Global oil supply from several OPEC countries in the Middle East, perhaps all of them, remains contingent on whether the Israel-Hamas War widens out, and by how much. On the demand side of the oil price equation, uncertainty remains on the economic growth prospects of China, the world’s largest annual gross crude oil importer in the world since 2017, and before that the key driver of the broader commodities supercycle. The country’s extremely tightly-enforced ‘zero-Covid’ policy, which was relaxed only at the end of 2022, featured multiple draconian lockdowns on several major cities that crippled the economy. Its unconvincing economic performance since then has acted as drag on oil prices, over and above generally bullish global geopolitical developments. For the broadly net oil importing countries of the U.S.’s allies in the West and the East, this has been a positive development in that it has not added to the already spiralling inflation and rising interest rates that threaten economic recessions. However, signs have begun to emerge that perhaps China is over the worst of its Covid-related economic malaise, and that more growth is on the horizon, and with it a bullish demand-pull on oil prices that the U.S. and its allies do not want. October 18 saw figures released showing China’s economy grew by 4.9 percent year on year in Q3. This beat market forecasts of 4.4 percent, affording grounds for optimism that it will meet its official annual growth target of ‘around 5 percent’. This followed Q2 GDP figures that showed growth of 0.8 percent on a seasonally adjusted basis, again higher than market forecasts (in this case, of a 0.5 percent increase). On a year-on-year basis, Q2 GDP expanded 6.3 percent - significantly better than the 4.5 percent rise in Q1. At around the same time as those figures were released, an official from China’s National Development and Reform Commission pledged that the country would roll out policies to “restore and expand” consumption without delay. The official added that: “Focusing on stabilising the bulk commodity consumption, improving automobile and electronics consumption as well as optimising consumption environment, we will introduce a batch of practical and effective policies and improve their implementation as soon as possible.” Following that pledge, several stimulus measures were introduced, including cuts in lending rates, reductions in FX reserves required to be held by banks, and the potential relaxation of home-buying rules. Around the same time as these were being rolled out, though, further crises relating to the country’s generally enormously over-extended property market came to light, with its biggest private sector developer, Country Garden, facing a bond default. The possible effects on China of such major defaults in the sector are particularly concerning, as it contributes around a third of the country’s GDP, and accounts for about 65 percent of total household assets.
This said, October 20 saw the People’s Bank of China (PBOC) conduct CNY828 billion (US$113 billion) of reverse repurchase contracts – roughly equivalent to a straight injection of CNY733 billion into the financial system – to mitigate some of the economic impact of the ongoing downturn in the property sector. On the same day, the PBOC maintained record low lending rates for the one-year loan prime rate (of 3.45 percent) and for the five-year rate (of 4.2 percent), and implied that more monetary easing may be effected if required. Additionally, on October 24, CNY1 trillion of new special sovereign bond issuance was approved, with the paper to be placed in Q4 this year. Chinese government news channels stated that the bond proceeds will be allocated to local governments to help deliver growth. The budget adjustment will raise the cap on the general fiscal deficit to CNY4.88 trillion - or 3.8 percent of GDP, from the initial planned deficit of 3.0 percent.
“The rare mid-year adjustment to the central government budget marks a turn in fiscal policy, showing that the central government is now ready to share the burden,” Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told OilPrice.com last week. “For more than two years, local governments have been struggling to fill their coffers amidst depressed revenues from land sales, and until the end of 2022 they had also taken on the massive costs related to Covid controls,” she said. “Although the additional budget is officially meant to ‘support post-disaster recovery and reconstruction’ and repair the damage from ‘floodings, typhoons, and other natural disasters’ – meaning that the property sector is unlikely to benefit from the fiscal support - the fresh package does ensure that local governments can maintain infrastructure spending in 2024,” she added.
For China’s overall 2023 GDP growth figure, the Q3 numbers already suggest that the official government target of ‘around 5 percent’ is already within reach, Victorino believes. “Even without the additional budget, a catch-up in spending was already expected to boost growth in Q4, and the central government had only spent around 65 percent of its planned budget in the first three quarters of the year,” she said. “Despite the rising pressure on local government balance sheets, bond issuances of local governments have also been lagging the run rate over the same period in 2022,” she told OilPrice.com. Given this, then, what does China’s fiscal policy mean for the country’s growth outlook in 2024? “Although the latest support package cannot be compared to the bazooka spending in previous downturns, it will boost activity by Q1 2024 at the earliest,” she said. “Additionally, the new budget ensures that infrastructure spending will persist in 2024, bumping up earnings of the industrial sector, and while the challenges of the property sector will likely persist through 2024, other parts of the economy have slowly turned a corner,” she concluded.
Real growth again from the industrial sector is likely to feature increased demand for oil from China, as opposed to the type of growth that has dominated from the beginning of this year. This has broadly been led by household consumption, mainly of services, following three years of intermittent mobility restrictions during the Covid period, Rory Green, chief China economist for GlobalData.TSLombard, in London, exclusively told OilPrice.com. In this phase, it was apposite to note that the transportation element accounted for just 54 percent of China’s oil consumption, compared to 72 percent in the U.S. and 68 percent in the European Union. Consequently, Green underlined, although the consumer-led rebound did produce an increase in oil demand, it did not in and of itself cause oil prices to surge. “Crucially now,” he said last week, “the start of a fresh stimulus cycle will eventually lead to a cyclical bottom, with base effects turning more positive, too, as the year progresses,” he added. “But we think that for now, stimulus is more pistol than bazooka and that the economy will continue to struggle with the property sector in contraction, so we continue to expect weak stabilisation in mid-to late Q4, and an ‘L-shaped’ recovery from there onwards,” he underlined. “For 2024, we think it politically untenable to report growth below 5% year on year, so the target will probably be ‘around 5 percent’ again,” he concluded.
By Simon Watkins for Oilprice.com
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