China has undergone three distinct phases in its reaction to COVID-19 since the Wuhan Municipal Health Commission reported the first small cluster of cases of 'pneumonia' in Wuhan city in Hubei Province on 31 December 2019. The first phase was the quick implementation of the 'zero-COVID' policy that allowed for the fast economic bounce back of China in just the second quarter of 2020. This was a time when elsewhere more than 3.9 billion people in more than 90 countries or territories having been asked or ordered to stay at home by their governments. The second phase was marked by repeated lockdowns in various areas of China, including several of its major cities, as outbreaks of COVID-19 and related strains of the virus prompted full lockdowns under the strict 'zero-COVID' policy. The third phase was prompted by nationwide protests against such continued all-encompassing lockdowns and comprised of the effective shelving of the policy that, in turn, has led to huge waves of infections and deaths. The next phase, which may well arrive earlier than many people expect, is likely to be the bounce back of China's economy.
To put this economic bounce back into context: the massive disparity between China's enormous economy-driven oil and gas needs and its minimal level of domestic oil and gas reserves meant that China almost alone created the 2000-2014 commodities 'super-cycle', characterised by consistently rising price trends for commodities used in a booming manufacturing and infrastructure environment. As late as 2017, China's high rate of economic growth allowed it to overtake the US as the largest annual gross crude oil importer in the world, having become the world's largest net importer of total petroleum and other liquid fuels in 2013. More specifically on the economic side of the equation, from 1992 to 1998, China's annual economic growth rate was basically between 10 to 15 percent; from 1998 to 2004 between 8 to 10 percent; from 2004 to 2010 between 10 to 15 percent again; from 2010 to 2016 between 6 to 10 percent, and from 2016 to 2022 between 5 to 7 percent. For much of the period from 1992 to the middle 2010s, much of this activity was focused on energy-intensive economic drivers, particularly manufacturing and the corollary build out of infrastructure attached to the sector, such as factories, housing for workers, road, railways and so on. Even after some of China's growth began to switch into the less energy-intensive service sectors, the country's investment in energy-intensive infrastructure build-out remained very high.
It is extremely difficult to gauge the current level of infections and deaths from COVID-19 and its related strains, as China's National Health Commission (NHC) stopped publishing daily COVID-19 case data on 25 December 2022, a practice that had been in effect since 21 January 2020. However, during a recent press conference, Kan Quancheng, a senior official in Henan - China's third most populous province - revealed that nearly 90 percent of people there had now been infected with COVID-19 and its related strains, which equates to around 88.5 million people in just that province.
Cases have risen to these levels in large part due to the zero-COVID policy and its strict implementation, as only extremely limited immunity to the virus has been allowed to develop. At the time of effectively shelving the zero-Covid policy, China still did not have an effective vaccine against the disease or any variant thereof, despite offers from all major vaccine-producing countries to make such supplies available to it. China also did not have an effective post-infection anti-viral, again despite offers from several Western countries to make such anti-virals and post-infection treatments available to it. Adding to these negative factors, as highlighted by OilPrice.com recently, is that China suffers from an extreme shortage of intensive care unit capacity in hospitals.
Although this unrestrained surge of COVID infections has caused an even deeper impact on activity in the near-term - which Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told OilPrice.com likely dampened to 2022 GDP growth of 2.8 percent - China's annual Central Economic Work Conference (CEWC) signalled in the middle of December that boosting growth will be the priority in 2023. "Investments in research and development in high tech sectors will be accelerated, specifically in new energy, AI, biomanufacturing, and quantum computing," she said. "Although the CEWC called for greater market access for foreign capital especially in modern services industry, the long-term policy direction of greater self-reliance in key sectors will be maintained and on fiscal policy, public spending will 'maintain the necessary intensity'," she added. "Therefore, there are upside risks to our 5.5 percent GDP growth forecast for 2023," she concluded.
With COVID infections having peaked on the east coast, and although a difficult time lies ahead for central and rural China, activity will begin to accelerate by March at the very latest, thinks Rory Green, chief China economist for TS Lombard, in London. "We noted in December that China was looking to kick-start consumer activity and sentiment in 2023, a message emphasised in [Premier] Xi Jinping's New Year speech," Green exclusively told OilPrice.com "Beijing is trying to reset domestic and international economic and political relations by toning down 'Common Prosperity' and 'Wolf Warrior' rhetoric and, more important, delivering stronger growth," he added. "We think that China is rapidly moving from COVID coma to reopening boom and that a GDP target of 'above 5 percent' will be established for 2023 and that Xi will look to report GDP comfortably above that floor," he underlined.
This said, it may be that the previously near-automatic feed-through of increased China economic growth on oil prices is not as marked this time around as in previous years. "China's central leadership is relying on reopening and the removal of negative policies - property, consumer internet, and geopolitics - rather than aggressive stimulus, to drive activity," Green told OilPrice.com. "For the first time, a cyclical recovery in China will be led by household consumption, mainly services [as] there is clearly a great deal of pent-up demand and savings - about 4 percent of GDP - following three years of intermittent mobility restrictions," he added.
For oil prices, he underlined, it is apposite to note that transportation accounts for just 54 percent of China's oil consumption, compared to 72 percent in the US and 68 percent in the European Union. Last year, net oil and refined petroleum imports were 8 percent lower by volume than the pre-pandemic peak, with infrastructure and export-oriented manufacturing partly offsetting lower mobility and less property construction. "Demand drivers should switch this year, with travel rising and property less negative, while infrastructure and manufacturing slow," said Green. "The certain outcome is an increase in oil demand - we estimate a 5-8 percent increase in net import volumes - but this is unlikely to cause oil prices to surge, especially as China is buying at a discount from Russia," he concluded.
By Simon Watkins for Oilprice.com
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Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More
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