China Economic Update – 12 February 2015

In 2014, China’s crude oil imports came to US$228 billion – accounting for almost 19% of the country’s total imports by value and around 2.5% of total GDP. Sustained lower oil prices will therefore reduce China’s financial outflows, providing a significant boost to the economy.

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How much will China benefit from the falls in oil prices?

Since early 2014, global oil prices have plummeted, falling by 55% year-on-year to around US$48 a barrel in mid-January (for benchmark Brent crude).

As the world’s second largest oil consumer (behind the United States) and largest net importer, China stands to benefit from sustained lower oil prices. That said, there is some uncertainty as to how large the benefit will be.

China’s economic model is changing – with less momentum provided by energy intensive heavy industry and investment and more from low intensity services. This means additional units of economic output are less sensitive to oil price movements than in the past.

In addition, China’s energy mix is dominated by coal, rather than oil, with the large majority of coal being domestically produced. Domestic coal prices fell in 2014 – albeit not nearly as significantly as oil prices.

We have revised up our forecasts for China in both 2015 and 2016, although only modestly, with a 0.1% upward revision in both years – to 7.1% in 2015 and 6.9% in 2016. We expect that Chinese authorities will take advantage of the oil price stimulus to lower public investment and continue the process of cleaning up shadow banking (and with it credit growth more generally). We continue to expect a slowing track for China’s growth – particularly given the political capital invested in announcing a ‘new normal’ of slower growth.

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