Lower oil prices boon for China’s economy

Published Dec 1, 2014

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SINCE China replaced the US as the largest net oil importer last year, falling oil prices have benefited economic development. The Bank of America Merrill Lynch said for every 10 percent fall in the price of oil, China’s gross domestic product (GDP) growth would be boosted by around 0.15 percentage points, lower consumer inflation by around 0.25 percentage points and would improve the current account balance by 0.2 percent of GDP.

Oil prices, which have lost a third of their value since June, hit fresh four-year lows on Thursday after the Opec producer club decided not to cut output despite a huge oversupply in the world market.

The benchmark Brent crude oil has fallen to below $80 (R883) a barrel, a sharp drop from market levels of more than $100 three months ago.

China is dependent on imports for almost 60 percent of its domestic oil supply. The fall in oil prices, therefore, translates into huge foreign exchange savings.

According to data from the National Bureau of Statistics, the country imported 281.92 million tons of crude oil in 2013, worth $219.6 billion.

It means China would save up to $30bn in oil imports this year if the declining trend in oil prices continued, said Lin Boqiang, the director of the China Center for Energy Economics Research at Xiamen University.

China International Capital Corporation (CICC) expects the average oil price in 2015 to be 20 percent lower than in 2014, which would generate $47bn in trade gains for China, or 0.5 percent of GDP, as well as boost household income and corporate profit growth.

Lower oil prices may squeeze the profit margins of oil refiners, but could significantly bring down expenditure for heavy users, such as logistics firms, airline carriers and private car users.

Fuel price cuts

The nation’s oil price adjustment mechanism calls for changes when international crude prices change by more than 50 yuan (R90) per ton during a time span of 10 working days.

China’s retail fuel prices have been cut for the eighth consecutive time since July, as the government reacts to lower crude prices and the country was expected to announce price cuts again late on Friday.

Moreover, lower oil prices would not only be passed on to downstream industries but also influence the prices of other energy and grains through the substitution effect. The impact of oil prices on agricultural product prices was more important for China than for developed countries due to the higher proportion of food consumption in the country, CICC said.

Declining oil prices will also benefit the consumer sector as lower inflation raises consumption through higher disposable incomes.

CICC noted that lower oil prices would provide Chinese policymakers with more room to ease monetary policy.

Last week, the central bank cut benchmark interest rates for the first time in more than two years to support the economy, which grew at its slowest pace since the depths of the global financial crisis in the third quarter, and will probably register its weakest annual growth rate in more than 10 years.

On the stock market, airlines surged on Friday on hopes of lower fuel costs. Air China, China Southern Airlines and China Eastern Airlines all climbed by the daily limit of 10 percent while China Ocean Shipping Company increased by 9.43 percent.

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