China's US$586 bln stimulus package to boost economy propels oil prices by 4 dollars

11-Nov-08

China, a key player in the world economy has announced a US$586 bln economic stimulus package to boost its floundering economy. This announcement was welcomed with a more than 4 dollar surge in oil prices. US light sweet crude rose to US$65.3 a barrel in New York, Brent crude rose to US$61.7. A weakening dollar also propped up oil prices. The Chinese cabinet announced a shift to an explicitly easy stance that central bank governor Zhou Xiaochuan said would mean faster money growth and more interest rate cuts. Beijing also confirmed that limits on bank lending had been removed. State-owned banks operate increasingly along commercial lines and could resist instructions to open credit akin to the refusal by state-owned oil firms earlier this year to refine more petrol because government-set prices meant they were making a loss. As global recession sets in and demand deteriorates in Europe and USA, exports from China have taken a hit. This resulted in reduced production, large stockpiles leading to squeezed cash flows and a pause in investments. This was coupled with another factor - the deferred effect of last year's tightening of credit to curb inflation and break the bubble of property prices. Together, both the factors acted on the confidence levels in China, that was thus far ensconced in a comfortable position that it was sheltered from the global credit crunch due to capital controls, a non-convertible currency and underdeveloped financial markets. Under panic, banks called in loans from smaller firms that form the backbone of the Chinese economy and also pulling back from foreign banks operating in China. Obtaining letters of credit became a tricky affair for importers and exporters. Manufacturing surveys for October plumbed record lows, steel and aluminum producers have slashed output and export orders booked at the recent Canton Trade Fair dropped by 17.5%. Sales at China Vanke - the biggest listed property developer, has plunged 22% this month from September.