China driving demand for GCC goods, exports up
Exports from the GCC countries to China rose to $7.1 billion in October from a yearly low of $4.9 billion in August, marking a 45.6 per cent increase in just one quarter, a report said.
Growth expectations in the Chinese economy show a strong correlation with its imports of energy, added the report from Kuwait China Investment Company (KCIC), which specialises in emerging Asia investments.
The Purchasing Manager Index (PMI), a leading indicator of Chinese GDP growth, is also an accurate predictor of oil imports from the GCC. For the most part of this year, global growth eased, including China’s, the economic powerhouse that led the global recovery between 2009 and 2010, said Camille Accad, economist at KCIC, who prepared the report.
Lower global growth diminishes demand for commodities across the world, such as industrial metals and energy products, which generally translates into a decline in their prices, bringing about reduced revenues for oil exporting countries - in spite of their capacity to affect prices.
However, in the last few months, China has shown signs of a recovery. All the major sectors of the country’s economy have recently indicated an upward trend, as last week’s retail sales, industrial production and investment indicators showed.
About 4.9 per cent of China’s total imports came from the Gulf in October, up from its August trough of 3.2 per cent, tracking PMI closely. This week, the HSBC Flash PMI confirmed the ongoing recovery, as it grew for a third consecutive month, from 50.4 to 50.9 in December, (a reading above 50 indicates expansion).
According to KCIC, this suggests that China’s demand for energy and other commodities will increase as well, which in turn will boost oil imports from the GCC, the report said.
Forty per cent of global oil comes from the 12 Opec countries. Its four GCC countries (Saudi Arabia, UAE, Kuwait and Qatar) account for about half of Opec’s total supply - 20 per cent of global oil supplies. The graph shows the percentage that imports from these four countries represent as a share of total imports in China.
The PMI is an index composed from data based on monthly questionnaires answered by purchasing executives in different sectors. The index monitors seasonally adjusted month-on-month changes in the managers' views on business conditions (i.e., business conditions are better, the same, or worse than last month).
A reading of above 50 means that more than 50 percent of managers see conditions as better than last month, hence an expansionary business environment. The HSBC flash estimate is released before the official and final HSBC PMI, and covers 85 to 90 percent of the data included in the final HSBC PMI reading. The manufacturing PMI is often used as a lead indicator on the condition of the economy, since China's industrial sector is approximately half of the economy.
Economic and financial implications
For the past two years, changes in the PMI have generally moved in the same way as GCC’s exports to China, suggesting a strong correlation between China’s industrial sector and its imports from the GCC.
The pick-up in the PMI in the last two months of this year implies that GCC’s exports to China will continue to be robust, as the graph shows. This is one of the main reasons why China’s recovery is important to the gulf: as China’s industry expands, so will the GCC’s, the report said.
China has been in a strong recovery due to the combination of prudent monetary stimulus and strong fiscal spending, aimed at boosting the country’s infrastructure investments. The recent uptick in PMI was mainly due to a rise in new orders, in spite of falling new export orders, which suggests that Chinese growth is being driven domestically. In a way, China is sheltering itself from the slow global backdrop.
China’s growing domestic economy should translate into resilient demand for the GCC’s energy exports, despite the sluggish global growth. Also, China’s improved PMI and its imports from the GCC are good gauges of Chinese and, consequently, global growth.
Both imply that the world economy is faring better, as China’s Gross Domestic Product (GDP), the second largest in the world, represents 14 per cent of the world’s total output. Supported by government spending, China is expected to grow faster in the first half of 2013.
And given the strong trade links between the two, with about a third of China’s crude petroleum being imported from OPEC’s GCC, the region will continue to benefit from China’s recovery, the report concluded.