Much of the world has been distracted by August and September's party in London, also known as the Olympics and Paralympics. While China’s medal count slipped below the 2008 Beijing performance, the tally was still ahead of the Athens 2004 level. During almost the same period (2008-2011) China's economic growth increased by 60.3% to $7.3trn. By Olympic standards, that growth rate would have exceeded 80 gold medals!
The race to overhaul the US is definitely on – and not just on the sports field. Unable to purchase in the US, CNOOC announced plans to acquire Canadian energy giant Nexen's asset for $15.1bn. The state-owned oil producer has offered a massive $15.1 billion for Nexen. If successful, the deal will set a new record for overseas acquistion by a Chinese oil company and will give CNOOC a foothold in Canada, the Gulf of Mexico, Nigeria and the North Sea.
US commentators have been quick to criticise the deal which they believe would divert local resources into Asia and provide unfair competition. Canada's president Steven Harper has yet to approve the takeover, which he says he will review with “proper scrutiny”.
Since 2008, China's economic landscape has been transformed. In 2008, the government pumped two trillion yuan ($586 billion) back into the economy from its cash reserves to help struggling industries - such as manufacturing, cement and steel - remain competitive and to avoid the worst impact of the global financial crisis. The result has been the 60.3% growth mentioned at the top of this commentary.
However, the mammoth 2008 cash injection, seems to have all but run out and the effect of the Eurozone downturn is being felt. Factory output reached its lowest point in nine months. The HSBC Flash China manufacturing purchasing managers index (PMI) fell to 47.8 in August, down from 49.5 in July, suggesting the sector is actually contracting as lack of foreign demand causes inventories to swell. Robert Rennie, chief strategist at Westpac Bank, commented it was a “very poor update” and expects “some very poor China data to come.”
A slowdown is already evident, causing many provinces to raise concerns over reaching their yearly growth targets. The remedy for which has traditionally been more investment. especially now as Beijing is pondering another gigantic cash stimulus.
Depending on who you believe the latest stimulus package could range from as much as seven trillion yuan ($1.1 trillion) to a more modest two trillion yuan ($315) and all this on top of the 1.2 trillion yuan ($188 billion) in cash for loans it recently freed up by cutting the bank's reserve requirement ratios (RRR). But would another massive stimulus really help?
Although China is currently sitting on a $3.3 trillion cash reserve, this could turn into a deficit if it keeps up the current trend of pumping cash to flatter growth figures and prop up under-performing state-backed industries. Andy Lees of AML Macro predicts that if the country continues to maintain economic growth by boosting investment, China's current account will turn negative within a year. According to Lees: "Sustaining economic growth by increasing the investment ratio... is [creating] a bubble." This comment is reinforced by the fact that investment comprised 49.2% of 2011's GDP.
What is needed is an acceleration in local consumption, not just state-led investment. Personally I expect that once the key governing group change is completed later this year, the focus will return to keeping the economy moving steadily forward.
If the government were to hit a deficit, one major concern is that this may affect the investment plans of the major state-owned enterprises. CNOOC, CNPC and Sinopec might find it difficult to maintain their overseas purchasing strategies and finance further refinery upgrades, meaning less Group I and II oil. Choices would have to be made: global expansion or local investment.
At a consumer level, if the economic growth weakens further, consumers may be less able to afford higher grade lubes, as required by an increasing number of OEMs. Only time will tell.
As ever, OATS will continue to monitor China's lubricants markets and provide the latest data and advice to its customers. To find out more about how we can help you, or, if you would like to comment on anything you have read in this Bulletin, simply contact Diana at DShen@oats.co.uk.
Sebastian Crawshaw
Chairman, OATS