The rising price of crude oil will not have as serious an impact on the Chinese economy as it seems, analysts said.

 

The oil price for the first time hit $100 a barrel in New York on Wednesday, thanks to what analysts called the deepening fears about the weakness of the US dollar and strong speculative buying.

 

If the price remains strong for some months, it will further drive down the dollar and deal a heavy blow to the US economy, said Sun Lijian, an economist with the School of Economics of Fudan University.

 

"It may influence the decision-making of the US manufacturers and, coupled with the deepening subprime crisis, drag down the US economy," he said.

 

And that may dampen global economic growth and indirectly affect China's exports, one of the three main engines of the economy along with consumption and investment, he said.

 

Foreign demand accounted for more than a fifth of China's economic growth in the first three quarters of last year, according to the National Bureau of Statistics.

 

Every $20 rise in crude oil prices would cut about 1 percentage point of economic growth in China, according to a 2004 research by the Asian Development Bank. Its assistant chief economist Frank Harrigan said in November that as the price climbed from $68 to $85, China's economy would suffer a 0.9 percentage point loss.

 

"High oil prices would also push up the country's consumer price index (CPI), the key gauge of inflation," said Zhuang Jian, senior economist with the Asian Development Bank in Beijing. "It may also raise the production costs of enterprises and possibly reduce China's imports of oil, thus changing its trade structure."

 

Higher oil prices may also push up demand for alternative energy products, such as biofuel, said Li Huafang, economist with the Shanghai Institute of Finance and Law. "It may in turn lead to a rise in international grain prices and the effect will spread to the domestic market, raising domestic grain and food prices."

 

That would deepen the inflationary pressure, he said. Food prices account for about one-third of China's CPI basket.

 

According to Wang Qing, chief economist of Morgan Stanley Research Asia-Pacific, China's CPI may be pushed up by 0.3-0.4 percentage point by a $10 rise in oil price.

 

Asian Development Bank's Zhuang, however, said the overall impact of high oil prices on China may not be very serious, although it may bring more pressure on inflation and corporate profits.

 

"China's energy use structure remains largely unchanged, with coal being its main source of energy," Zhuang said.

 

Agreed Wang Qing, saying the impact would probably be "moderate and quite manageable" because of China's low dependence on oil as a source of energy.

 

Coal accounts for about 70 percent of the country's total energy consumption and the nation has over 1 trillion ton of coal reserves, about 320 billion tons of which can be extracted immediately, according to official figures. This can meet domestic demand for at least 100 years, analyst said.

 

Wang said the government would subsidize the refiners as oil prices remain high, which will make up for a large part of the gross domestic product losses.

 

Analysts said the speculative buying of oil is the major force behind the current oil price spurt and it will not last very long.

 

(China Daily January 4, 2008)