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China's rapidly expanding demand for crude oil in the 1990s has brought about debates about the potential impact of the energy challenges facing China. Within the country, energy as a security issue has seized the attention of its leaders. Outside China, international strategic thinkers have been arguing among themselves over how China's thirst for oil would impact on regional peace and stability.This paper sets out to examine the following questions: How and why has the basic need for crude oil been perceived as a security question in China? How does China enhance its oil security? Is the option to engage Russia and Central Asia viable and why? What are the possible impacts of China's oil diplomacy on regional security and stability? It concludes that the oil diplomacy with Kazakhstan and Russia is far from promising. In the short run, China has to rely on the oil in the Middle East and to exploit the resource in its offshore areas in the medium to long term. This may lead to festering relations with Russia, the US, Japan, India and the Southeast Asian nations. The growing presence of China in the Persian Gulf and East and South China Sea gives cause for concern to the US, Japan, India and the Southeast Asian states.

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The Third Plenum of the 14th Central Committee of the Chinese Communist Party (CCP) in November 1993 decided in principle for a comprehensive reform of central-provincial fiscal relations. Soon after the Plenum, the central government announced that the new fiscal system, known as the tax-assignment system (fenshuizhi), would be implemented nation-wide in 1994. With the aim of providing adequate revenues for government, particularly the central government, by revamping central-provincial revenue-sharing arrangements, the reform is to “[change] the current fiscal contractual responsibility system of local authorities to a tax assignment system …” and to “gradually increase the percentage of fiscal income in the gross national product (GNP) and rationally determine the proportion between central and local fiscal income.”