China’s stunning economic growth was almost single-handedly responsible for the commodities supercycle from the late 1990s to the onset of the 2014-2016 Oil Price War, as analysed in full in my new book on the new global oil market order. This was characterized by consistently rising prices of the key commodities that the country required in its dramatic economic expansion. In 2013, China became the world’s largest net importer of total petroleum and other liquid fuels and, as late as 2017, its still high rate of economic growth allowed it to overtake the U.S. as the largest annual gross crude oil importer in the world. Late 2019 saw most of this activity grind to a halt as Covid hit the country, and the economic slowdown was exacerbated by its Draconian handling of the virus, with its ‘zero-Covid’ policy seeing complete shutdowns of major economic centres at the slightest hint of infection. Last week saw China officially announce its economic growth target for 2024 of “around 5 percent” – the same as last year’s, which it managed to beat by 0.2 percent. The key question now, given China’s enduring status as the world’s leading gross importer of oil, is whether can this be achieved again.
One factor that cannot be underestimated in this question is the sheer political will to ensure that this growth target is met. China’s top political figures – including President Xi Jinping – are acutely aware of the potential for high youth unemployment caused by low economic growth 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 23.4 percent. This is why China stopped publishing the youth unemployment data after June 2023’s figure showed this jobless rate at an all-time high of 21.3 percent – very close to the Arab Spring level. The previous November had seen the beginnings of anti-Covid lockdown protests in China, after a fire in Urumqi led to several deaths, which the leadership knows have the potential to change focus into broader anti-government movements if the economy does not maintain a high growth rate. The basic trade-off in China has long been the people’s acquiescence for most things, provided that the government provides them with what they need and want – food, a place to live, a job, education, healthcare, and the chance for their children to have even more opportunities. This is why towards the end of 2023, President Xi ordered several new stimulus measures to ensure that the government’s economic growth target – also “around 5 percent” then - was hit. This included CNY828 billion (US$115 billion) of reverse repurchase contracts announced by the People’s Bank of China (PBOC) on 20 October. On the same day, the central bank 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 24 October, CNY1 trillion of new special sovereign bond issuance was approved, with the paper to be placed in Q4. Chinese government news channels stated that the bond proceeds would be allocated to local governments to help deliver growth. The budget adjustment also raised the cap on the general fiscal deficit to CNY4.88 trillion - or 3.8 percent of GDP, from the initially planned deficit of 3.0 percent. The effects of this latter measure partly washed through into the early part of this year too, Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told OilPrice.com. “The incoming bond supply remains elevated, and this will require continued liquidity injections from the central bank,” she said last week. “Aside from a bigger bond supply, the central government will likely raise the pressure on local government to implement the budget in a timely manner and, assuming the run rate of government bond issue is accelerated in the coming months, growth in aggregate financing will likely pick up,” she added. “The 50 bps [basis points] reduction in reserve requirement ratio implemented in February [2024] has already injected CNY1 trillion in long term liquidity and this gives the PBoC some time to assess if there is need for further policy easing,” she concluded.
Added to this, there are signs that China’s trade globally is beginning to markedly trend up again. Exports jumped 7.1 percent year on year to US$528 billion in January and February, following a 2.3 percent gain in December 2023, and ahead of market forecasts of a 1.9% rise. This was echoed in its trade surplus, which increased to US$125 billion over the January and February period, compared to just US$104 billion in the same period a year earlier, again beating market forecasts. Stronger global trade on its own is unlikely to be sufficient to achieve the official “around 5%” growth figure, though. To reach its target, Beijing will need to increase infrastructure investment and to do so it will need to overcome two key obstacles, Rory Green, chief China economist for GlobalData.TSLombard exclusively told OilPrice.com last week.
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The first obstacle is the lack of money in local government for such projects, and to deal with this the government is likely to set an expansive fiscal stance, with central government taking on greater debt and redistributing to weaker provincial authorities. “The deficit target of 3.2 percent, a central government special-purpose bond quota of CNY1 trillion, and a local government special purpose bond quota of CNY3.9 trillion, mark a departure from the hawkish fiscal stance over H2 2022 and H1 2023,” he added. The second obstacle is a lack of projects that would promote Xi’s longer-term policy objectives, and here the expansive fiscal position might indicate that Beijing is shifting to a cyclical pro-growth stance, thinks Green. “In addition to the stimulus announced at the NPC [National People’s Congress], we expect government borrowing - CNY1 trillion between central and provincial balance sheet) and pledged supplementary lending of CNY500 billion in the second half of this year,” he said. “Alongside adjustments to allow a wider array of projects - similar to new “common prosperity” aligned property investment - all of this would just be enough to report official growth at 5%,” he added.
Fiscal expansion and increased trade is likely to feature increased demand for oil from China, as opposed to the type of growth that has dominated 2023 - broadly been led by household consumption, mainly of services, following three years of intermittent mobility restrictions during the Covid period. In this phase, it is 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. According to the International Energy Agency, increases in global oil demand are set to halve from 2.3 million barrels per day (bpd) in 2023 to 1.2 million bpd this year, but China will continue to lead this demand growth. It is also apposite to note that China’s economy is valued at US$18 trillion, and India’s - currently the darling of the developing commodities markets - at US$3 trillion. This means that even if China’s growth falls short of its “around 5 percent” target, an annual growth rate of even 4.5 percent would mean China adding an economy the size of India’s to its own every four years.
By Simon Watkins for Oilprice.com