Why Goldman Sachs says China’s economy is better than the US in handling oil shock
Make it a win for the Chinese economy, at least according to Goldman Sachs.
With global energy prices rising 50 percent due to the Iran war, Goldman’s strategists argue that China’s economy is better positioned to weather the storm than its peers, including the United States.
“China looks to be doing better than most in this oil shock,” Goldman Sachs strategist Kinger Lau wrote in a new note Monday.
China’s perceived advantage stems from a decade of strategic preparation, Lau said.
The US and the EU remain heavily dependent on oil and other liquid fuels, accounting for approximately 40% and 44% of primary energy consumption, respectively. However, China managed to reduce this figure to only 28%.
This diversification means that when the price of Brent crude oil (BZ=F) reaches $115 per barrel, the direct inflation “tax” imposed on the Chinese economy is mathematically lower than that felt in the West.
Read more: How do oil price shocks affect your wallet, from gasoline to groceries?
Goldman Sachs pointed out three special “shields” that protect China from the global oil shock.
The first is renewable energy dominance. Alternative and renewable energy sources, including nuclear, wind, solar and hydropower, now account for 40% of China’s electricity generation, up from 26% a decade ago.
The second is huge strategic reserves. Lau said China had spent years quietly building the “Great Wall of Oil”.
Its strategic and commercial stocks currently total approximately 1.2 billion barrels. This is enough to keep the country afloat for more than 110 days, even if all crude oil imports dropped to zero tomorrow.
And finally, China is diversifying its supply chains.
As the world worries about the Strait of Hormuz, whose shipping route accounts for 20% of global oil flows, China has maintained strong supply lines with countries outside the Middle East such as Russia, Australia and Malaysia.
Goldman’s economists cut their U.S. real GDP growth forecast by 0.4% due to the oil price shock. In contrast, China’s estimate was lowered by just 0.2%; this was the lowest revision in the Asia-Pacific region.
Lau warned that the economic resilience of the Chinese economy does not mean it is time to weigh in on the region’s stocks. Entire economies caught a cold due to very high oil prices.
Lau explained: “While the direct effects of higher energy prices for a longer period are likely more manageable for the Chinese economy, spillover effects/concerns regarding global stagflation, stickier US rates and a stronger Dollar, and the ongoing geopolitical risk premium could hurt Chinese equities through earnings, valuation and money flow channels.”
