Given the extreme disconnect between China’s huge economy-driven oil and gas needs and its minimal level of domestic oil and gas reserves, the country’s influence over oil prices has long been profound. As a result of this imbalance, China almost alone created the 2000-2014 commodities ‘super-cycle’, characterized by consistently rising price trends for all commodities that are used in a booming manufacturing and infrastructure environment.
This was a product largely of the 8 percent-plus annual GDP growth recorded by China over that period, with many spikes well above 10 percent and only a relatively short move down in economic growth at the onset of the Great Financial Crisis. Aside from huge quantities of imported oil and gas, this massive economic growth was fueled by enormous debt piled up but then hidden away in various financial mechanisms that China believed it could simply pay off eventually through its rapid economic growth. Developments in the last week or so hint that both of these bubbles may be set to burst, taking the big bid in oil out of the market.
Combined with the corollary bubbles in China’s housing and other asset markets that have been inflating over the past few years, as analyzed in depth in my new book on the global oil markets, the situation in China right now is very similar to the one in the West in 2007/08 to which nobody paid attention until there started to be bankruptcies, which then snowballed into the full-blown Great Financial Crisis.
Although officially China’s debt-to-GDP ratio is currently just under 70 percent, in reality, it is much higher. Even according to the People’s Bank of China’s own data, outstanding ‘total social financing’ (which measures overall credit supply to the economy) stood at CNY284.83 trillion (USD44.1 trillion) at the end of December 2020, up 13.3 percent from a year earlier, with an increasing share of this being used to pay debt servicing costs.
Even back when China’s economy was growing at an average of 8 percent-plus per year, year in year out, it was mathematically not possible for it to grow its way out of this debt burden, and with GDP set to fall to around 5 percent or lower next year and likely beyond that, the concerns over China’s mountainous debt position have only increased with recent news of debt-related troubles at Evergrande.
Originally a real estate developer – therefore, at the center of the Chinese government’s previous initiatives to fuel economic growth by huge infrastructure building projects, including new towns and cities – Evergrande took on even more debt (including through extensive bond issues) expanding its business portfolio. Overall, at a minimum – and these are just the known figures – Evergrande’s expansion in real estate (it owns more than 1,300 projects in more than 280 cities across China) and into wealth management, electric car production, and food and drink manufacturing, among others, cost it over US$300 billion in borrowing. Unsurprisingly, it is struggling to pay this debt and to service its bond payments, just like those who have known about China’s hidden debt pile for years were warning.
“Although concerns of contagion beyond the property sector have pulled back, risk appetite for China’s offshore bond markets remains weak,” Victorino told OilPrice.com last week. “The real estate sector accounts for only 2.2 percent of the incoming bond maturities in the onshore market in 2022, but the share of real estate bonds maturities in the offshore bond market is substantially higher at almost 18 percent,” she said. “In the coming year, refinancing needs of the real estate sector in the offshore market will rise by around US$10 billion to almost US$57 billion, and total offshore maturities are expected to peak in March and April,” she underlined. “Considering that hawkish policy on the real estate sector will remain, defaults will continue to test investors’ nerves in 2022,” she concluded.
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