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Caution: Dragon slowing down

Forget the EU crisis. Gulf oil exporters should worry about China slowing down. If the Chinese and wider global downturn continues, expect Saudi Arabia to be the first to cut crude output.
While the region fixates on the Greek, Spanish and Italian tragedies unfolding in the Eurozone, the Middle Kingdom is experiencing a downturn of its own.
Much less dramatic than the Euro crisis for sure, but the Chinese economy is experiencing headwinds, one that could have significant consequences for the regional economies in the medium term.
China, along with its other BRIC counterparts, has been carrying the day since the global financial crisis snuffed out growth in developed economies. But almost all the emerging markets are flagging now after years of robust growth and no help from the developed markets.
The emerging market slowdown could have an adverse impact on Gulf economies even if they will be able to absorb the lower revenues in short-term.
Two interest rate cuts in China within less than a month strongly suggests the Beijing is not content with the country's economic trajectory trend and is fine-tuning its policies.
"However high it aims, PBOC's [People's Bank of China's] action in practice merely work as the band aid to the bleeding economy," said Dee Woo a standing director at Beijing New Century Research Institute for Multinationals. "But it won't be able to fix it. The central bank's aggressive pro-liquidity maneuvers at best serve to sustain the over-leveraged economy and avoid the systematic short-circuit of debt financing."
Even OPEC, which almost never sounds alarmist in its tone, expects Chinese oil demand to ease.

"China's oil demand is expected to continue to grow, but not at the same rate as anticipated earlier in the year," noted the OPEC in its July report on the global oil demand. China's second-quarter oil demand growth is forecast at 0.45 million barrels per day y-o-y."
OPEC expects Chinese oil demand to rise by 4.25% this year, compared to the 5.12% posted in 2011.
On Monday, the International Monetary Fund cut its GD forecast for China by 0.2% in 2012 and another 0.3% in 2013.
"In the medium term, there are tail risks of a hard landing in China, where investment spending could slow more sharply given overcapacity in a number of sectors," warned the IMF.

GULF STATES' CHINESE TAKEAWAYS
Gulf states are taking note of the changing economic environment and the fact Chinese oil demand in June hit a 20-month low.
After pumping oil at record levels to ensure that crude prices did not overheat in the aftermath of the Iranian conflict, they are watching with some consternation as prices now languish at year lows.
Saudi oil production has continued to keep the pedal on output and has maintained production at 10 million barrel per day during the past 10 months.
NCB Capital's chief economist Said Al-Shaikh says that while the Kingdom has taken a dovish stance at the latest OPEC meeting by aiming for a soft landing of prices at about USD100 per barrel, it is likely that the pace of the latest freefall in prices to below USD90 for Brent crude might have stirred an element of nervousness in OPEC members, including Saudi Arabia.
"Although the recent downswing in prices below the USD90's level has not prompted any overt reaction from the Kingdom yet, we believe the Kingdom's view of a fair and defensible oil price remains USD100," said Al-Shaikh. "Should the market balances actually warrant a reduction in production, it is expected that Saudi Arabia will be among the first to reduce output aggressively."
OPEC states supply nearly half of Chinese oil imports and changes to Chinese economic environment could have a more direct impact than a U.S. or European downturn.
Other OPEC states would also suffer from a Chinese and global downturn.
HSBC notes that UAE's fragile recovery could be reversed especially as it is already vulnerable than other Gulf states to an EU crisis.
"In contrast to neighbouring Saudi Arabia, we do not sense UAE has a strong appetite for boosting public spending to combat weakening external demand, or accelerating the overhaul of domestic infrastructure," noted Simon Williams, an economist at HSBC Middle East.
INJECTING STIMULANTS
Doomsday analysts like Beijing Research Institute's Dee Woo see a more structural challenge for the Chinese economy. He points to Beijing's over-leveraged economy and 'cash-starved' banks as some of the key reason why China could be in for a longer decline than is widely anticipated.

"The pyramid of debt/credit is cracking and will collapse since the conditions of underlying economic agents are deteriorating.There's no mount of monetary band aids that can alter that destiny," wrote Mr. Woo.
More mainstream banks such as HSBC expect more monetary easing, mainly through the use of quantitative tools and another 25 basis point reduction, likely to be delivered in the third quarter. The Chinese government could also launch a fiscal stimulant plan with tax cuts and greater public spending.
"Once they filter through, all these measures will likely lift GDP growth to above 8.5% y-o-y in H2. That said, this is a much more modest recovery than the V-shaped surge in growth from 6.6% to 11.4% in 2009."
The Saudi government's oil revenue is likely to be lower than previously forecast given the change to our oil price assumption; however, macroeconomic fundamentals should remain robust, wrote Samba analysts Andrew Gilmour and James Reeves in a note to clients.

The analysts expect oil revenues to decline by 16% from its previous forecast, which may seem like a significant drop, but it should be kept in perspective: this year's oil revenue is only likely to be some $16 billion lower than in 2011 (a 5% decline). Earnings are comfortably above the five year average of US$225-billion, said Samba analysts.
For the other OPEC nations especially those in the Gulf, the Chinese and wider BRIC slowdown robs them of the unbridled growth that they should be experiencing given the massive various government stimuli and high oil prices. Instead, they may just have to settle for moderate growth.

© alifarabia.com 2012

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