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)