The bullish reaction in many of the world’s major stock markets to news that China has “eased” its “zero-Covid” policy limiting the economy has been misplaced from all perspectives. In general, first, China hasn’t relaxed its Covid-zero at all, it’s just made some small adjustments. Second, these small adjustments will worsen the net effect of its zero-COVID policy, as they will lead to an increase in COVID-19 cases, given China’s complete absence of any effective vaccinations or treatments for the disease. Third, it is China’s continued economic slowdown and not its economic buoyancy that should be welcomed by the world’s developed market economies. Such a slowdown will reduce China’s huge demand for oil and gas, and it was soaring energy prices that led to the toxic combination of high inflation and high interest rates that threatens recession in several major world economies. China’s zero-Covid policy is based on the imposition of ultra-strict lockdowns introduced on entire cities as soon as a relatively tiny number of Covid-19 cases are identified. On November 11, the Chinese government unveiled 20 minor changes to the zero-Covid policy in force for about three years. One such change is that travelers from overseas will request a negative PCR test within 48 hours of boarding a flight to China instead of two. Another is that foreign travelers will have to self-quarantine for eight days, rather than 10, and another is that within China, people deemed “close contacts of close contacts” of Covid-19 carriers will no longer need to quarantine. in quarantine. The new guidelines also ban mass testing unless “it’s not clear how infections spread” in an area. That said, on the same day these announcements were made, Beijing municipal officials requested many city residents to be tested daily, more often than in recent weeks.
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The core problem in China’s latest approach to Covid-19 is the same as most half-measures: that is, they only serve to make the problem worse. In this example, any easing of China’s zero-COVID policy will lead to a marked increase in COVID-19 cases because the country still lacks an effective vaccine against the disease or any of its variants. This is despite ongoing offers from all major vaccine-producing countries to make those supplies available. Chinese President Xi Jinping has personally championed his country’s one-sided approach to fighting COVID-19, repeatedly characterizing it in Chinese Communist Party and nationalistic terms. “We have to adhere to scientific precision, zero-Covid dynamics… Persistence is victory,” he said She said in April. “Zero-Covid is a people’s war to stop the spread of the virus” He added. Furthermore, this increase in cases will lead to more deaths, as China also lacks an effective post-infection antiviral and still refuses to purchase such supplies from foreign suppliers, again despite ongoing offers from several Western countries to realize such supplies available antiviral and post-infection treatments for China.
The clean sweep of support President Xi won at the recent 20th Party Congress to be re-elected general secretary of the Communist Party of China for a third term almost certainly means that China’s approach to Covid-19 will not change significantly a short. “China’s commitment to its dynamic COVID offset strategy remains the strongest obstacle to growth, and official statements before and during the Party Congress trumpeted the policy as the most appropriate for the country,” said Eugenia Fabon Victorino, head of Asian strategy for SEB. OilPrice. com. “In 2020, China’s economy managed to recover quickly from the first wave of infections as mobility restrictions managed to limit transmissions to a small number of regions, but increasingly contagious viral strains led to a substantial increase in regions reporting new cases of Covid daily,” she added. Indeed, just over a month ago, even before the latest changes to China’s Covid-19 policy, 26 out of 31 regions had experienced severe outbreaks. Also, at the end of last week, China’s National Health Commission reported 23,276 new daily Covid-19 infections.
In terms of specific negative ramifications for China’s economic growth, the main Purchasing Managers’ Index (PMI) for factory activity fell unexpectedly in October, to 49.2, a drop of 0.9 from the previous month and indicative of a total contraction. In line with this, China’s crude oil imports for the first three quarters of the year declined 4.3% year on year, marking the first annual decline for the period since at least 2014. At the end of the first half of this year, then, the economic outlook for China was already deteriorating more than previously expected, with SEB’s Victorino having already downgraded its GDP growth estimate for China earlier in the year, to just 3 .5%.
A significant drop in oil prices may not be what oil companies want, but it is certainly what the global economy, and especially the economies of developed countries, need. Since the end of the third quarter of last year, global investors across all asset classes, including commodities in particular, have observed a toxic mix of rising inflation fueled largely by rising energy costs and repeated sharp increases in interest rates to counter this trend. At the same time, concerns have grown that higher interest rates for an extended period could plunge developed market economies into recession. U.S. quarterly economic growth fell from 3.7% in the first quarter of 2022 to 1.8% in the second quarter and the same again in the third quarter as inflation climbed to nearly 40-year highs. over 8% and the federal funds rate was raised to 3.75 -4.00%. German economic growth saw the same pattern of decline, from 3.6% in the first quarter to 1.7% in the second quarter and 1.2% in the third quarter, as did the UK’s, from 10, 9% in the first quarter to 4.4% in the second quarter and 2.4% in the third quarter.
Why did this toxic inflation-interest-rate-growth cocktail start towards the end of the third quarter of last year? Mainly because late September saw the public release of the first indications that Russia had specific plans for a full invasion of Ukraine. These were reports from several sources, based on the remarks by US intelligence officers of very unusual Russian military movements on the border with Ukraine after the conclusion of the joint Russia-Belarus military exercises that took place. This was the point where savvy oil market players started buying oil heavily. Prior to this, oil traded consistently around $65 a barrel Brent level. This level reflected the clearing price which took into account the already evident weakening of demand from China, which it had surpassed the United States as the world’s largest annual gross importer of crude oil in 2017 and has been the global backstop for oil since the start of its rapid economic expansion in the 1990s. As this Russia-Ukraine war premium declines as Europe continues to make arrangements to replace energy from Russia with energy from other sources, as it will, this $65 a barrel level is likely to be the base point for prices of oil, rising or falling since then.
It should be noted that this level falls within the actual ‘Trump oil price rangeof US$40-75 per barrel of Brent, as detailed in my previous book on world oil markets. Any price above US$35 a barrel is enough for most US shale oil producers to make a decent profit. Any price above $75 a barrel begins to raise fears in US presidents about exactly the kind of toxic equation of rising energy prices driving rising inflation driving lower growth driving the electoral disaster that has been seen since September of last year.
By Simon Watkins for Oilprice.com