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Monday, October 24, 2016

The main threat to oil prices comes from China

$ 30 per barrel to the price of oil is preparing the Russian Ministry of Finance. The main threat, according to authorities, is “a hard landing of the Chinese economy that will have truly global implications. Whether this danger is so great and what will be expected under this scenario the Russian economy?

The Ministry of Finance considers the possible decline in oil prices to $ 30 per barrel during the realization of negative forecasts for the world economy. One of the risks is the situation in China’s economy, said Deputy Minister of Finance Maxim Oreshkin.

“What you need to prepare is about $ 30 per barrel for the next few years”

He explained that the model of growth of China’s economy is unstable, it has a giant structural imbalances. The outflow of capital from China in recent months is accelerating. According to Oreshkin, there are two stories that can play bad service for the Chinese economy. “On the one hand, growth of profitability on the global market, in the US, which will make investment abroad more profitable, on the other, the story of the real estate market. If the growth rates and the collapse of the bubble in the real estate market will occur simultaneously is a prerequisite for a “hard landing” of Chinese economy”, – says Oreshkin.

If this happens, the oil market does not expect anything good. “What you need to prepare is about $ 30 per barrel for the next few years,” he explained.

Therefore, when calculating the draft budget of Russia for the next three years based on the price of oil in 40 dollars for barrel. “Because we understand that the budget is built from $ 40 per barrel, to adapt to the stress scenario of 30 dollars for barrel is possible. If you take more than high prices, the whole economic situation will be vulnerable to potential shocks coming from external markets”, – said Deputy Minister of Finance.

However, Russia must continue to follow the path of reducing dependence on oil prices. And it turns out, says Oreshkin. If three years ago the Russian budget balanced specifically at a price of 110 dollars for barrel, now – at 80 dollars (although the average oil price will be much lower at 40-50 dollars per barrel). Now the Russian Ministry of Finance is necessary to move in the direction of $ 40-50 per barrel. Now, as you know, balancing the budget help reserves accumulated specially for this occasion. Plus the floating rate, which is due to the weakening of the ruble partly offsets the fall in energy prices and increases the competitiveness of the industry.

Fears of a hard landing in China have a real basis. Talking about this risk for several years. Literally at the beginning of this year with such a forecast made by a famous financier George Soros. A hard landing is almost inevitable. I don’t expect it and I’m watching it”, – said Soros. Obvious signs of her he called the acceleration of capital outflows from China and a high level of debt.

Economic practice also speaks in favor of the imminent landing in China. The fact that China the past 15 years has shown the economic miracle, but it couldn’t last forever. Already in 2012 the country’s GDP started to slow down. In 2015, the growth, the PRC’s GDP amounted to 6.9%. These growth rates were the lowest in the last 25 years. In 2014 was an increase of 7.3%, and once the Chinese economy were all surprised to see double-digit growth rates. Slowing the pace is a clear sign that Chinese authorities are still very successfully patch the existing problems. But as yet no country has managed to avoid a hard landing after the economic and investment boom. At some point, the levers of growth cease, and the economy needed restructuring, transition to a new track. In this period of perestroika she and sags.

There is research RGE, based on a study of 47 cases of economic restructuring after the investment boom of the past 60 years. The analysis showed that in all cases the growth has slowed down dramatically: if in an average year, the economy grew by 6.8% to a peak of the investment boom in the next five years, growth has slowed to 2.8%. And many economists believe that China is unlikely to be an exception. And here is already the fifth year since in 2012 China’s economy first slowed the pace of growth. That is, China has never been closer to the transition point, the beginning of structural changes.

There is an outflow of capital ($1 trillion in 2015, while the debt of the country grows. To support devaluating the yuan just last year, China had to spend more than $ 500 billion, this year the amount will be more. Real incomes rose, this means that Beijing can fall into a “middle income trap”, when consumption stabiliziruemost and is no longer the engine of economic growth.

In addition, because of the soft monetary policy of the Central Bank of China in the past two years, the demand for real estate acquisition on credit. Low interest rates are increasingly bid up the price of apartments and houses. First, most of the loans were in the stock market, but after its collapse last summer, the estate has become one of the main investment instruments with the aim of preserving capital. Chinese citizens cannot invest abroad because of the existing controls over the movement of capital. In this situation, the economists see a bubble.

Contradictions in the development of Kitaotao some economists have reasons to believe that the Chinese economy will be able to overcome these difficulties. For example, in China’s investment boom has provided not only foreign players, there is the state itself a major investor. Therefore, the collapse of the Chinese economy now may not happen.

“The changing situation of the global economy and the emergence of a “bubble” in the real estate market poses serious challenges, as well as the scale of the environmental problems, the instability of the stock market, the creation of a US TRANS-Pacific economic partnership, the pace of population ageing and the relatively low purchasing power of citizens,” – says Daniil Kirikov, a managing partner at Kirikov Group.

But China, in his view, have sufficient resources to solve the challenges it faces. “Predictions of the imminent “hard landing” of China’s economy sound for more than six months, but none of the scenarios did not happen. The reasons for this are that the volume of the stock market of China is only about 30% of GDP, whereby his condition is not so important for the economy, as in North America or EU countries,” explains Chirico.

Finally, he drew attention to the policy of the Central Bank of China: in contrast to the Central Banks of the US, EU and Japan, the Chinese Central Bank lowered the rate on loans to less than 5%, and the volume of reserve requirement to 18%. And this creates good prospects for growth in the near future, he said. As for the real estate market, Chirico expects the preventive intervention of the authorities of China in this situation, which will contribute to its stabilization.

Chinese authorities have repeatedly shown the ability to stimulate the economy, agrees the managing Director of “BCS Ultima Vitaly Bagmanov. In addition, the US can change your mind to start an era of increasing rates, based on the latest macroeconomic statistics, this means that capital outflows from China will be limited.

However, the Chinese threat, unfortunately, not the only one. On the stability of world oil prices can affect the growing number of drilling rigs in the United States. They increase for more than three months. If this goes on, the balance of supply and demand have to wait much longer than another two years. Another thing is that this negativity can smooth the OPEC meeting in late September to freeze production. But I will agree – while a big question.

“Another significant risk for the global economy is the potential for a Eurozone breakup, which could become even more powerful shock, as in the Old world concentrated a huge amount of financial flows”, – says Bagmanov. It is impossible to eliminate unknown factors that may trigger a global economic shock.

For Russia it is important that with oil. And while there is no certainty that the Ministry of Finance prefers not to take risks and to be prepared for a stressful scenario.

The fall in oil prices to $ 30 the Russian budget revenues will be reduced even more reserve funds may be exhausted in two years, and funds for modernization and diversification of production will be much less. “In these circumstances, the government likely will raise taxes and fees, which will only exacerbate the recession. You can expect tangible the fall of the ruble, but this will not lead to a serious shock to the economy. Observed in recent months, the strengthening of the national currency of the Russian Federation only hampered the position of the business, denying access to the only resource for the growth – devaluation. Otherwise we can expect further declines in real incomes and maintaining a tighter monetary policy. Together this will mean a continuation of the recession in the next 2-3 years”, – tells a grim prospect Daniil Kirikov.

However, Artem Deev from AMarkets calms: short-term price fall to $ 30 a barrel maybe, but the average for the year this level is virtually impossible. “The expectations of average prices at this level is akin to the expectations of the end of the world. If this happens, the world will face severe shortage of oil in future years. Therefore, it is hardly necessary to consider this scenario as a major,” says the Deev.


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