Surging covid cases set to hurt China’s oil demand In 2023

Having finally ditched its zero-Covid policy, China is now experiencing a wave of Covid cases. The Chinese purchasing managers’ index, which tracks manufacturing and service sectors, slumped well below economist’s expectations in December. The IMF has warned that the next couple of months will be bad for China and the global economy, with oil demand set to weaken, according to Oil Price.

Oil demand in China could be very weak at the start of the year as manufacturing activity in the world’s top crude oil importer plunged the most since the early days of the pandemic in February 2020, amid soaring Covid cases after China ditched its ‘zero Covid’ policy.

The Chinese purchasing managers’ index (PMI) slumped to 47.0 in December from 48.0 in November, per data from the National Bureau of Statistics (NBS), which fell below the expectations of economists in a Reuters poll. The 50-point mark in the index separates contraction from growth, with readings below 50 indicating a contraction in activity. So in December, Chinese manufacturing activity dropped for a third consecutive month and the drop was the steepest since the onset of the pandemic in February 2020.  

China’s re-opening has led to a surge in the number of Covid infections and with lower and less effective vaccination in the country, labor shortages and supply chain disruptions have started to emerge.

The Chinese economy is off to a difficult start to 2023, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), told the CBS program Face the Nation in an interview aired on Sunday. China’s re-opening and the surge in infections that followed is “bad news” for the global economy in the short term, Georgieva said.

“For the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative. The impact on the region would- would be negative. The impact on global growth would be negative,” the head of the IMF told CBS. “China has slowed down dramatically in 2022 because of this tight zero COVID policy. For the first time in 40 years China's growth in 2022 is likely to be at or below global growth. That has never happened before. And looking in to next year for three, four, five, six months the relaxation of COVID restrictions will mean bush fire COVID cases throughout China,” Georgieva noted.

Oil prices bounced back on the last trading day of 2022, but despite the volatility throughout last year, prices rose annually by just 10% compared to 2021, due to the Chinese slowdown, fears of recessions, and aggressive interest rate hikes from the Fed and other central banks.