China’s Economy Gains Momentum, but Disappointing Oil Demand Looms

China’s economy grew by 2.2% on a seasonally adjusted basis in Q1, a significant improvement from the previous quarter’s 0.6% growth, which was positive news for the country’s economic outlook. However, unlike China’s past economic growth, which had a direct correlation with rising oil prices, this growth may not result in a direct increase in the price of oil.

This is because China’s economic growth was driven by manufacturing, and its energy needs are vast, leading it to become a significant player in the global oil market. While many in the oil market have been hoping for a significant recovery in China’s economic growth to boost oil prices, the first part of the equation appears to be taking place, with Q1’s figures exceeding expectations and the possibility of even better growth in the future.

There are further indications that China’s economic recovery might exceed expectations, and these signs have come from the country’s troubled property sector.

Property prices are still deflating, but they are showing monthly improvement in 64 out of 70 cities. Home sales have also been on the rise, especially in Tier-1 and Tier-2 cities, with existing homes and China’s state-owned enterprise developers leading the way in transactions.

However, there is still caution in the market, with pre-sales remaining a concern for buyers, accounting for 70-80% of total transactions. Nevertheless, the chief China economist for TS Lombard, Rory Green, notes that the property market has reached a bottom and questions remain regarding the speed and extent of its recovery.

Although China’s economy is rebounding and showing positive signs, the relationship between this growth and oil prices is not as direct as it used to be. The first phase of China’s economic growth was characterized by a significant expansion of energy-intensive manufacturing capabilities, which drove a huge demand for energy, especially oil. This was followed by a rise in the middle class, which led to a surge in domestic consumption-led demand for goods and services.

The current phase of China’s economic growth, however, is not like any seen before in the market. Rather than relying on aggressive stimulus, China’s leadership is looking to drive activity by reopening and removing negative policies.

For the first time, household consumption, mainly services, will lead China’s cyclical recovery, with pent-up demand and savings from three years of intermittent mobility restrictions expected to drive consumption. Although oil demand is likely to increase, it is not expected to cause oil prices to surge, as transportation only accounts for 54% of China’s oil consumption, and China is buying at a discount from Russia.