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The Free Ride in China Is Over

By Toby Shute – Updated Nov 11, 2016 at 6:17PM

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The Chinese government introduced a surprise subsidy cut -- so who benefits?

In our recent Foolish oil outlook, we noted the detrimental impact that fuel subsidies are having on worldwide demand. Many countries have readjusted their rates to more closely reflect global prices. At first it looked like China would be a holdout, but even this prince of price-fixers is feeling the pressure.

China's announcement that it's immediately raising gasoline and diesel prices -- by 17% and 18%, respectively -- is a significant move, and the winners and losers are starkly clear.

The most obvious beneficiaries are the oil refiners, China Petroleum & Chemical (NYSE:SNP) -- also known as Sinopec -- and PetroChina (NYSE:PTR). Without the ability to set prices for their retail products, these companies see their refining profits pickled when crude oil prices pop. The government actually paid Sinopec to compensate the company for its operating losses, so slashing the fuel subsidy actually saves the government money on multiple fronts.

Another big beneficiary of today's fuel-price adjustment is Gushan Environmental Energy (NYSE:GU). This company cooks up batches of biodiesel from waste vegetable oil. As noted in my first look at the company, margins have steadily contracted, but they're still incredible compared to the suckers using pricey petroleum feedstock. Today's price increase is pure gravy for Gushan.

Along with the diesel and gasoline increases, the Chinese government also decided to kick electricity rates up a notch as well. I think that's why you're seeing shares of utilities like Huaneng Power (NYSE:HNP) powering higher today as well. On the margin, a higher electricity price also has to be good for solar makers such as Yingli Green Energy (NYSE:YGE), since their modules have an easier time competing at a higher price point.

The electricity price increase spares residential customers, not to mention agricultural players such as AgFeed Industries (NASDAQ:FEED), so that leaves big industrial players like Aluminum Corporation of China (NYSE:ACH) to bear the higher costs. Chalco may not be cheering, but these price increases will help keep China from coming untethered from real-world commodity costs.

Want to see our Motley Fool CAPS players' highest-rated China stocks? Look no further.

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Stocks Mentioned

PetroChina Company Limited Stock Quote
PetroChina Company Limited
PTR
$43.03 (-1.36%) $0.59
Aluminum Corporation of China Limited Stock Quote
Aluminum Corporation of China Limited
ACH
$8.75 (-6.92%) $0.65
China Petroleum & Chemical Corporation Stock Quote
China Petroleum & Chemical Corporation
SNP
$43.60 (-0.91%) $0.40
Huaneng Power International, Inc. Stock Quote
Huaneng Power International, Inc.
HNP
$18.73 (-3.48%) $0.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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