From the mid-1990s to onset of Covid at the end of 2019, China almost singlehandedly drove the commodities supercycle, consisting of ever-increasing prices for the key materials it required to drive its extraordinary economic growth. As the virus took hold across the country, accompanied by its Draconian ‘zero-Covid’ policy that saw entire cities closed at the merest hint of the illness, its economic growth rate plummeted. Last year, it managed to hit its official economic growth target of ‘around 5 percent’, finally posting a 5.3 percent rise over the year, and maintaining its 2023 target for this year as well. However, doubts about the solidity of this rebound have never entirely gone away and they fully resurfaced again last week as the once seemingly unstoppable Asian Tiger announced Q2 economic expansion of 4.7 percent year on year (yoy). This was not only lower than the official target, but it also undershot consensus analysts’ expectations of a 5.1 percent rise over the period. As still the world’s biggest importer of crude oil, all eyes in the oil market remain on China is its likely economic progress from here.
One somewhat positive factor for its oil demand is that the energy-intensive industrial sector has been performing relatively well, increasing by 5.3 percent yoy in June, ahead of market expectations of 5 percent. That said, it was lower than May’s 5.6% growth and is the second straight month showing a decline. “Q2’s figures highlight that divergence in growth drivers persist, with industrial activity continuing to outstrip services,” Eugenia Victorino, head of Asia strategy for SEB in Singapore told OilPrice.com last week. “The Q2 number confirms the momentum of monthly data prints on industrial production and non-manufacturing PMI,” she added. Positive too was the 8.6 percent year-on-year rise in the country’s exports in June, surpassing expectations of an 8 percent rise and improving on the 7.6 percent increase in May. The figure marked a 21-month high of US$307.9 billion and saw the fastest growth since March 2023.
Having said that, the better-than-expected gain has been attributed by many China watchers as being the result of manufacturers front-loading their orders in expectation of increased tariffs being imposed from several of its major trading partners, including the U.S. May 1 saw Washington impose a raft of new sanctions on more than a dozen companies in China and Hong Kong for their support of Russia’s war in Ukraine. As highlighted recently by OilPrice.com, U.S. Secretary of State Antony Blinken made it clear during his recent trip to Beijing that China is “helping fuel the biggest threat” to European security since the Cold War by exporting technology and components essential for Russia’s ongoing war. Privately, according to a senior European Union (E.U.) energy security source spoken to by OilPrice.com, the U.S. has expressed the same concerns about such technology transfers being used by Russia through its Iranian proxies Hamas and Hezbollah in the Middle East, as analysed in full in my new book on the new global oil market order. “China’s insistence that these exports are used solely in a regular commercial capacity cuts no ice with anyone, and this is a sharp red line [for the U.S., U.K., and E.U.,” the E.U. source exclusively told OilPrice.com.
Consequently, the May 1 sanctions are a small part of what will be a laddered approach of escalating sanctions from now on, depending on how China continues to act regarding Russian aggression in Ukraine and the Middle East. “The same applies to the new E.U. tariffs on China’s electric-car makers – a major growing part of its economy – and these can be ramped up at any point,” the E.U. source added. As an adjunct to this, last week also saw Washington state that it is considering extending its trade restrictions on any company that provides China with access to advanced U.S. semiconductor technology. This tough line on China from the still-in-place President Joe Biden aligns with his long-held hardline on China. During his 2020 presidential campaign, he employed very tough rhetoric on China and repeatedly spoke of it acting together with Russia in the context of both the Middle East and Asia. As also detailed in my latest book, although the broad approach of the Biden team to China in his early presidency was close to predecessor Donald Trump’s highly trade-centric policies to ensure Beijing continued to move in the direction of an equitable trade policy with the U.S., there were important differences. The key one was that Biden’s team would not “give up security considerations for trade”, as Trump frequently did, according to Trump’s former National Security Adviser John Bolton.
It may be that China is waiting for a return of Trump at the end of this presidential campaign in anticipation of the resumption of such a relationship, according to the E.U. security source. An early case in point of this bargaining involving trade and security, according to Bolton, was the almost complete reversal of hard-hitting U.S. sanctions imposed on Chinese telecommunications company ZTE for committing major and repeated violations of the U.S.’s sanctions on Iran and on North Korea. According to Bolton, after a private telephone call to China’s President Xi Jinping – in which it later transpired that Xi told Trump that he would “owe [Trump] a favour” if he reduced the sanctions against ZTE – Trump did exactly what Xi had asked for. Trump shortly after tweeted: “President Xi of China and I are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!” As Bolton wrote in his book ‘The Room Where it Happened’: “Since when had we started to worry about jobs in China?”
In the meantime, China’s Third Plenum of the Central Committee four-day meeting ended last week, with Xi reaffirming its commitment to the development philosophy that stresses high-quality economic growth. He also announced a target to double the size of its economy by 2035. However, no major new measures were announced that are geared to stimulating further economic growth from this point, aside from the People’s Bank of China cutting key lending rates. SEB’s Victorino does not expect Beijing to hit the panic button and substantially accelerate policy support anytime soon, given that year-to-date growth is still running in line with Beijing’s “around 5 percent” annual target. That much of this is coming from the energy-intensive industrial sector – rather than from services as in 2022 – may prompt optimism from those who want oil prices higher. However, this ‘Post-Covid Phase’ of growth currently does not necessarily look like one that will power China’s oil demand dramatically higher and drag benchmark prices ever higher with it. The key reason is that China continues to buy substantial amounts of oil at greatly reduced prices from Russia, Iran and Iraq too, through various mechanisms also analysed in full in my latest book.
By Simon Watkins for Oilprice.com