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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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China’s Growing Debt Could Be Bearish For Oil Prices

Much has been made over China bypassing the U.S. recently to become the world’s largest crude oil importer and even more media attention has been given to the ongoing trade dispute between Washington and Beijing, yet amid all of the geopolitical posturing and associated media coverage, there is another development in China that could be just as important for global oil markets – China’s corporate debt quandary.

In an effort to continue spurring China’s decades-long run of stellar economic growth, banks opened the flood gates with loans worth trillions of dollars to the country’s corporate giants, prompting Chinese President Xi Jinping to tighten the screws on both legitimate banks and the so-called murky world of shadow banking. This belt tightening has now entered its third year.

The ratio of Chinese corporate debt to GDP is already very high by international standards - at 168 percent in 2017, Fitch Ratings service said recently. Moreover, it is expected to start rising again as nominal GDP growth declines towards 8 percent from the unusually high rate of more than 11 per cent in 2017.

Amid this trend, household debt in the country has also spiked over the past decade (2008-2018), a rare phenomenon for a culture that until recently prided itself on its financial thriftiness. In April, Bloomberg said that household debt in China is growing at a pace that rivals any increases in major economies. At $6.7 trillion, and a record 50 percent of GDP, private debt is now approaching developed-world levels and crimping consumer spending power, the report said. Related: OPEC’s Dilemma: Demand Destruction Or Production Boost

Now with government efforts underway to rein these excessive debt levels, Fitch said yesterday that this debt crackdown is a key risk to the country’s economic growth and will have significant knock-on effects for the global economy, particularly emerging markets with high commodity dependence or close Chinese trade links.

Soft landing ahead

This could also lead to a sharp slowdown in business investment, Fitch added, forecasting that growth in China would slow to around 4.5 percent over the medium term. The ratings agency added that the implications of this scenario for the global economy would be significant but not dramatic, unlike a full-scale hard landing.

However, though not a dramatic hit, the anticipated economic slowdown in China will still impact commodities, including global oil markets, with Fitch projecting oil prices to drop 5 to 10 percent from its base scenario.

Any drop in Chinese oil demand will also have a direct impact on oil producing countries that have carved out market share in the country, notably Russia, Saudi Arabia, with Iran and Iraq also jockeying to gain more market share in the world’s second largest economy. The list of impacted oil exporting countries will also include the U.S., which has seen its oil market share in China grow recently. More demand for U.S. crude is anticipated in China as the spread between global traded Brent crude and other blends based on the benchmark widens with NYMEX-traded West Texas Intermediate (WTI) crude and other crude types linked to WTI. Last week that spread hit around $11, a level not seen in three years. Related: New Technology Could Wipe Out Trillions In Fossil Fuel Investment

However, any decreases in U.S. oil imports to China would have a negative impact on Beijing’s recent pledge to increase American energy imports to help offset the massive trade deficit between China and the U.S.

On the other hand, as trade barbs between the world’s two largest economies follow an up and down, even see-saw trajectory, Beijing could use American energy imports as a retaliatory tool against fresh U.S. tariffs.

"Just as newfound U.S. resource wealth can serve as a tool for rebalancing trade, it (energy imports) can also become a target for retaliation in trade disputes," analysts with ClearView Energy Partners said in a recent note.

However, despite Fitch’s recent forecast and the on-going trade tug of war between Washington and Beijing, China’s gas demand should suffer less of an impact from any slowdown in Chinese economic growth in the next few years. The government mandate to have natural gas make up at least 10 percent of the country’s energy mix needed for power generation by 2020, with more earmarks by 2030, will offer piped gas exporters (predominantly Russia) and LNG exporters, Australia, Qatar, Malaysia and others as well as the U.S. vast opportunities to capture more Chinese gas market share.

By Tim Daiss for Oilprice.com

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