How will China’s new economic stimulus measures affect oil prices?

China has been the world’s largest net importer of total oil and other liquid fuels since 2013, and since 2017 has also become the largest annual gross importer of crude oil, overtaking the US in this regard. These benchmarks were driven by its rapidly growing need for energy to fuel its booming economic development since the mid-1990s, which in turn catalyzed the supercycle during that period characterized by ever-rising commodity prices on who asked them the most. When Covid hit in late 2019, China responded with a “Zero-Covid” policy that saw entire economic centers shut down at the slightest sign of the virus, causing its economic growth rate to plummet from staggering highs previously observed. Its recovery since then has been uneven, although last year it managed to meet its official economic growth target of “around 5 percent”, clocking in at 5.2 percent expansion. The same target of around 5% remains in place for this year, and to that end it announced last week the biggest stimulus measures seen since the end of the Covid pandemic. Given its pivotal role in the global energy market, the key question is what impact this will have on oil prices.

The People’s Bank of China (PBoC) laid some of the groundwork for the big announcements on September 24, the day before, when it cut its key 14-day reverse repurchase (repo) rate by 10 basis points (bp, one-hundredth of one percent). ). Since this is the interest rate at which they borrow money from commercial banks, the cut is intended to decrease the amount of money these banks park in the PBoC and thereby increase the money supply in the open market. Similarly, the following day the central bank announced a 20bp cut in the 7-day reverse repo rate and added further stimulus measures on top of that – surprisingly aggressive for the PBoC, which usually only announces one measure of stimulus at a given time. , with considerable gaps between them. One of the additional measures was a 50bp cut in the required reserve ratio (RRR, the percentage of deposits a financial institution must hold in reserve as cash) – again aimed at releasing more money into the open market. There was also a direct minimum of CNY 500 billion ($71 billion) of liquidity support for the equity market, with a facility in place at the central bank for various types of institutional investors to use for to buy shares.

Related: New Saudi Oil Price Rumors Warn OPEC Cut Violators

In addition, a special focus of the central bank has fallen on the country’s now long real estate sector, which now accounts for about 30% of its economy. Specifically, the PBoC cut the rate on existing mortgages by 50 bps. To the same end, the central bank will increase its lending program to the sector, offering 100 percent of the principal value of bank loans to regional state-owned enterprises. “Such loans will be used to buy unsold homes at reasonable prices, and before that it was 60% of the equity when it was first announced in May,” Eugenia Victorino, Head of Asia Strategy for SEB, exclusively said Singapore. OilPrice.com last week. “By providing 100% financing, the expanded program should accelerate the completion of outstanding projects and, together with rate cuts on existing mortgages, the new package should help boost household confidence in the real estate sector,” she added. As it stands, Victorino pointed out, the consolidated budget for 2024 assumed that the deficit would reach at least 6.2% of the gross domestic product (GDP), which should be enough to reach the GDP growth target. “However, budget implementation has lagged – since July, local governments have spent less than 50% of their annual allocations and with a slower operating rate, local government spending is lower over the same period from 2023,” she said.

In addition, there are three more fundamental reasons that argue against any significant increase in oil prices from China’s latest monetary stimulus measures. The first is the changing nature of its economic growth model, as fully discussed in my latest book on the new global oil market order. From 1992 to 1998, China’s annual economic growth rate was basically 10-15 percent; from 1998 to 2004, 8-10 percent; from 2004 to 2010, again 10-15 percent; from 2010 to 2016, 6-10 percent, and from 2016 to the beginning of the Covid years 2019, 5-7 percent. For most of the period from 1992 to the mid-2010s, much of China’s massive economic growth was based on a huge, energy-consuming expansion of its manufacturing capabilities. Even after some of China’s growth began to shift to less energy-intensive service sectors in the second broad phase of its growth, its investment in building energy-intensive infrastructure remained very high. This pattern continued for many years alongside China’s third phase of economic growth, which was the rise of a middle class that fueled a boom in demand for goods and services driven by domestic consumption. All of these phases have had the net result of significantly increasing China’s demand for oil and gas. The current phase of growth is one that appears to be focused on the development of advanced manufacturing and technological capabilities rather than property construction and the production of large export products, the newer model being much less energy-intensive than the older, little for in time.

The second reason is that China does not want oil prices at the upper end of historical levels. Part of the reason it has become the world’s largest importer of many commodities – including oil and gas – is that it has so few resources of its own. As the world’s leading importer of oil, it is simply not to its advantage to have the price on the bullish side. It is true that he gets big discounts on benchmark prices from both Russia and Iran, but it is still better for him that these benchmarks are lower rather than higher. In this regard, the US and several of its key allies remain China’s main export customers, with the US alone still accounting for more than 16% of its export earnings. Rising energy prices in these countries could fuel inflation again and lead to higher interest rates, bringing with them the prospect of an economic slowdown, as seen after Russia’s invasion of Ukraine in 2022. According to a senior source in the field European Union’s energy security complex spoke exclusively to OilPrice.com, the economic damage to China – directly through its own energy imports and indirectly through damaging the economies of its key Western export markets – would rise dangerously if Brent oil prices remained over $90. -95 bp for more than a quarter of a year.

The final reason is directly related to the US, which, given its massive oil and gas reserves and even greater geopolitical power, can still do much to influence energy prices – and wants them lower, too. Long-standing estimates are that each $10 bp change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline increases, more than US. $1 billion a year is lost in consumer spending, negatively impacting the US economy. Historically, about 70% of the price of gasoline is derived from the global price of oil. This is achieved in the second part of this equation, as fully analyzed in the latest new book, which is that since the end of World War I in 2018, the sitting American president has won re-election 11 times out of 11 if the economy was not in recession within two years of the next election. If it was in recession during that time frame, then only one sitting president won 7 times. Even this single victory is debatable, as the winner—Calvin Coolidge in 1924—had not, strictly speaking, won the previous election (and thus could not be “re-elected”), but rather had acceded to the presidency automatically upon death in office. of Warren G. Harding. The same pattern generally applies to the re-election chances of the president’s party’s candidates in the US midterm elections, the outcome of which affects the incumbent’s ability to continue his legislative agenda for the final two years of their presidency. Indeed, according to a 2016 study by Laurel Harbridge, Jon A. Krosnick, and Jeffrey M. Wooldridge called “Presidential Approval and Gas Prices”a 10-cent increase in gasoline prices was associated with a 0.6 percent decrease in presidential approval over the study period from January 1976 to July 2007.

By Simon Watkins for Oilprice.com

More top reads from Oilprice.com