Quantitative Easing

Global energy-driven inflation could ease as China sees weaker growth

The main driver of rising inflation that is causing economic chaos in the developed world remains the historically high oil and gas prices that have been in play since the prospect of Russia’s invasion of Ukraine emerged. for the first time, which was in September last year, when the price of oil was around US$65 per barrel (bp) of Brent. This increase, combined with the huge increase in global liquidity caused by the various long-running quantitative easing programs that followed the Great Financial Crisis, led the Western government to embark on a series of dramatic rate hikes. interest rates aimed at limiting inflation but which, in themselves, can cause long-lasting economic recessions. China’s economic outlook, which overtook the United States as the world’s largest annual crude importer of crude oil in 2017. Part of the problem for the Chinese economy has been the exceptionally negative effects of its “zero-Covid” policy. This policy, championed personally by President Xi Jinping, is based on ultra-tight lockdowns that are introduced in entire cities as soon as a relatively small number of Covid-19 cases are identified. December 2021 had seen a refinement of the zero-Covid strategy into one incorporating the idea of ​​”dynamic compensation”, which gave local governments more flexibility in imposing restrictions, allowing daily increases in symptomatic cases to be capped at about 200 on a national basis. It was thought that this number could be increased, given that in the new outbreaks in March this year alone, 184,000 people with possible Covid symptoms were placed under medical observation in isolation in the first two weeks of these outbreaks. .

Related: China’s fuel export forecast to hit highest level since April 2020

The optimism arose from comments from several Chinese agencies on a possible relaxation of zero-Covid rules, then came the publication in mid-April of the guide by the Chinese Center for Disease Control and Prevention (CCDC) which described the measures to be implemented. quarantined at home. These would have mitigated the crippling effects on the economy of people forced to quarantine in centralized state-run facilities, even if they suffered very mild symptoms or none, after testing positive for Covid. -19. Those hopes were dashed, however, because when asked for further clarification on these home quarantine procedures, the CCDC simply reiterated previous rules. President Xi then personally reiterated that: “We must adhere to scientific precision, dynamic zero-Covid… Perseverance is victory. As it stands, China still does not have an effective Covid-19 vaccine, or an effective post-infection antiviral, and it still refuses to source from non-domestic suppliers, despite offers. repeated calls from all the major producing countries to make these supplies available.

The clear support that President Xi garnered at the recent 20th Party Congress to be re-elected as General Secretary of the Communist Party of China for a third term almost certainly means that this zero-Covid policy will not change at all. “China’s commitment to its aggressive COVID-suppression strategy remains the strongest impediment to growth, and official statements before and during the Party Congress have trumpeted that the policy is most appropriate for the country,” said Eugenia Fabon Victorino, head of Asia strategy for SEB. OilPrice.com Last week. “In 2020, the Chinese economy managed a rapid recovery from the first wave of infections, as mobility restrictions succeeded in limiting transmissions to a limited number of regions, but increasingly contagious virus strains resulted in a substantial increase in regions reporting new COVID cases daily,” she added. Indeed, just over a week ago, 26 out of 31 regions had experienced severe outbreaks that threatened to spread to major trading cities in China.

Another part of the problem for China is the increasingly perilous position of the country’s real estate sector and, by extension, its huge hidden debt burden. The collapse of China’s leading real estate developer, Evergrande, earlier this year under the weight of more than $300 billion in liabilities heightened fears that the contagion could spread beyond the real estate sector, crushing demand in the Chinese offshore bond markets. As highlighted by OilPrice.com At the time, and long before that according to then Fitch analyst Charlene Chu, China had long been hiding a mountain of debt, used in part to fund its extraordinary economic growth for some 20 years since the 1990s. Combined with the corollary bubbles in China’s housing and other asset markets that have ballooned in recent years, as analyzed in depth in my new book on world oil markets, the situation in China right now is very similar to the West in 2007/08 which no one paid attention to until there started to be bankruptcies, which then went ballistic snow in the large scale financial crisis. “Ahead of Congress, Beijing announced a new round of policy adjustments to boost housing demand,” SEB’s Victorino said. “However, cash-strapped developers continue to default on offshore bond maturities – in fact, the offshore issuer-based default rate among real estate names continues to climb, to 20.4% in September, from 5 .2% at the end of 2021,” she added.

In terms of specific negative ramifications for China’s economic growth, the key Purchasing Managers’ Index (PMI) for factory activity unexpectedly fell in October to 49.2, a drop of 0. 9 from the previous month, and indicative of an outright contraction. With that in mind, China’s crude oil imports for the first three quarters of the year fell 4.3% year-on-year, marking the first annual decline for the period since at least 2014. As at the end of the first half of this year, then, the economic outlook for China was already deteriorating more than expected, with Victorino of SEB and TS Lombard’s head of China and Asia research, Rory Green, having already reviewed at the cut their GDP growth estimates for China earlier in the year to just 3.5% in the case of SEB, and just 2.5% in that of TS Lombard.

By Simon Watkins for Oilprice.com

More reading on Oilprice.com: