Since the mid-1990s, China has been the key global buyer of multiple commodities needed to power its economic growth. The purpose of this growth was partly to create and enlarge a middle class over which it is generally much easier to maintain control than either a fractious upper class or working class. It was also to establish a superpower counterpoint in the Global South to rival that of the U.S. in the Global North and eventually to overtake it as the world’s top superpower, as analysed in depth in my new book on the new global oil market order. China’s stellar economic growth for many years pushed the prices of the major commodities it needed ever higher, almost single-handedly creating and sustaining the commodities supercycle over those years. The onset of Covid in the country at the end of 2019, and the Draconian ‘zero-Covid’ policy used to try to contain it, severely impacted this growth and its wider ambitions (for now, at least). The key question for the global oil markets is what will happen to China in 2024?
China’s economic growth target for 2023 was officially “around 5”, which meant that it was almost certainly going to be attained on paper, regardless of the reality behind the figures. That reality is that growth of anywhere between 3 and 5 percent was achieved, depending on how the data is interpreted. For at least the first two quarters of the year, key economic releases were poor – especially outside the consumer sector. This meant that jobs were increasingly hard to come by in China’s cities, into which the country’s dream of a new middle-class existence had drawn tens of millions away from their previous agricultural-based lives since the late 1990s. Young people have found it especially difficult, and the youth unemployment rate grew so much that China stopped publishing it after June’s figure showed this jobless rate at an all-time high of 21.3 percent. China’s top political figures – including President Xi Jinping – are acutely aware of the potential for high youth unemployment to spiral into widespread protests. They know that just before the series of violent uprisings in 2010 that marked the onset of the Arab Spring, average youth unemployment across those countries was only marginally higher - at 23.4 percent - than China’s is now.
For the Chinese Communist Party and its current leadership, then, this has now become an existential crisis and one for which it cannot continue to use its previous tried-and-trusted method of growing its way out of all difficulties. This method basically involved pumping government money into economy, often through state-owned enterprises (SOEs) and financial institutions to achieve ever-increasing degrees of economic growth. The understanding was that this could be repaid at some point in the distant future, at such a time in fact when the growth of the assets the money had bought could pay for the debt incurred. As long ago as March 2017, then-Premier Li Keqiang made two major announcements at China’s annual National People’s Congress (NPC) in Beijing. The first was that the world’s second-largest economy had cut its growth rate target to the lowest level in 27 years. The second was that: “Developments both inside and outside China require that we are ready to face more complicated and graver situations.”
Even before this acknowledgement by Li, though, the global financial markets were aware that China had for a while been demonstrating the three key symptoms that preceded all the major financial crises of the past three decades – the 1997 Asia Crisis, the 1998 Russia Crisis and even the Great Financial Crisis that began in 2007, as analysed in depth in my new book on the new global oil market order. These were a high degree of debt leverage, a rapid rise in asset prices and a decline in underlying growth potential – in short, all the factors need to inflate a bubble that would then burst. The debt of any country can be divided basically into two components: domestic and foreign. China’s foreign debt rose from around US$52.55 billion in 1990 (about the start of the country’s dramatic surge in economic growth) to about US$2.4 trillion in 2020 (around the time of the onset of Covid). China’s government debt to GDP ratio was about 68 percent at that point. Even with the increase in this government debt to GDP ratio after Covid (to just over 80 percent at the beginning of 2023), the other component - domestic debt - is where the serious problems lie. This is because it has long been an area beset by a lack of clarity, which persists to this day. Unofficially, including this debt, China total debt-to-GDP ratio is anywhere between 270 percent and 300 percent, up from around 200 percent just five years or so ago. Even according to the People’s Bank of China’s (PBOC) own data, outstanding ‘total social financing’ (which measures overall credit supply to the economy and includes off-balance-sheet forms of financing that exist outside the conventional bank lending system) stood at CNY5.98 trillion (US$858 billion) in January 2023.
One obvious sector of concern – among many others that are less so – is the property sector, which accounts for around a third of China’s entire GDP and about 65 percent of total household assets. According to Rory Green, chief China economist for GlobalData.TSLombard, speaking exclusively to OilPrice.com recently, even back at the end of 2022 China’s property sector was 30 percent larger than underlying demand, and he estimated a 1 percent hit to potential growth in a benign structural slowdown scenario. As problems in one of China’s two biggest property concerns - Country Garden - became more public (mirroring what had happened before at Evergrande, as analysed by OilPrice.com back in December 2021), the government introduced new stimulus measures. October 20 saw the PBOC conduct CNY828 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 additional bond quota is expected to be raised before end?2023 and, earmarked for disaster relief and climate projects, the additional financing will prop up activity by Q1 2024,” Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told OilPrice.com last week. Since these new measures, upward revisions to China’s GDP forecasts have been trickling out, despite the continued contraction in the property sector. The IMF recently raised its GDP forecasts by 0.4 percent for both 2023 and 2024 - to 5.4 percent and 4.6 percent, respectively. The latest figures showed that Chinese industrial output for November expanded at the fastest pace in nearly two years, while retail sales rose less than expected, which is a tentatively positive sign for oil demand. For much of this year, growth such as it was had come from consumer activities, which tend to power oil demand in China far less than growth from the industrial sector. Given this switch in growth drivers, OPEC forecasts Chinese oil demand averaging 16.41 million barrels per day (bpd) in the first half of 2024, up 3.2 percent from 2023 levels, while the International Energy Agency predicts the country’s oil demand averaging 17.1 million bpd for the full year, to show 3.9 percent growth over.
By Simon Watkins for Oilprice.com