China’s Changing Policies Could Create Huge Oil Demand Deficit

Figures released last week show that China’s crude oil imports in the first half of 2021 fell for the first time in eight years. China has been the world’s largest net importer of crude oil and other liquids since September 2013, and almost on its own created the 2000-2014 commodity “supercycle”, characterized by steadily rising price trends. for all commodities – including petroleum – that are used in a booming manufacturing and infrastructure environment. This boom in oil consumption from China was largely the product of the country’s average annual GDP growth of 8% during this period, with many peaks well above 10%. So this sudden drop in oil imports in the first half of this year – against the decline in economic growth in recent years – does it mean that a major factor supporting oil prices has gone to? good ? A notable decline in China’s economic growth rate began in 2012 when it fell below the key figure of 8% for the first time since 1990. Since then, China’s true GDP growth figure has been rising. the subject of much guesswork because, official annual figures have always been above at least 6 percent, traders and analysts are aware that the figures are under extreme political pressure which could not tolerate aggregate GDP figures of, say, just 3 percent a year, which a number of traders and analysts think it is. Whatever the actual figure, the fact remains that until this latest release of data for the first half of this year, China has consistently accounted for consumption of 10-14 million barrels per day (bpd). of crude oil since 2012, surpassing 10 million barrels per day of crude oil imports in 2019, after overtaking the United States as the world’s largest net importer of crude oil in 2017.

China had also apparently faced the economic fallout from the COVID-19 pandemic which peaked (to date) in 2020. As early as the second week of April 2020 (just three to four months after the virus started to hit surface notably elsewhere in the world, and just a week or two after the announcement of the UK’s first full national lockdown), the lockdown of Wuhan – the Chinese city in which the global COVID-19 pandemic began – has been relaxed. Although as an export-driven economy, China would still face problems in the weeks and months to come, steps were immediately taken to mitigate these downside risks to its economy.

In fact, even before the easing of the lockdown in Wuhan, China’s industrial sector had once again been operating at levels above pre-COVID-19 rates for more than two weeks. According to data released by the National Bureau of Statistics of China in early April 2020, the official Manufacturing Purchasing Managers Index (PMI) – a sentiment survey of factory owners in the world’s second-largest economy – was 52 in March. Not only was this a huge jump from an all-time low of 35.7 in February, but also a reading above 50 shows the manufacturing sector was in fact growing.

Technically, it can be argued that the unexpected drop in China’s crude oil imports in the first half of 2021 is the product of shrinking margins available to Chinese refiners given the recent rise in global crude oil prices. However, this also happened – and to a much greater extent – in the second half of 2018, and China’s crude oil imports did not drop at that time.

This time around, it’s critical to note that China’s second-quarter GDP fell to 7.9% year-on-year, slightly lower than the median forecast of 8.0% from analysts covering the industry.Excluding the easing of favorable base effects, quarterly gains of 1.3% qoq [q-o-q] were following downward revisions in first quarter printing, ”said Eugenia Victorino, head of Asia strategy for Singapore-based SEB. Last week. “While June activity indicators managed to beat expectations, the growth momentum remains unbalanced, with retail sales growth declining to 12.1% year-on-year from 12.4% in May, but the rate compound growth over the past two years rose to 4.9% in June from 8.0% in 2019, indicating that household spending remains far from pre-pandemic trends, ”she said. declared. Related: Oil Continues To Crash On OPEC News, COVID Fears

“In the meantime, residential property sales are slowing rapidly due to rising mortgage rates and we are therefore cautious about the slowdown in the recovery in private consumption,” she added. “In addition, the credit impulse declined sharply in the last quarter and historically the credit cycle has a six-month lead, indicating a continued decline in sequential growth in the short term,” she said. “The general reduction in the reserve requirement ratio that took effect on July 15 is expected to partially offset the slowdown in growth, but it is not yet clear whether this will be enough to prolong the recovery,” she concluded. .

The situation that China finds itself in may support the idea that the country is no longer interested in playing the kind of leading role in the world’s economy as it has for the past 10 to 20 years. in particular, which is even more worrying. for those who have a bullish outlook on future oil prices. “There was a time when China’s credit boost was the most important data in the global macroeconomics, and for nearly a decade the country was locked into a model of stop-go policy, with every swing. of China’s national monetary / fiscal position ultimately producing powerful swings in the broader global industry cycle, ”Dario Perkins, managing director of macro macro for TS Lombard, London, told last week. To be precise, if China tightened, the world might expect a deflationary alert, usually around eight to ten months later, and if authorities relaxed, reflation would become the big topic, ”he said.

This enduring correlation between China’s economic measures and the rest of the world seemed to go far beyond traditional trade ties, including China’s role as a source of final demand, which Perkins believes was – and is. remained – a function of the fact that with developed economies suffering from secular stagnation and central banks powerless to stimulate demand, China had become the main source of the world’s “balance sheet”. “By adding 30% of world GDP to the Communist Party of China balance sheet, the country had become the marginal source of demand for the entire world economy, but that leaves a problem – because China no longer wants to play this role. “, added Perkins.

Specifically, he pointed out, Beijing has adjusted its economic targets and is now less willing to embark on major credit stimulus measures, as China’s central authorities are now aware that the rapid and continuing accumulation debt poses a risk to future growth and to stability and national security as well. This is linked to movements seen since 2017 in China which have largely signaled a shift from a credit-fueled expansion to a focus on slower sustainable development, and have included a crackdown on the shadow banking system, tackling the burden of inherited debt and the removal of explicit GDP targets. This change can also be seen in China’s response to the COVID-19 pandemic compared to its response to the first significant outbreak of the global financial crisis in 2008. According to TS Lombard figures, in 2020 the COVID-stimulus- China’s 19% was 10% of GDP (up from 13% in 2008), compared to 26% of GDP in the United States, 40% in Germany and 24% in France. “China’s stop-go political cycle is still there, but the intervention threshold is higher and the stimulus scale is likely to be smaller,” Perkins said.

So what does this mean for global growth and, by extension, for oil demand? “In the near term, the global economic ‘cycle’ – if you can even call it that – is dominated by COVID, with the contractions and expansions associated with closures and reopening comfortably overshadowing the fallout from Chinese policy, direct or indirect, ”he said. underline. But after the developed world settles into a new normal in which COVID-19 or any subsequent variant is treated and viewed the same way as the flu – annual mass vaccinations and acceptance of a certain death rate per year – then a China policy shift will leave a huge gap in global demand for oil (and all other commodities used in a booming manufacturing and infrastructure environment that Beijing has bought out over the past 30 years ). “If China is truly falling in love with the state stimulus package, the world will need another source of demand if it is to avoid an economy that is even more stagnant than before COVID-19,” he said. concluded Perkins.

By Simon Watkins for Oil chauffage

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Felix J. Dixon