China’s Economic Upswing May Not Boost Oil Prices

The massive disparity between China’s enormous economy-driven energy needs and its minimal level of domestic oil and gas reserves meant that the country was the key driver of the 2000-2014 commodities ‘super-cycle’, characterised by consistently rising price trends for commodities. As late as 2017, China’s high rate of economic growth allowed it to overtake the US as the largest annual gross crude oil importer in the world, having become the world’s largest net importer of total petroleum and other liquid fuels in 2013. China’s ‘zero-COVID’ policy subdued its economic growth but, with this policy officially abandoned on 8 January this year, much is being made of a return to more usual economic growth levels in China and the boost this may give oil prices. However, the return of high Chinese economic growth does not mean another oil price boom. This more bearish view is not one shared by the US Energy Information Administration (EIA), which last week stated that the end of COVID-19-related lockdowns in China is expected to spur travel and drive growth in global oil demand this year. It added that a brighter economic picture in China, and elsewhere, next year will also attribute to continued oil demand growth in 2024. More specifically the EIA highlighted that liquid fuels consumption in China is forecast to be 700,000 barrels per day (bpd) higher in 2023 than it was in 2022. Overall, the agency said, growth in China and in the rest of the world is seen as the main driver of an expected 1.5 million bpd increase in global oil demand this year to 100.9 million bpd, a 430,000 bpd jump from February’s estimate. It may be that economic growth from several non-Organization for Economic Cooperation and Development (OECD) countries, including India, lift global oil prices by some degree for a while. However, in China’s case, it is likely that the next phase of its economic growth, post-COVID-19, will not be the same as the phases before that provided a long and sustained boost to oil prices. 


Certainly, there is likely to be much stronger growth in China this year than there was in any of the pandemic years, Rory Green, chief China economist for TS Lombard, in London, exclusively told “We noted in December [2022] that China was looking to kick-start consumer activity and sentiment in 2023, a message emphasised in [President] Xi Jinping’s New Year speech,” he said. “Beijing is trying to reset domestic and international economic and political relations by toning down ‘Common Prosperity’ and ‘Wolf Warrior’ rhetoric and, more important, delivering stronger growth,” he added. “We think that China is rapidly moving from COVID coma to reopening boom and that a GDP target of ‘above 5 percent’ will be established for 2023 and that Xi will look to report GDP comfortably above that floor,” he underlined. 

Indeed, this ‘above 5 percent’ economic growth target was reiterated on 5 March this year, although it came after 2022’s big miss on that year’s 5.5 percent economic growth target. This said, Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told last week, this year’s target should be met without requiring a release of flood-like stimulus, particularly considering this year’s inflation target of just 3 percent. Although most activity indicators for February have yet to be released, Purchasing Managers’ Index numbers already suggest that the recovery in 2023 will be broader than in the second half of last year. “By end-2022, export numbers in China and its regional trading partners were already struggling amidst the cyclical moderation in tech exports and expectations of a global recession,” said Victorino. “Yet, the improvement in export orders in February was echoed in the PMI numbers of China’s Asian trading partners, so although the export environment remains a downside risk to China’s growth outlook, the reopening is already providing some offset to intra-Asian trade,” she added.

Policy support is expected from China’s central authorities to ensure that the recovery will broaden out further. Victorino expects a reduction in the reserve requirement ratio (RRR) of around 50 basis points this year and the higher target of 12 million new urban jobs, compared to the 11 million target set in the last two years, implies a focus on labour-intensive economic recovery. This, though, is likely to be in line with a services-led growth narrative, rather than one based on a new boom in manufacturing or further infrastructure build-out. 

Indeed, Victorino highlighted to, then-Premier Li Keqiang indicated (before he was succeeded on 11 March by Li Qiang) the need to guard against ‘unregulated’ expansion in the property market and ensure ‘effective risk prevention and mitigation’. “This suggests that support for the sector is unlikely to intensify much from here and, thus far, China’s piecemeal policy response to the property sector has improved investor sentiment,” she said. “This said, homebuyers remain wary of pre-build transactions, keeping property sales depressed, and if household confidence does not recover sufficiently, there is a risk that households may spend their savings on repaying legacy mortgages rather than raising their spending on goods and services,” she concluded.

This shift in growth drivers away from the manufacturing and infrastructure build-out catalysts that were behind the 2000-2014 commodities super-cycle may well mean that the previous near-automatic feed-through of increased China economic growth into higher-for-longer oil prices is not as marked this time around as in previous years. “China’s central leadership is relying on reopening and the removal of negative policies – property, consumer internet, and geopolitics – rather than aggressive stimulus, to drive activity,” TS Lombard’s Green told “For the first time, a cyclical recovery in China will be led by household consumption, mainly services, as there is clearly a great deal of pent-up demand and savings – about 4 percent of GDP – following three years of intermittent mobility restrictions,” he added. 

For oil prices, he underlined, it is apposite to note that transportation accounts for just 54 percent of China’s oil consumption, compared to 72 percent in the US and 68 percent in the European Union. In 2022, net oil and refined petroleum imports were 8 percent lower by volume than the pre-pandemic peak, with infrastructure and export-oriented manufacturing partly offsetting lower mobility and less property construction. “Demand drivers should switch this year, with travel rising and property less negative, while infrastructure and manufacturing slow,” said Green. “The certain outcome is an increase in oil demand – we estimate a 5-8 percent increase in net import volumes – but this is unlikely to cause oil prices to surge, especially as China is buying at a discount from Russia,” he concluded.