China Suffers Two Blows: High Oil Prices, Lowest Industrial Output Since 2002

Crude oil exports from Saudi Arabia to China nearly doubled in size over the past year from 920,000 barrels per day to around 1.8 million barrels, CNBC reported in August.

Needless to say, the financial impact from an attack on Saudi oil infrastructure will be more felt in China than in the U.S.

China Suffers Two Blows

Cheap oil over the past year was a blessing in disguise for China's economy and served as a counter against slowing retail and industrial growth and the hottest inflation rate since 2013, The Wall Street Journal reported.

The futures market is signaling an investor belief oil prices won't move back to last Friday's level until summer 2020. This poses a new challenge for China, as a sudden spike in oil prices adds a new element of risk to devaluing the yuan.

Separately, China's industrial output for the month of August rose just 4.4%, which represents the lowest rate since 2002, Bloomberg reported.

Coupled with the spike in oil prices, Citigroup analysts are now expecting China's economy to grow 6.2% in 2019 and 5.8% next year, down from prior estimates of 6.3% and 6%, respectively. 

China Responds: Impact 'Remain To Be Seen'

China's government said the impact on its oil imports "remains to be seen," while analysts mostly agree it is too early to jump to any conclusions, the South China Morning Post reported.

In the meantime, China's government might be put in a position where it needs to look for alternatives and find new crude trading partners.

Iran could supply China with oil, but this poses a major risk in further complicating Beijing's relationship with the U.S. This could even result in China expanding its role in the Middle East for the first time.

"China may seek to further diversify its sources, but rising tensions could also prompt China or give it a justification to adopt a more assertive role in regional diplomacy — something it has largely refrained from so far," Kevjn Lim, a doctoral researcher at Tel Aviv University told SCMP.

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