2014’s Unexpected Oil Crash: Implications for China’s Economy and Global Commitments

Dr. Scott MacDonald's picture

Economic forecasts often do not work. That was evident in 2014 with the surprising +40 % plunge in oil prices. While this signaled economic problems for Iran, Russia, Nigeria and Venezuela, it is a positive development for other countries, including China.

This is important because Chinese businesses are going to need help next year, a time of slower domestic economic growth related to structural reforms, questionable growth prospects in Europe and Japan (which result in lower exports), and rising interest rates in the US. The last is likely to result in dollar-denominated Chinese corporate debt getting more expensive. Reflecting the more challenging business environment, the Shanghai Academy of Social Science is forecasting that China’s real GDP will be 6.64% in 2015 and 6.78% in 2016. If so, lower oil prices are an unexpected windfall for China, the world’s top importer. Lower oil prices are likely to help its trade balance, cut transportation costs, boost the financial performance of Chinese companies, and make reduce prices for consumers. Lower oil prices also allow some less cost-efficient businesses, like iron ore mines and shipping, to hold on and preserve jobs, at least in the short term. There are other factors that probably have greater long-term significance, including Chinese companies being pulled more into the Middle East and Africa to secure oil contracts. This raises risks for Chinese multinational corporations and leads to another development, a pressing need for a more active Chinese foreign policy in these regions, preferably sharing the role with other concerned powers in maintaining regional stability. China’s oil import dependency climbed to 57% in 2014, but is set to be at 61% in 2015 (according to China’s current five year plan). China cannot escape the embrace of the wider world, but the collapse in oil prices is an unexpected positive.