China’s Growth Slows – 1/26/16

China’s slowdown continues to be a drag on global growth and energy demand.

China’s refineries continue to increase output exacerbating the oversupply problem that has kept oil prices around $30 a barrel. The nation bought more crude in 2015 but it appears that the country is just taking advantage of prices that have fallen to lows not seen in over a decade in order to fill its strategic oil reserve and meet unsustainable demand from small, private “teapot” refiners. The nation continues to flood foreign markets with the products of rampant overcapacity. Stockpiles of such oil products will drive down prices, and harm other refiners in East Asia, while giving the false impression of sustained oil demand. Energy demand from China is set to fall as a result of cuts to heavy industry such as steel.

The Chinese government faces numerous economic challenges in 2016. Domestic consumption is still low, higher-wage job opportunities for the growing middle class are still too few, corruption remains common, and environmental damage is growing too significant to ignore. Additionally, population control policies have made the China one of the most rapidly aging countries in the world. Analysts are skeptical of recent efforts to reverse the trend and suggest that the damage done to the gender ratio will be felt for the upcoming decade at least. In response to the rising levels of pollution, the Chinese government is having more success diversifying its energy production capacity, focusing on nuclear and alternative energy.

Several factors have contributed to slowing Chinese growth. A liberal credit-fueled stimulus program left many companies with substantial debt burdens, created overcapacity, and resulted in inefficient allocation of capital by state-owned banks. The government’s 12th Five-Year Plan called for reforms aimed at increasing domestic consumption in order to make the economy less dependent on fixed investments, exports, and heavy industry. The recent slowdown has threatened many planned economic reforms, which included giving the market a more decisive role in allocating resources. Rising capital outflows are signaling growing concern with the ability of Chinese leaders to handle the economy and maintain a stable business environment.

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