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%
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.