China’s economic data delivered a grim reality check to those in the market that had expected the current malaise to be a crisis of confidence. It is worth taking a step back to look at why the economic outlook of the world’s second biggest economy is lackadaisical at best. The country’s economy was a tenth of the size of the US 40 years ago but having become an integral part of the global arena the value of the country’s goods and services shot up to 75% of that of the US, in 30 years. The closing of this gap significantly slowed since President Xi took hold of the country’s reins 10 years ago and the economy is reluctant to start roaring after COVID restrictions were lifted last December. Consumer spending is sluggish, exports declined 14.5% in July from the previous year and imports dropped 12.4%. Investment is lacklustre, the vital property sector is still in the doldrums. The manufacturing sector shrank for the fifth consecutive month in August, (although the Caixin survey showed a return to expansion), and the government target of 5% growth in 2023 could be missed. The economy expanded 0.8% in July month-on-month. Policy response is unconvincing, the proposed and actual cuts in interest rates that are meant to incentivise spending are rather symbolic than effective. Whilst the western world struggles with inflation, China is threatened by a deflation spiral. Consumer spending and youth unemployment data is missing from the picture. It is becoming ever more obvious that the country’s increasingly autocratic leadership functions along ideological lines in its attempt to gain geopolitical leverage. Autocracy and market economy do not complement each other. Considering that China is projected to be responsible for close to 70% of the annual global oil demand growth (IEA estimate), continuous economic headwinds and grim growth prospects will inevitably lead to a downgrade of the country’s oil consumption pulling the rug out from under the feet of tight oil balance. Whilst the remainder of this year promises to see supply shortage, partly due to reasonably healthy global consumption and partly because of the Saudi determination to provide a high price floor, unless the Chinese economy stages a confident revival next year the mood will sour markedly.
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