China: Slipping On High Oil Prices By Antoneta Bezlova

China: Slipping On High Oil Prices

By Antoneta Bezlova

09 January, 2008
Inter Press Service

BEIJING, Jan 9 (IPS) - China’s economic minders have always prided themselves on the fact that despite the country’s insatiable appetite for energy its booming economy has remained largely insulated from fluctuating international oil prices.

But when prices hit 100 US dollars per barrel in early January, the unease among officials and pundits was palpable.

"China is vulnerable precisely because it has never experienced an oil crisis," says Zuo Xiaolei, chief economist with Yinhe Securities. "Our energy contingency planning is only in its initial stages and sharp increases in oil prices are bound to have a big impact on the country."

While the U.S. has held oil reserves since 1976, and Japan since 1980, China’s national oil reserve stockpile is only now taking shape. What is more, China’s current overall reserves equal just half a month’s consumption -- a drop in the sea by the standards of the country’s roaring economy.

In 2003 China overtook Japan in becoming the world’s second largest oil consumer. Last year the country relied on imports for 50 per cent of its oil needs. With an economy growing at a double-digit rate for the last four years, the country’s oil consumption is projected to rise by 15 percent annually.

But oil’s rise to 100 dollars a barrel is bad news not only for the country’s long-term energy security. The sharp increase comes at a challenging time for an economy, which has been trying to shift gears and prime domestic consumption as its new driving engine.

While strong exports remain a significant force fuelling economic growth for China, the country’s mandarins have been trying to boost domestic consumption to bring the booming trade surplus down and reduce tensions with trade partners. In the U.S. and Europe, China is often presented as a competitor for jobs and profits and accused of manipulating its currency to preserve its dominance as an exporter.

But efforts to support domestic consumption and alleviate trade tensions now seem threatened by higher oil prices. "If all of a sudden people have to pay more for energy commodities they would naturally want to reduce their other expenditures," said an editorial in the Beijing Youth Daily this week, voicing public concern.

But what worries Chinese leaders most is the effect soaring oil prices would have on stubborn inflation they have been battling since last year. Nearly every month in 2007 has brought a new decade-high figure in inflation. Consumer prices were up 6.9 per cent in November. In October they were up 6.5 percent.

While low compared with the 20 percent plus inflation rates of the early 1990s, it stoked fears of social unrest among the rural and urban poor. In late 1980s inflation problems triggered economic turmoil and were blamed for social disturbances that culminated in the infamous Tiananmen democracy crackdown.

Some economists have tried to point out that "core" inflation, excluding energy and food, remains low while the surge in food prices simply represents the strength of demand for food products.

Food, however, remains by far the largest expenditure item for many Chinese households. Reports in the Chinese press have blamed ballooning food prices on rising fuel costs as farmers have struggled to make profit from selling their produce in the cities and having to cover costly transportation bills.

"Diesel costs more this year and I have to charge more for bringing my fruits into Beijing," concurs Deng Rui, who keeps a vegetable and fruit stall in the Tianzhu market in Beijing suburbs. The stall displays piles of oranges, apples and Beijing’s traditional winter fare of sweet potatoes. "There is no shortage of anything this winter," Deng says, "but just about everything costs more".

Economists’ projections about inflation in 2008 are not rosy either.

"International oil prices would continue to rise and this means more inflationary pressures on China," Tan Yaling, researcher with Bank of China told The Economic Observer newspaper this week. "One should not forget that China’s inflation index for 2007 excluded the adjustment of domestic oil prices".

The Chinese government continues to control domestic retail fuel prices but as the global crude price skyrocketed from 70 dollars a barrel in July to 100 dollars last week, it has allowed prices at home to rise by nearly 10 per cent.

Reflecting concerns about rising inflation and economy overheating, Beijing has said its monetary-policy stance in 2008 will change from "prudent" to "tight". The announcement, made at the end of an annual policy meeting in December, represents a change from a decade of economic management, which supported high growth.

China is already facing charges that its high-powered economy is the factor driving prices around the world. A recent report by the central bank of Canada also claimed that China’s demand for petroleum and mineral resources would push prices further up in the coming years.

Aiming to ease fears that its growing thirst for imported oil will drive up already high prices, China issued a white paper on energy policies in late December, pledging not to disrupt international markets.

"China did not, does not and will not pose any threat to the world’s energy security," the document stated, aiming at fears that Beijing’s global search for oil and gas might create diplomatic friction and jeopardise other nations’ interests.