end to the huge discrepancy between China's domestic fuel prices and the international crude oil market.
The new prices precede a new fuel tax system that kicks in on Jan.1 and will boost the amount of direct tax on fuel.
The government lowered price caps on gasoline by about 14 percent, on diesel by about 18 percent and on kerosene by about 32 percent. Airline shares leapt on the relief from kerosene, and got extra lift because the government delayed imposing the new tax on kerosene and slashed fuel surcharges for airlines.
But it did not explain how it had arrived at the new fuel prices and its announcement left plenty of room for guesswork.
"When changes in international oil prices exceed a certain level for a certain period of time, domestic prices for refined oil products will be correspondingly adjusted," it said.
The government said it would continue to "set and guide" gasoline and diesel prices to minimise the impact of volatility or a big jump in crude prices.
To many, the opaque new price-setting mechanism looked almost identical to the old system, which was theoretically based on a "cost plus" formula but in practice consisted of the government announcing new prices when it felt so inclined.
"This reform was mainly about changing tax, not prices," said Lin Boqiang, director of the Centre for China Energy Economics Research at Xiamen University.
"Things that occurred in the past, like fuel shortages, will happen again if the same conditions resurface," he said. "It seems the government is not sure that the transitional and developing economy can absorb sharp fluctuations."
Independent oil analyst Paul Ting said the latest price cuts were relatively modest and would do little to stimulate demand, since many prices had already fallen below the new ceilings in anticipation of the widely-anticipated cuts.
"All in all, it is likely that China will reduce prices again to account for the rapidly declining crude oil price," he said.
China has kept a lid on prices for fear of stoking inflation and angering drivers, but it repeatedly experienced fuel shortages over the past few years because domestic fuel prices were out of line with international prices, restricting supply in a market where demand was rampant.
"NOTHING IS CLEAR"
The system forced it to subsidise state-controlled oil firms Sinopec and PetroChina, which made massive losses on refining until crude prices fell by $100 a barrel, swinging their refining operations into big profits.
"Oil prices will not stay low for ever. Who can say there won't be shortages again, considering the price formula is almost the same as before," said an analyst in Beijing who declined to be named.
"We may see more downside flexibility in prices under current circumstances, the question is whether the government has the courage to raise prices quick enough if crude prices soar again."
The turnaround in crude prices has given China breathing room to cut retail prices and boost the consumption tax levied on fuel, which will trim demand over the longer term. But hopes of moving towards market liberalisation have not been borne out.
"Nothing is clear except the consumption tax, we do not know how much average processing costs are or what makes up 'an appropriate profit'," said Niu Li, an analyst with the State Information Centre, a government think tank. "The fundamental problems were not touched." (Reporting by Jim Bai, writing by Tom Miles, editing by Anthony Barker)