From the mid-1990s until the outbreak of the COVID-19 pandemic at the end of 2019, China almost singlehandedly drove a commodity supercycle, with prices of key raw materials that fueled its phenomenal economic growth continuing to soar. As the virus spread across the country and strict “zero COVID” policies were implemented, in which entire cities were locked down at the slightest sign of infection, economic growth plummeted. Last year, China finally hit its official economic growth target of “about 5%” and recorded a 5.3% annual increase, maintaining its 2023 target for this year. But doubts about the solidity of this recovery have not completely disappeared, and they were fully raised again last week when the once-thought-unstoppable Asian tiger announced that its second-quarter economic growth was 4.7% year-on-year. Not only was this below the official target, but it was also below analysts’ consensus forecast of a 5.1% increase over the period. China remains the world’s largest importer of crude oil, and the oil market’s attention remains on China’s future economic development.
A slight positive for oil demand was the relative strength of the energy-intensive industrial sector, which grew 5.3% year-on-year in June, beating market expectations of 5%. Still, it was lower than May’s 5.6% gain and marks the second consecutive month of declines. “The second-quarter figures show that industrial activity continues to outperform services, continuing the divergence of growth drivers,” said Eugenia Victorino, head of strategy for Asia at SEB in Singapore. OilPrice.com “The second-quarter numbers support the momentum from the monthly release of industrial production and non-manufacturing PMI data,” he added last week.Also boosted by the country’s exports, which grew 8.6% year-on-year in June, beating expectations of an 8% increase and improving from a 7.6% increase in May. The figure was a 21-month high of $307.9 billion and the fastest growth since March 2023.
Related: U.S. oil and gas drilling activity picks up
However, many China watchers say the larger-than-expected increase is the result of manufacturers frontloading orders in anticipation of higher tariffs from several major trading partners, including the United States. On May 1, Washington imposed a new set of sanctions on more than a dozen Chinese and Hong Kong companies for supporting Russia’s war in Ukraine. As OilPrice.com recently covered, US Secretary of State Antony Blinken stated during a recent visit to Beijing that China is “fueling the biggest threat” to European security since the Cold War by exporting technologies and components vital to Russia’s ongoing war. Privately, the US has expressed similar concerns about such technology transfers that Russia is using through its Iranian proxies Hamas and Hezbollah in the Middle East, according to a senior European Union energy security official OilPrice.com spoke to, which I analyze in detail in my book on the new global oil market order. “China’s argument that these exports are only for normal commercial purposes holds no weight for anyone, and this is a clear red line. [for the U.S., U.K., and E.U.,” the E.U. source exclusively told OilPrice.com.
Consequently, the May 1 sanctions are a small part of what will be a laddered approach of escalating sanctions from now on, depending on how China continues to act regarding Russian aggression in Ukraine and the Middle East. “The same applies to the new E.U. tariffs on China’s electric-car makers – a major growing part of its economy – and these can be ramped up at any point,” the E.U. source added. As an adjunct to this, last week also saw Washington state that it is considering extending its trade restrictions on any company that provides China with access to advanced U.S. semiconductor technology. This tough line on China from the still-in-place President Joe Biden aligns with his long-held hardline on China. During his 2020 presidential campaign, he employed very tough rhetoric on China and repeatedly spoke of it acting together with Russia in the context of both the Middle East and Asia. As also detailed in my latest book, although the broad approach of the Biden team to China in his early presidency was close to predecessor Donald Trump’s highly trade-centric policies to ensure Beijing continued to move in the direction of an equitable trade policy with the U.S., there were important differences. The key one was that Biden’s team would not “give up security considerations for trade”, as Trump frequently did, according to Trump’s former National Security Adviser John Bolton.
It may be that China is waiting for a return of Trump at the end of this presidential campaign in anticipation of the resumption of such a relationship, according to the E.U. security source. An early case in point of this bargaining involving trade and security, according to Bolton, was the almost complete reversal of hard-hitting U.S. sanctions imposed on Chinese telecommunications company ZTE for committing major and repeated violations of the U.S.’s sanctions on Iran and on North Korea. According to Bolton, after a private telephone call to China’s President Xi Jinping – in which it later transpired that Xi told Trump that he would “owe [Trump] President Trump said ZTE would get “benefits” from easing sanctions, and did exactly what Xi asked. Shortly after, Trump tweeted, “President Xi Jinping of China and I are working to get Chinese Telecom Giant ZTE back in business as quickly as possible. Many jobs are being lost in China. The Department of Commerce has been directed to get it done!” As Bolton wrote in his book: “The room where the incident occurred”“Since when do we start worrying about jobs in China?”
Meanwhile, China’s Third Plenary Session of the Central Committee of the Communist Party of China (CPC) concluded last week over four days, with President Xi reaffirming his commitment to a development philosophy that emphasizes high-quality economic growth. He also announced a goal of doubling the size of the economy by 2035. However, other than the People’s Bank of China lowering its key lending rate, no major new measures were announced at this point to stimulate further economic growth. SEB’s Victorino doesn’t expect Beijing to hit the panic button and significantly accelerate policy support anytime soon, given that growth so far this year is still in line with Beijing’s “around 5%” annual target. That much of it is coming from the energy-intensive industrial sector, rather than services as in 2022, may encourage optimism among those hoping for higher oil prices. But this “post-COVID” growth does not seem at the moment necessarily going to dramatically boost China’s oil demand and further lift benchmark prices. The main reason is that China continues to buy large amounts of oil from Russia, Iran and Iraq at significantly discounted prices through various mechanisms, which I also analyze in detail in my latest book.
Article by Simon Watkins of Oilprice.com
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