The Covid Effect: China’s long march to recovery

Author Karen Teo and Tom Reed

Beijing faces choices as it looks to revive the Chinese economy, including the degree to which its recovery will depend on oil, gas and coal, write Karen Teo and Tom Reed.

This series of country profiles from Petroleum Argus provides a snapshot of how key oil and gas producers and consumers are being changed by the Covid-19 crisis.

China is where it all started. Its people and economy felt the impact of Covid-19 weeks and in some cases months before other parts of the world, but Beijing's aggressive handling of the virus meant the country also emerged from lockdown early. So when energy demand was collapsing elsewhere, China was witnessing the start of a commodity demand rebound, fuelled in part by cheap imports.

The pandemic cut Chinese GDP by 6.8pc in the first quarter. Refiners' fuel sales shrank by at least 20pc over that period, while like-for-like electricity output fell by as much as 7pc. But the economy expanded by 3.2pc in the second quarter as lockdown measures eased. Oil and power demand rallied dramatically, with crude demand rising to a record high and Chinese refinery runs exceeding those of the US in the second quarter.

The need to co-ordinate pandemic countermeasures and direct an economic revival plays to the strengths of China's governance model. Beijing would prefer to harness investment strategies to "build back better" — laying the groundwork for a more sustainable, greener economy in the long term. But 70mn Chinese citizens have lost their jobs as a result of the crisis, threatening to scupper President Xi Jinping's 2017 pledge to end poverty in the country by 2020. Political imperatives such as this suggest that China's economic recovery will be driven by fossil fuels.

Crude and LNG imports surged to new records in June, fuelled by low prices. Crude's collapse below $40/bl triggered a floor price clause in China's system for setting fuel prices that gave refiners, on paper, incentives to maximise throughputs.

GDP growth may rise by 2.5pc as stimulus measures kick in, one government think tank predicts. The IMF’s more-cautious estimate 1pc looks more reasonable — but this would still make it the only major global economy to grow in 2020.

The central government is leaning heavily on fiscal stimulus, cutting taxes and issuing more local government bonds to fund infrastructure projects to try and weather the downturn. After clamping down hard on corporate debt, which ballooned after the 2007-08 global financial crisis, Beijing is now encouraging firms to tap debt markets, to help fund the recovery.

Refinery investments are continuing apace with plans to add at least 1.6mn b/d of greenfield capacity by 2022. These new facilities will improve supply security for the feedstocks needed at China's naphtha-dependent steam crackers, but at the expense — given the current state of global product demand — of vastly increasing output of the gasoline, diesel and jet which China already exports.

State-owned firms are expected to take one for the team by vastly expanding their graduate recruitment schemes. And China could add up to another 94GW of coal-fired power generation capacity this year, creating new markets for the coal sector, a major employer — further diluting the political will to decarbonise.

This underlines the extent to which China’s post-Covid economic reconstruction will not be a particularly green affair — except where it gels with the country’s manufacturing strengths. China remains a world leader in solar and wind power technology, to the benefits of its own renewable power output.

Fever pitch

China’s increasingly assertive stance on the international stage is fuelling perceptions that Beijing is taking advantage of other countries' weakness to establish a hegemonic role in Asia. And yet China clearly remains wary of Washington. US secretary of state Mike Pompeo has begun to talk openly of working with the Chinese people to "change the behaviour" of their government — language the US has used in the past with Iran.

"We assess that China prefers that President Trump — whom Beijing sees as unpredictable — does not win re-election," a US intelligence assessment said last month.

If there is an irony in the massive expansion of the Chinese state under Xi — economically, culturally and politically — it is that Beijing could direct a grand vision of energy policy for a greener future. But, fighting both the pandemic and clashing with the US, its energy roadmap is likely to take the most expedient, direct — and energy-intensive — route to recovery.

Petroleum Argus
Petroleum Argus is our flagship business intelligence service with an international reputation for providing thought-provoking and independent analysis of the global oil and gas markets.
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