Houston Community News >> Chinese Investment Slump Threatens Oil Prices
11/26/2006 — Chinese investment
flows are slowing down which could spell the end of the current investment
cycle, and signal a recession ahead. Given the importance of emerging markets
like China in sustaining oil price growth in recent years this is unwelcome news
on top of the continuing crisis in US housing. The rate of increase in new
investment projects in China has slowed from 22.2 to 4.4 per cent, while the
annual growth in overall fixed-asset investment was down from 31.3 per cent in
the first half to 26.8 per cent, leading to alarm among local economists.
Reuters reported that the Secretary-General of the China Society of
Macroeconomics, Wang Jian, told the China Securities Journal that these figures
translated into an outright decline in new investment starts of 20.8 per cent in
October against a year earlier.
'This could spell the end of the investment cycle,' he said. 'Past investment
has generated overcapacity in some sectors, so it's objectively inevitable for
these phenomena to lead to disaster in the future.'
Chinese growth ending
More ominously he noted: 'The Chinese economy will be coming to the end of its
current growth cycle and will be embarking on a transition from prosperity to
recession'. His verdict was also that the fall off in investment was too large
for the consumer to make up the gap, and marked the end of the cycle of
expansion which began in 2002.
This data is bound to be seized upon like the first signs of weakness in the US
housing market earlier this year, and dismissed by those who see it as an
inconvenient reality. Yet in the opaque world of Chinese official statistics
this does look like a rare beacon of light on the true position.
For the idea that Chinese economic expansion could continue to support the world
economy as the US economic locomotive slowed under the impact of a housing
crisis has always looked over-optimistic. The US is China's biggest export
market, and if the US is entering a slowdown so will China.
Indeed, emerging market business cycles tend to be far more volatile than those
of developed markets, and a recession in China will more than likely be a
dramatic and highly unpleasant phenomenon. It would also have a huge impact on
commodity markets in general and industrial commodities in particular.
Oil price impact
Oil prices would clearly tumble as such a scenario unfolds. And as investment in
new projects has already dropped in China there is little that can be done,
anymore than oil producers could reverse the slump in the US housing market
which is already impacting US GDP growth.
It appears that the long-standing rule that a period of high oil prices is
always followed by a global recession may not have been broken after all. Rather
that the sustaining of low interest rates for an extended period has delayed the
onset of the inevitable recession.
The danger now is that by allowing the global economic boom to inflate for
longer than in the past, the following recession will be longer and deeper than
previous downturns. This is not a happy immediate outlook for oil and gas prices
as global demand will fall.
(Contributed by ameinfo.com)