Written by Yuhua Zhang, GEI Associate
Following my last article where I discussed the growth trend of China economy, it is time to look at the effects on China of the lower oil prices.
There is no doubt that lower oil price means lower cost of production and consumption and larger profits to oil consuming countries. China, as one of the largest oil importing countries which has a crude oil external dependence around 60% of consumption, significantly benefits from the lower oil prices.
China mainly benefits on several aspects:
Decrease price level prevents domestic inflation - With the continuing lower oil price since last year, the growth rate of China CPI reached the lowest level on November, 2014 since 2011. In other words, China inflation rate is well under control during the past year. With the weak growth rate of China economy, lower oil price brings more space for Chinese policymakers to adjust monetary and fiscal policies. For one, the lower rate of inflation leads easier monetary policy to avoid deflation. Also lower oil price brings higher trade surplus to China, thus generating expectations of exchange rate appreciation. Moreover, low inflation rate provides better circumstance for taxation and pricing reform.
Alleviate burden to China economy - Continuous lower oil price brings significant tax reduction to China economy. Yuetao Wu, the president of China Center for International Economic Exchanges, states that according to a simple estimation, the price of importing crude oil in 2014 drops at least 10 dollars, it reduces our cost by about 20 billion, and it will be a large bonus if the price further declines in 2015, the cut of importing cost can be considered as tax reduction to the whole economy.
Increase real income to consumers - On the one hand, the lower oil price directly decreases the transport cost to consumers. On the other hand, the restriction of inflation increases real income to Chinese families and motivates their consumption in other industries.
Promote natural environment protection - According to a statement by Wenke Han, who is the director of national development and reform commission energy research institute, lower oil price prevents the development of some production projects with high pollution (such as coal based projects). Thus natural environment is protected.
However, although benefiting a lot from the lower oil price, China still cannot neglect the potential risks. Firstly, in recent several years, China invests heavily in oil industry, investors should recalculate their reward from investment options. Secondly, China faces risk of default by other countries such as Venezuela, who compensates their loans from China by oil. Furthermore, lower oil price may cause negative effects on development of new energy, some high cost exploitation projects have to be suspended. As a result, it may drive retaliative rebound of international oil price after 5 to 10 years, thus causes heavier pressure cuased by increased oil consumption.
Oil is the blood of modern industry and one of the most important international commodities and strategic materials. Oil consuming countries just like China must make good use of this beneficial situation,