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Special Bulletin
A Japanese Perspective on the International Energy Landscape (212)March 27, 2015

China's Economic Slowdown and the Challenges for its State-run Oil Companies
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
From March 22 to 25, I attended an international conference in Hong Kong and exchanged
views with local experts on a wide range of topics involving international energy and Asian
economic situations, including recent crude oil price drops and geopolitical issues in the Middle Eastand Russia. The most impressive issue for me in the discussion with them was a growing concern
about the future course of the Chinese economy.
At its annual session from March 5 to 15, the National People's Congress, or the Chineseparliament, adopted the government's basic policy for 2015 which sets the economic growth target ataround 7.0% for the year. The target was thus lowered by 0.5 percentage points from the previousyear. China had recorded double-digit economic growth before the 2008 Lehman Shock and its
growth gradually decelerated to 7.4% in 2014, below the government's target of 7.5%. Though being
above 7%, the growth was the lowest in 24 years. It slipped below a government target for the firsttime in 16 years. The Chinese government has positioned the even lower growth of 7.0% as
representing the so-called “New Normal” and given priority to the quality and efficiency ofeconomic growth.
Nevertheless, the Chinese economy's growth deceleration has a significant impact on theworld economy as it has served as the driver of global economic growth since 2000. Behind theloosening international oil supply-demand balance represented by the recent crude oil price plunge
and a general slump in international commodity markets is slack demand in China after its sharp
expansion in the 2000s. The slackness has become a key factor to shake the global energy situation.
Interestingly, the discussion with experts in Hong Kong led me to find that many of them areconcerned about the Chinese economy's further deceleration. They voiced concern about China'sfailure to accomplish the 2015 growth target. Matters of concern to market players there include
delays in economic restructuring and reform, real estate price falls, nonperforming loans and general
oversupply. Even if the 7% growth target is achieved, they may feel that economic sentiment may beless robust than indicated by such growth rate. Given railway transportation and electricity

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consumption data that better reflect real economic fundamentals, many experts felt that recent
growth may be limited to 3-4%.
At the PNC session, the government, while giving priority to the quality of economic growth,
indicated that the 7% growth target should be achieved to stabilize society through employment
security and that it would take flexible monetary and fiscal policies to attain the target. Given thatthe massive economic stimuli worth as much as 4 trillion yuan after the Lehman Shock have caused
the current overcapacity and real estate bubbles, many Hong Kong experts pointed out that it would
not be easy for the Chinese government to expand fiscal spending to boost the economy again.
When the present Chinese leadership was inaugurated, it vowed to promote structural
economic reform to achieve sustainable economic growth, trumpeting the so-called “Likonomics”
policy named after Premier Li Keqiang. But many Hong Kong experts noted that the Chinese
government might have become less serious about economic reform as greater priority has been
given to the maintenance of the growth target and employment security. They admitted various
ongoing reform efforts while doubting their quality and effects. It was interesting that some experts
indicated that the Chinese government might give priority to economic management througheconomic and investment operations of leading state-run companies.
In this respect, Hong Kong experts made various arguments about the roles and challenges for
Chinese state-run oil companies. The 2014 Fortune Top 10 Companies (in turnover) included
Chinese state-run oil companies CNPC (ranked fourth) and SINOPEC (third), which are among thebiggest, strongest companies in China. Naturally, they are expected to make great contributions toChinese economic growth. But Hong Kong experts noted that the crude oil price plunge and theloosening oil supply-demand balance have exerted grave pressure on these Chinese state-run oilcompanies.
As upstream revenues are important for Chinese state-run oil companies as well as oilmultinationals, crude oil price drops have become a great burden on them. Hong Kong experts also
indicated that crude oil price falls might have caused great challenges for the maintenance ofproduction at major Chinese oilfields (including Daqing) that are maturing and aging. They also
noted that if the Chinese government’s natural gas market reform were designed to lower gas prices
in line with international market trends, it would also greatly affect Chinese state-run oil companies.
Some were concerned that these Chinese companies that fail to promote streamlining andcost-cutting efforts while being expected to make some contributions to economic growth could
become less competitive than foreign oil firms that are substantially reducing costs. The discussion
with Hong Kong experts provided an opportunity for me to feel that Chinese state-run oil companies

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face various challenges.
China must maintain economic growth while giving priority to the quality and efficiency ofgrowth. Whether or not the economic growth target of 7% can be achieved in 2015 is a greatchallenge for the Chinese government and will become a key factor that could greatly influence theworld economy and the international oil situation. We may have to closely watch what measures theChinese government will take to achieve the growth target and what role Chinese state-run oil
companies will play in this respect.

Contact: report@tky.ieej.or.jp
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