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Analysts were divided over whether it would boost or curtail demand.
Oil prices plunged nearly US$5 (S$6.80) a barrel on Thursday, after China announced the move, but rebounded by more than US$4 a barrel in early trading yesterday morning.
The view now gaining ground is that China's fuel price increase may actually boost rather than curtail demand for fuel in the world's second-largest oil consumer.
Many Chinese refiners have resisted producing fuel in recent months, as the retail prices they were allowed to charge were not high enough to cover the cost of their main raw ingredient, crude oil. Now that they can charge more for fuel, these same refiners may actually produce more diesel and petrol, spurring demand for crude in the process.
Beijing raised retail prices of diesel and petrol by as much as 18 per cent. It was its first hike in eight months and its sharpest one-off rise.
Subsequently, prices of crude oil fell almost US$5 to below US$132 a barrel. The thought at first was that higher mainland prices in China would reduce demand.
Stocks around the world rallied on hopes that lower fuel prices would boost economies, with consumers having more money to spend elsewhere.
'The real question is whether oil will go down towards US$100, closing the gap for the Chinese and reducing pressures on the global economy,' Stratfor, the intelligence agency, said in a report.
'If they don't, the Chinese in particular will have some very hard decisions to make.'
China, which accounts for some 40 per cent of the global rise in oil demand, spends billions to subsidise fuel consumption.
However, this policy has come under intense global scrutiny. The country's massive demand for oil is seen as one key factor behind the product's almost sevenfold surge from US$20 six years ago to a record high of nearly US$140 a barrel earlier this month.
Beijing last raised fuel prices by about 11 per cent last November. It has resisted further increases in the face of inflation soaring to near a 12-year peak, and the fear of fanning social unrest before the Beijing Olympics in August.
Consumers and analysts were thus caught off-guard when China's top economic planning unit, the National Development and Reform Commission (NDRC), announced the latest hikes which took effect at Thursday midnight.
High oil prices, said the NDRC, had created 'contradictions in the purchasing price of oil being higher than the selling price of refined products (that) were becoming more glaring by the day'.
It gave the assurance, however, that public transportation costs would not change, but it did announce a hike in electricity fees as China faces the prospect of power outages in the summer months when air-conditioning use peaks.
The state-owned China Daily reported yesterday that areas in Sichuan province, ravaged by a massive earthquake last month, would be exempted from the fuel hikes.
Almost 20 billion yuan (S$4 billion) in subsidies will also be granted to needy groups, China's Finance Ministry said yesterday, most of it to cushion the crunch in the farming, fishery, forestry and public transport sectors.
Still, motorists were upset with the higher fuel costs.
'These have more than doubled to over 6 yuan per litre over the past five years, while I can raise my rates only by 20 to 30 per cent, or risk losing my clients,' said Mr Jiang Shunli, 48, who operates a private chauffeur service and cannot obtain a subsidy.
Cab driver Xiang Long, 35, was sceptical too that the promised subsidies would cover higher costs.
'I got only 110 yuan per month in subsidies after the last fuel hike in November,' he told The Straits Times.
'It was just symbolic as I still had to take money out of my own pocket. I think it would be like that again this time.'
