This week is scheduled to see the lockdown of Wuhan – the Chinese city in which the global coronavirus pandemic began – end, following a recent visit to the city by China’s President Xi Jinpiang. Although as an export-led economy China will still face some trouble ahead, moves are afoot that will mitigate these downside risks to its economy and already its industrial sector is back operating at levels even above the pre-coronavirus rates. For the global oil sector this resurgence at this time means two things. The first is that a key demand element in the supply/demand pricing matrix will return in scale. The second is that China will take the opportunity afforded it by other leading global economies facing the peak of the coronavirus outbreak to make long-term strategic deals with key oil suppliers at extremely advantageous terms to itself.
Of course, China will not entirely escape a notable negative impact from the effects of the coronavirus outbreak across the country. Indicators of domestic activity for the two months to February show the pullback in economic activity came in much worse than many of the most pessimistic forecasts, highlighted Eugenia Victorino, head of Asia Strategy for SEB, in Singapore. “In a synchronised move, industrial production, retail sales and fixed asset investment all fell in deep negative territory for the first time on record and the decline in the hard data not only confirmed the sharp drop in sentiment indicators like PMI, but it also indicates that the authorities are not smoothing the data,” she told OilPrice.com last week. “Even as China is gradually rolling back its containment measures, the rapid spread of coronavirus to the rest of the world paved the way for a wholesale imposition of other governments’ restrictions and the consequent rise in precautionary behaviour of households and firms,” she said. “Combined, this implies that demand for Chinese-made exports will soften in the near term and thus, overall, we are lowering our GDP growth forecast for China to four per cent in 2020,” she added.
This said, she – along with many others – is actually raising her GDP growth forecast for the country for 2021, in SEB’s case to 6.8 per cent. Part of the reason for this pervasive view is not only that China is already bouncing back extremely quickly in all sectors, except those relating to the service industries, but also because, as an authoritarian regime, it can act with ruthless determination to achieve one specific goal after another with all means necessary. On the first of these points, for example, despite the slowdown in domestic activity indicators for the two months to February, March saw an incredible turnaround, especially in the core manufacturing sector of China’s economy. According to data released by China’s National Bureau of Statistics just over a week ago, the official manufacturing purchasing managers’ index (PMI) – a survey of sentiment among factory owners in the world’s second largest economy – was 52 in March. Not only was this a huge leap up from the all-time low reading of 35.7 in February but also a reading of above 50 shows that the manufacturing sector is actually growing. On the other side of the equation, China’s non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also jumped up from the all-time low 29.6 in February to a growth-showing 52.3 in March. These readings translated into a broader economic confidence amongst the population as seen in the fact that the renminbi-denominated China A-share index rose in the last week of March from just over 2,600 to just below 2,800.
There is much to come, though, as China seeks to take advantage of the relative indisposition of its global economic rivals. “The reaction of the Chinese authorities has been more rapid and rigorous than during the 2003 SARS epidemic, with the more relevant comparison being with 2008, when China faced a succession of tests: the 8.0-measured earthquake in May, the Olympics in August and the global financial crisis in the autumn,” highlighted Larry Brainard, chairman of the emerging markets panel for TS Lombard, in London. Now, as then, the Chinese leadership understands the political imperative to act decisively to control the economic fallout of the current crisis and, as such, said Brainard, the balance between deleveraging and growth is likely to be tilted towards stimulus in order to make up ground lost due to the virus and quarantine. “This balance has characterised economic policy for the past two years, and we think the new tilt will probably last for the rest of this year,” he underlined. “The leadership’s need to ensure that expansion stabilizes around the official target of six per cent is all the greater because of other challenges it faces: notably, the unrest in Hong Kong and the DPP [Democratic Progressive Party] victory in the Taiwan elections as well as the future of relations with the U.S. after last month’s ‘Phase 1’ deal,” he told OilPrice.com.
Even before the coronavirus outbreak, China’s planned infrastructure stimulus had been significantly expanded and this is a policy that is likely to be continued, and increased further. “We expect the quota for special bond issuance by local governments will be hiked next month to RMB3.1 trillion [US$450 billion], up from last year’s RMB2.15 trillion but, more importantly, the required percentage allocation of local government cash to any given project has already been cut, allowing local officials to increase the leverage of each project,” said Brainard. “Additionally, the use of bond proceeds will now be channelled into transportation and local infrastructure projects rather than land bank and shantytown development projects, as was the case last year and these changes will result in faster infrastructure fixed asset investment growth,” he added. At the same time, said TS Lombard’s chief China economist, Bo Zhuang, in order to mitigate the always-perilous risk for China of rising unemployment, the country is likely to again pursue housing construction stimulus, in particular. “Over the past two months, there has been a sharp contraction in new home sales and housing investment, which has increased risks for developers and local governments, as both rely heavily on revenues from land sales,” he said last week. Although the central government’s stance has so far been cautious – it has underlined that “housing is for living in, not for speculation” – now, said Bo, a combination of an external demand shock, inbound supply chain disruption and potentially sizeable job losses will prompt the authorities to launch another round of property stimulus in order to create labour-intensive jobs in this sector.
All of these infrastructure-boosting stimulus packages in the past have been extremely good for oil demand from China, taken in tandem with the manufacturing of the items required for them and this time will be no different. Happily for China, the current beleaguered global oil industry landscape makes for very ripe pickings indeed, with oil going cheap and many regimes desperate to lock in some reliable revenue streams, no matter what the overall cost to their independence. As has been tracked and highlighted by OilPrice.com for the last several months, China has been especially busy in targeting those countries that are vital for its cornerstone multi-generational power-grab strategy of ‘One Belt, One Road’. Having secured the assistance of Russian muscle by dint of long-term lucrative oil and gas supply deals for Moscow with Beijing, China has been upping the tempo of its sequestration of the good bits of Iraq and Iran, and to a lesser degree Oman. In conjunction with these targets, it is fair to assume that China will be keenly awaiting the outcome of the current Saudi attempt – again – to destabilise the U.S. shale sector, particularly given how precarious the U.S. view on its relationship with Saudi Arabia had already become. It should be remembered that only a year or so ago, Saudi Crown Prince Mohammed bin Salman (MbS) was meeting with Chinese President Xi and securing a US$10 billion oil deal. Very kind words were exchanged, with Xi stating that “China is a good friend and partner to Saudi Arabia,” whilst MbS said “Saudi Arabia’s relations with China can be traced back a very long time [and]…over such a long period of exchanges with China, we have never experienced any problems [with China].” With Xi overlooking the relatively recent murder of journalist Jamal Khashoggi apparently on the personal order of MbS and MbS overlooking the forcible internment of up to one million brother-Muslim Uighurs in Xinjiang, the US$10 billion deal was for a Chinese-Saudi joint venture to develop a refining and petrochemical complex in China’s northeast Liaoning province. In addition, though, according to the Saudi Arabian General Investment Authority, 35 other memoranda of understanding were signed during the February 2019 visit of MbS to China, including deals related to energy and mining.
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