China’s growth engine could finally run out of steam this year

When I read the Financial Times front page main headline on New Year’s Eve, China to End the Year as Worst Performing Stock Market, the little forecast radar in the back of my head chirped: “You, as well, China. Will the big 30-year-old energy demand engine finally derail in 2019?”

As we step across the threshold into the new year, it is hard to have happy, optimistic thoughts about the 12 months about to unfold. The natural order of things, of course, is the expectation that as a new year dawns we should all feel like a bursting firework of hope and colour, with half a dozen achievable resolutions.

Most years you can muster that momentum of denial for a few days at least, until such time as “the first punch in the face” lays all your best plans to rest, to quote the once-upon-atime more robust Mike Tyson.

On this occasion, it felt like all the positive vibes for 2019 were sucked out of the balloon before the knot was even tied as the global economy drove off the proverbial cliff in the fourth quarter, taking oil on a 40 per cent dive and the Dow Jones stock index on 1,000point whiplash swings.

Most major global equity markets ended the year wearing Make Stocks Great Again caps as the worst performances in a decade were pink-slipped into Christmas stockings. For once, China did not come over the hill to rescue the bulls on Wall Street, despite tepid efforts by President Donald Trump and President Xi Jinping to make peace and hang out their bromance shingle one more time.

In many ways we were all just happy to crawl out of the wreckage with a pulse, dust ourselves off and stumble across the 2018 finish line, giving thanks that the parachute remained partially inflated by the peaks climbed earlier in the year.

The Rubik’s Cube problem that we need to try and answer here in the heart of Opec-land as soon as possible is: how do we recapture the halcyon days of September when the world came back from the summer holidays with a great bronze suntan and a nice tight demand-driven oil market, holding Brent crude oil firmly up in the $70s per barrel range?

Chests were puffed out with achievement after two years of Opec+ co-operation had delivered the biggest coordinated oil market management success story in history – embarrassing the usual Greek chorus crowd into begrudging acknowledgement that the oil exporters group may indeed have found a 2.0 lease on life.

Even the International Monetary Fund and its reliable cheerleaders at the World Economic Forum gave all things Chinese a clean bill of health as recently as August, declaring China’s strong GDP growth will continue: the country now accounts for onethird of global growth.

China’s per capita GDP continues to converge to that of the US, albeit at a more moderate pace in the past few years. But what a difference a few months make.

In many ways, as the central banks whip away the 10-year old punch bowl of quantitative easing free money, we could come face to face with the same question: should Opec+ chase higher prices or fight for market share?

As each economic cycle passes into the dustbin of history this question gets louder, and the obvious answer succumbs to the weight of gravity like an astronaut re-entering the Earth’s atmosphere after a few months floating around on the International Space Station. While Opec may feel it can float on the air of supply-restrained elevated oil prices, the shale oil roughnecks in Oklahoma pull another million barrels of oil supply capacity out of the ground.

I am increasingly becoming a convert to the doctrine of Mark Moody-Stuart, the former chairman and managing director of the Royal Dutch Shell Group, and the non-executive chairman of Anglo American, who advocates that low-cost oil producers have carried higher cost producers for far too long.

Mr Moody-Stuart, who sits on the board of Saudi Aramco, likes to remind any industry colleagues who are willing to listen: “For normal commodities such as iron ore or copper, the lowest-cost producers command the largest market share”.

The great energy transition may be about to tip the scales in favour of the market share argument as the peak crude oil demand drum bangs ever louder, with China at the forefront of the transformation to the development of a new low-carbon energy world.

Beijing has spent an estimated $60 billion subsidising its electric car industry over the past decade, and it is now turning its attention to hydrogen fuel cell vehicles.

Watch this space in 2019.