West cannot coerce China to follow its lead

A long-announced European Union ban on oil imports from Iran came into force on Sunday as previously planned. Despite the fact that taken together the EU countries are the world's largest economy and the fact that the euro still remains a leading international currency, the enforcement of the EU ban on Iranian oil is not expected to have any substantive influences on the world oil market.

A generally declining price tendency is now the basic character of the current world oil market. On Feb 7, the Brent crude oil price stood at $117.8 per barrel, but it had declined to $93.5 by June 27. The gloomy global economic outlook and a new round of macroeconomic policies adopted by world's major economies have been the fundamental reasons for the continuous decline of oil prices in recent months.

With the escalation of the sovereign debt crisis in Europe, the eurozone is now on the brink of an economic recession. The EU economy contracted 0.1 percent year-on-year. Worse, the unemployment rate in the eurozone soared to a record high of 11 percent. The total unemployed population now stands at 17.4 million. It was the 12th month in a row that the eurozone's unemployment rate reached or surpassed 10 percent. The situation in some countries is even worse, Spain has a 24.3 percent unemployment rate and Greece 21.7 percent.

Alongside a worsening economic prospect in the eurozone are emerging signs of an economic downturn in emerging nations, which played a crucial role in boosting the global economic recovery following the US subprime mortgage crisis. India, a previously booming emerging economy, is now struggling with its own economic predicament. Pessimism at home and abroad has also mounted over China's economic outlook. A soft economic growth momentum worldwide will unavoidably dampen the global demand for primary products, which will in turn cripple the base that bolsters price rises for raw materials and energy, including oil.

The mild counter-crisis measures adopted by world's major economies in recent months have also undercut the possibility of a new bullish market for global primary products. To maintain economic growth, a number of countries, both developed and developing, have loosened their monetary policies since the start of this year. Many central banks, including those of Denmark, Australia and Brazil, have successively lowered their benchmark interest rates. Brazil has even made seven consecutive interest rate cuts to lower it to a historical low.

As the largest emerging economy, China also cut its benchmark interest rates by 25 basis points in early June, the first cut in three years. India, Vietnam and other emerging markets have successively embarked on their own rate-cutting campaigns. However, the European Central Bank, which is now at the epicenter of the crisis, and the US Federal Reserve, have not followed suit. The European Central Bank has maintained its 1 percent rate unchanged for months.

Not cutting their interest rates does not mean the European Central Bank and the Fed have not been under pressure to maintain economic growth. It is only because they realize that to further cut their already low rates would not have the desired results and would instead have unwanted side effects. Excessive dependence on rate cuts as a way to spur economic growth will possibly plunge the US and Europe into a "liquidity trap".

It is a fresh reminder that the excessively loose monetary policies worldwide in the wake of the global financial crisis in 2009 failed to boost an obvious global economic recovery. On the contrary, property prices drastically rebounded amid flooding liquidity. It is because of fears over the reoccurrence of the 2009 recession that major central banks have maintained self-restraint while taking measures to tackle a new round of crises. This is also the reason why the prices of overseas primary products began declining shortly after soaring, following the announcement of rate cut made by China's central bank in early June.

After years of Western sanctions, Iran's share in the world oil market has been on the decline. At the same time, OPEC members have increased their oil output. Statistics show that the daily oil output by OPEC in May reached 31.8 million barrels. In this context, the US-led ban on Iranian oil is not expected to affect the trend of world oil prices.

As the biggest buyer of Iran's oil and its big supplier of consumer goods, China has no reason to blindly follow Western sanctions on Teheran. The US-led West has no privileges to force China to make concessions, nor will the sanctions block all the channels for Iran's oil to flow into the Western market.

China should import its oil depending on international oil price trends instead of other factors.

The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

(China Daily 07/02/2012 page9)