China saves $460 billion a year as commodity prices come crashing down

January 26
3:52 AM 2016

China has inarguably emerged victorious with a savings of $460 billion, as the drop in global commodity prices affected almost all nations from Brazil to South Africa. This number is arrived at by Kenneth Courtis, former Asia vice chairman at Goldman Sachs Group, who said that nearly $320 billion was saved due to cheaper oil prices alone, and the remaining $140 billion for metal, coal and agricultural commodities.

According to Fortune, Courtis used some simple assumptions for the calculation. The country imported 12.5 barrels of oil a day. Each barrel was priced at $30, which led to savings of $70 a barrel from 2014. Daily savings came to $87.5 million, and thus China ended up with a whopping $320 billion a year from cheaper oil prices alone. The total $460 billion a year included another $140 worth of cheaper energy, metal, and agricultural items.

The dropping or steadying prices of everything from petrol prices to cost of raw materials are a sign that the economy has finally got a facelift, which definitely helped China shift its economic growth model from heavy industries and investment and focus on consumption and services.  "It's shown up in low consumer-price inflation and more stuff that households have been able to buy," said Louis Kuijs, the head of Asia economics at Oxford Economics Ltd. in Hong Kong and a former World Bank economist in Beijing. "Manufacturing companies would have had even worse profit developments if it had not been for those low commodity prices," as reported by Bloomberg.

As mentioned, capitalizing on the lower prices, last year China went on an importing spree and saved as much as $188 billion of import costs for commodities like oil, soybeans, iron ore, copper concentrate, following which the Ministry of Commerce spokesperson stated, "That significantly cut the costs of domestic companies and improved efficiency."

However, a large portion of the profit is set aside for domestic population. This drop in prices of household spend on energy, along with the all-time low oil prices, has not only benefitted the economy but has succeeded in controlling overall inflation. This consequently led to more purchasing capacity for other goods and services. This fact is confirmed by Courtis when he said, "China is the great winner from the crash of commodity prices. A significant portion of that windfall gain is being transferred to the domestic population," as per RT.

The flipside to this story is the adverse impact of the deflation on China's own oil companies and its Fortune 500 listed state-owned conglomerates. More than half of the country's workforce is engaged in energy and agriculture industries that are now staring at plummeting commodity prices. Producer price inflation has been reportedly recording an annual rate of -5.9% for the last five months, which is certainly not normal.

Thus, while China will definitely make the most of the neat little profit it made from last year's imports, the negative impact on its own industries might demand a bite out of the economic benefit, to offset the resultant losses.  

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