This week, a major oil processing plant in Saudi Arabia was destroyed by a barrage of drone attacks, removing 2 million barrels from global surplus. The surge in the price of oil could place more pressure on the economy of China, which could have an impact on the ongoing trade deal talks.
China, the biggest importer of oil, is expected to struggle in finding an alternative source of oil in the short term if Saudi Arabia fails to recover swiftly from the attack which has already wiped out half of the nation’s production of oil.
With the economy of China vulnerable to seeing slower growth and faces downward pressure according to Premier Li Keqiang, some strategists anticipate that the sudden spike in oil prices could serve as an unanticipated roadblock in the short to medium-term trend of the economy of China.
Could the incident encourage China to secure a trade deal with the U.S.
While the increase in oil prices remains a small factor in the stability of the economy of China when other major fundamental factors are considered, the country has seen its economy slowdown noticeably in recent months, partially fueled by the trade war with the U.S.
Premier Li said that it will be challenging for China to sustain a growth rate of over 6% as it finds pressure amidst global economic uncertainty.
“Against the backdrop of a complicated international situation and given the higher base of comparison, it is not very easy for China to still sustain a medium-to-high growth speed of above 6%. Such a speed still ranks high among the world’s major economies,” Premier Li stated.
Economists, including Martin Lynge Rasmussen at Capital Economics, foresee policymakers in China eyeing a monetary policy easing in the near term to alleviate some of the pressure on its economy.
Still, even with the devaluation of the Chinese yuan, Rasmussen emphasized that China is likely to see increasing decline in its economy over the next 12 months, making a trade deal with the U.S., whether it is a partial or a comprehensive deal, all the more valuable.
“With a strong rebound unlikely any time soon, we anticipate that policymakers will ease monetary conditions further in the coming months. A weaker renminbi is unlikely to fully offset the increasing headwinds from US tariffs and cooling global demand, and we expect a further slowdown in economic activity over the coming year as a result.”
Deal is crucial at this period
In mid-2019, the sentiment around a potential trade deal between the U.S. and China dropped as analysts suggested that Chinese negotiators may be waiting out the presidency of the U.S. President Donald Trump to secure a trade deal with the U.S.
However, the rare “goodwill” gesture shown by President Trump to delay the imposition of tariffs in October and the agreeance of both sides to pursue a partial trade deal have significantly improved the sentiment around the talks ahead of the next round of the trade deal talks.
The slow down of the economy of China, the unexpected decline in the supply of oil in Asia as a result of the attacks on Saudi Arabia’s processing plants, and growing uncertainty in the global economy may incentivize China to continue to work towards a trade deal with the U.S.
Gavyn Davies, chairman of Fulcrum Asset Management and co-founder of Prisma Capital Partners, said the activity growth of China in the past 18 months has remained relatively robust at 7% despite of its short term struggle.