China economy seen weathering oil prices

China economy seen weathering oil prices

BEIJING: A long-term rise in oil prices of $10 per barrel will shave 0.5 percentage point off China’s economic growth while slashing the trade surplus by as much as $32 billion, Deutsche Bank said on Wednesday.

Higher oil prices would only have a limited impact on China’s overall economy, the seventh-largest in the world, but would eat even further away at corporate margins that have been squeezed by competitive pricing, the bank said in a report.

“Indeed, the sectoral impact — on certain industries — could be a few hundred times larger than the macro impact of oil price changes,” analysts Jun Ma, Nam Nguyen and Richenda Elledge wrote in the report.

They premised their analysis on a crude oil price base of $52 a barrel. It was hovering around $64.80 at 0937 GMT on Wednesday. A per-barrel price rise of $10 would boost consumer inflation by 0.5 percentage point, the report said.

China’s gross domestic product rose 9.5 percent in the second quarter from a year earlier, the eighth straight quarter of growth over 9 percent. Annual consumer inflation has fallen from a peak of 5.3 percent in August 2004 to 1.3 percent this August.

A $10 rise would also directly lead to a reduction of $12 billion in the trade surplus, but by causing slower economic growth in countries that buy a lot of Chinese goods, it could further eat away another $15 billion to $20 billion.

China’s trade surplus is expected to more than triple this year to $100 billion.

The rising surplus, along with strong inflows of foreign investment and speculative money, has put pressure on China’s currency, the yuan or renminbi, to rise in value against the dollar.

“This should help reduce — albeit far from eliminating — the upward pressure on RMB appreciation,” the report said of oil’s impact on the trade surplus.

The start of an era of permanently higher oil prices meant investors should turn to sectors that are insulated from such increases, such as telecommunications, while steering clear of energy-intensive sectors such as chemicals, the report said.

Although higher oil prices would draw more investment to the oil industry, that increase would be overwhelmingly offset by a decrease in investment in other sectors already squeezed by falling profits.

“In sum, stronger oil prices are likely to depress investment demand in a more significant way than its impact on private consumption,” the wrote.

The net impact of Beijing’s reaction to rising oil prices — building strategic oil reserves, buying energy assets overseas, proposing new taxes to curb consumption, and encouraging alternative energy — was likely to support global oil prices and oil asset valuations, they said.

China reiterates tight investment, credit policy

Meanwhile China reinforced policies aimed at preventing an economic overheating, saying the government should continue to control growth in credit and fixed-asset investment. reuters