Cars lined up at a gas station in Wuhan, China, before the government let companies increase gas prices up to 18 percent.

By JIMMY WANG

GANSU, China - Returning the fueling nozzle to the pump, Zhang Li jumped into the driver’s seat of his gas-guzzling Land Rover. “Such a long line, said the 45-year-old tour guide, shaking his head. “What’s the world coming to- My stocks are worth air, and now I have to wait an hour for overpriced gas, too.
Mr. Zhang’s lament elegantly captured the twin dilemmas that led China’s leaders to unexpectedly raise gas prices here by double-digit percentages recently. While much has been said about China’s hesitance to raise domestic prices for fear of inflation, Beijing was facing an equally vexing problem: artificially low gas and diesel prices were indirectly depressing China’s stock markets by hurting the performance of the energy giants Sinopec and PetroChina.
The decision by the Chinese government to raise consumer fuel prices illustrates the balancing act Beijing is compelled to perform in advance of the Olympics.
On one hand, raising gasoline prices could stoke inflation, and that could spark protests among poor Chinese who are hit hardest by price increases . On the other hand, the surprise announcement about the fuel price increases seemed to be a reply, at least in part, to widespread calls for change.
Price controls have saved Chinese consumers and businesses billions - and prevented the kind of protests that led to rioting, and even a murder at the pump, the last time prices rose.
But controls have also squeezed Sinopec and PetroChina, China’s top oil refiner and producer, respectively. They still had to pay near-record oil prices on world markets even if they were not allowed to charge market prices to consumers. The companies lost money on every liter of gas they sold in China.
Combined, the companies make up 16 to 20 percent of the Shanghai Composite Index. PetroChina alone had a market capitalization - the total value of all its shares - larger than General Electric or Microsoft at the end of 2007.
Many Chinese investors are angry over the prolonged downturn. “I invested 80 percent of my savings, said Wang Li, a 30-year-old manager in Shanghai. “And I’ve lost over half my money now. I’m angry - the government’s measures to keep the stock market above 3,000 have failed.
Before the government let diesel prices increase 18 percent and gas prices 16 percent on June 19, the Shanghai exchange had lost 14 percent of its value the previous week - and more than 50 percent since its high last year.
As a matter of policy, the Chinese government sets gasoline and diesel prices well below international market prices in order to encourage economic growth. In 2007, China’s subsidy of gasoline alone was $22 billion, close to 1 percent of its gross national product.
While in the past this formula for economic growth worked miracles by allowing businesses and factories in China that use oil to operate at low cost, it is now at the crux of one of China’s biggest policy issues.
With oil prices reaching $137 a barrel recently, Sinopec and PetroChina shut down gas stations across the country. Long lines formed in front of gas and diesel pumps as the oil giants strove to cut their refining losses by selling less fuel. Financial analysts have urged China to raise its gasoline and diesel prices .
Back on the highway in Gansu, Mr. Zhang said: “When the market took a dive earlier this year, I was really depressed for a while. I didn’t go to work several days; I just drank. Now I’m anxious every day; I watch the stocks and I can’t sleep. I’m just simmering inside with anger. Who knows- One day I might just explode.