The Real Loser
From the Oil Price Jump Is China
Nation is already dealing with an inflation spike and
weak manufacturing margins
Unhappy ShoppersChinese
consumer prices and spending data, change from a year earlierSource: CEIC
%Food price
indexPork price indexRetail sales
(real)2013’14’15’16’17’18’19-30-20-1001020304050Retail sales (real)xApril
2013x11.8%
By
Nathaniel Taplin
Sept. 16, 2019 7:44 am ET
Higher oil prices are no longer an unalloyed negative for the
U.S., but they are for the world’s largest crude importer: China.
The country is already dealing with a vicious outbreak of African Swine Fever that
has pushed the price of pork, its staple meat, up over 40% on the year.
Inflation is running at its hottest since 2013, excluding the volatile Chinese
New Year holiday period. And amid the ongoing trade war with the U.S., August
data released Monday showed investment, retail sales and industrial
growth all slowing further—the latter to its weakest
in 17 years.
For much of the past year, cheap oil has eased the pain
for beleaguered Chinese consumers and businesses. Following Saturday’s attacks on Saudi Arabia,
though, the Brent benchmark on Monday has risen about 10% to $65 a barrel. And
it could stay elevated for a while, even as Saudi Arabia brings some production
back online—in part because investors are now reevaluating the risk of more disturbances in the Middle East. Brent
futures show investors betting that oil prices won’t fully move back down to
where they were on Friday until next summer, even with the global economy
widely expected to weaken further.
All of this will make shoring up sagging Chinese growth even
more difficult. China has managed to dull the impact of U.S. tariffs with a
cheaper currency. Pricier oil, on top of out-of-control food prices, makes
devaluing the yuan even riskier than it already was.
Beijing’s recent move to
exempt new purchases of U.S. pork and other agricultural products from tariffs
should be viewed primarily in the context of China’s increasingly alarming
domestic food prices rather than softening trade tensions.
Expensive oil makes looser monetary policy riskier too.
Analysts widely expect an imminent cut to rates on a key central bank lending
facility that underpins China’s new benchmark lending rate. But policymakers
remain trapped between a weakening economy and too-pricey food and housing.
House prices are still up over 10% on the year, and growth in housing
investment actually accelerated to a four-month high in August.
The outlook for
Chinese growth is weaker than ever. Given the constraints, though, modest
rather than overwhelming 2015-style policy stimulus is probably the best
investors can hope for.
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