Oil shock tests China bet to insulate its economy

Soaring oil prices triggered by possible sanctions on Russia’s energy supplies will make China’s already-challenging economic growth target for the year even tougher to achieve.
Beijing is betting that its large domestic energy supplies, close ties with Russia and low consumer inflation will insulate it from surging crude prices. But, with oil costs now 40% higher than they were two weeks ago, Chinese businesses are facing a profit squeeze, consumers’ spending power could be hit, and global growth will take a knock, curbing demand for Chinese-made goods.
Barclays Plc’s chief China economist, Jian Chang, estimates a global energy shock could subtract between 0.3 and 0.5 of a percentage point from China’s economic expansion this year by suppressing consumption and external demand. To prevent a large fallout, “authorities will intervene to mitigate the negative impact from surging oil prices,” she wrote in a note.
China is the world’s biggest oil importer, purchasing more than $257bn worth of crude last year, according to official statistics. Chang expects Beijing to order state-owned oil refiners to cut profits and use price controls on fuel to cushion consumers. China imports about 15% of its oil from Russia and may be able to pay lower prices for those imports due to reduced demand from the US and Europe, she added.
Underlining China’s continued interest in Russian commodities as part of efforts to maintain energy security, Beijing is in talks with state-owned firms including its oil majors on opportunities for potential investments in Russian companies or assets, according to people familiar with the matter.
The implication of higher oil prices is that Beijing will need to add more fiscal and monetary stimulus to the economy to meet its ambitious growth target of around 5.5% for the year, which was announced just three days ago. The dilemma for policy makers is that the threat of inflation may make central bank easing more challenging.
“It will certainly be a constraint on China’s monetary policy,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong. “There’s less monetary policy space with the mounting risks and uncertainties, and as the Federal Reserve hikes, there’s a shorter window for the People’s Bank of China to ease monetary policy.”