The global energy market is influenced by geopolitical factors, such as U.S. elections or conflicts in the Middle East, as well as natural events like hurricanes and floods. However, many overlook China’s impact, even though it should not be underestimated for several reasons.
Economic Downturn
China’s economic peak was in 2021, and now it faces significant challenges due to excess production capacity, a housing market slump, and low consumer activity.
Illustrating this, in September, consumer prices in China intensified deflationary trends, with monthly price growth at zero (-0.1% m/m seasonally adjusted) and annual price growth slowing to 0.4% y/y. Food prices were the only growth driver (+3.3% y/y), while non-food prices fell by 0.2% y/y, and service price growth slowed to 0.2% y/y.
Core inflation, excluding energy and food, dropped to 0.1% y/y, with an average of 0.5% y/y over nine months, indicating economic deceleration, while energy price volatility persists.
Producer prices decreased by 2.8% y/y, with ongoing price declines in durable goods (-2.1% y/y) and non-durable goods (-0.3% y/y).
China’s foreign trade cooled slightly in September, with exports at $303.7 billion (+2.4% y/y) and imports at $222 billion (+0.3% y/y), maintaining a high trade balance of $81.76 billion. Over the past 12 months, China’s positive trade balance totalled around $0.9 trillion, which remains comfortable for its economy, but the yuan’s depreciation against the dollar led to a net decrease in both import and export volumes.
Despite government efforts to mitigate the situation, risks of prolonged deflation similar to Japan’s scenario remain, requiring greater stimulation to ensure a gradual economic slowdown to approximately 3.5–4.5% annual growth over the next 3–5 years.
Impact on the Oil Market
China’s economic downturn inevitably affects the global fuel and energy market, as it remains the world’s largest oil importer. Overall, oil imports remain stable at 11 million barrels per day, only slightly below last September’s levels and in line with the past six months to a year. The average price of imported oil in September decreased in line with global market trends, reaching $77.2 per barrel. In monetary terms, China’s annual oil import expenses remain stable at about $0.34 trillion.
Impact on Energy
Energy resources, in turn, remain stable. This is due to strategic government decisions that allowed the country to reduce energy costs per unit of GDP by 5–15% from 2022 to 2024. This was achieved through resource imports from economically struggling countries at discounts of up to 30% below market prices, along with modernizing China’s energy system and optimizing costs.
What Should Investors Do?
Direct foreign investment in China has turned negative for the first time since 1998. Economic issues in China signal the need to reassess investment portfolios. For instance, shifting towards American energy companies that are likely to boost production could open new investment opportunities. A strategy focusing on more reliable assets, such as gold or U.S. bonds, may also be appealing and promising.
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