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Oil Prices To Threaten China Economy

Oil price may pose threat to China economy

An oil price rise on the international market may pose a potential threat to China's economy, experts say.

Niu Li, a senior economist at the State Information Centre, said the price hike could drag down China's economic growth by at least 0.8 percentage point.

A direct impact of the oil price rise was that China would have to pay extra money to import the same amount of oil as it planned.

Oil prices rose as high as US$46.90 a barrel yesterday, from US$32 a barrel at the beginning of the year.

"The price should not be kept at that high level for the rest of this year," he said.

For 2004, the average oil price should be about US$38 per barrel, from US$28 per barrel last year, Niu said.

"This means China will have to pay an extra US$8.8 billion to import its planned amount of 120 million tons or 880 million barrels of oil," he said.

His sentiments were echoed by industrial officials. "The State will have to pay a large amount of foreign exchange reserves to import the oil," a senior manager with PetroChina was quoted by Beijing Youth Daily as saying.

Industrial experts also predicted a price hike in the domestic market soon.

The price rise would have a big impact on imports and the country's economic development as a whole, Niu said.

"The economy is likely to grow 9 per cent this year, slowing from a predicted rate of 9.8 per cent," he said.

The price rise would also have an indirect impact on the economy, Niu said.

"Companies' profits will drop, while consumers will have to pay more for transportation," he said.

The high oil price was a major reason for price rises in means of production and living materials, which have increased the likelihood of inflation.

Niu said the price rise had made the external development environment bad.

Industrial experts say that if oil prices rise further, central banks in Asian countries will have to raise interest rates to deal with inflation.

Inflation in Southeast Asian countries, South Korea and India, which rely heavily on oil imports, is already intensifying.

Consumer price indexes in South Korea and the Philippines rose 4.4 per cent and 6 per cent respectively in July, the highest in three years.

Experts have also expressed worries about whether the Asian economy would reach the growth target of 7 per cent predicted by the Asian Development Bank.

The oil price rise already had a great impact on Asian stock markets during past months.

In the United States, the economic growth slowed to 3 per cent in the second quarter, from 4.5 per cent in the first quarter.

"The economic slowdown in the Asian countries and the United States will result in a reduction of imports from China," Niu said.

With the aim of minimizing the impact of oil price rises on China's future economic development, the government should speed up establishment of a strategic oil reserve system, he said.

"The establishment of a reserve system will help flatten domestic prices when there are international oil price hikes," he said, "The reserve will also help avoid oil supply breaks resulting from events such as the September 11 terrorist attack."

Developed countries such as the United States and Japan have already established strategic oil reserve systems, Niu said.

"The lack of strategic oil reserves means not only greater risks for the national economy, but also for politics and national safety," he said.

China became a net oil importer in 1993 and the third largest oil consumer in 1995.

Its oil production grew at an average annual rate of 1.7 per cent during the past decade, but oil demand grew at an annual rate of 6.7 per cent.

The country's oil demand has increased by more than 10 per cent during the past two years, much higher than the 3 per cent increase in developed countries, Niu said. Oil production continued to grow by about 1.7 per cent, he said.

"Oil production in Daqing, one of China's major oil fields, has begun to drop," he said.

This would put China's oil production in a difficult situation, if there were no new discoveries, he said.

"China should purchase oil through various channels, including the futures market, during the establishment of an oil reserve system," Niu said.

The government should also encourage more domestic oil companies to participate in international oil exploration to narrow the gap between oil demand and supply, he said.

The mix of oil imports should be adjusted, so that the imports are not limited to crude oil, he said.

He said the higher oil prices on the international market were mainly because of the strong demand.

"The economic recovery in the United States, European and the Asian economies since the beginning of the year has placed massive demands on oil," he said.

Terrorist attacks and regional conflicts have also contributed to the rising prices.

The latest price rise has a close relationship to the presidential election in Venezuela and the crisis facing the Russian oil firm Yukos.

Yukos previously produced 1.7 million barrels of oil every day, accounting for about 20 per cent of the total production in Russia.

But now, production has became unstable, because of a monetary crisis.