Is Chinese economy really recovering?

Recently, Chinese economic data show recovering. Since exports are still in slump, analysts describe that these positive changes have been led by the domestic demand.

HSBC's December manufacturing PMI was 50.9, the highest figure in the past 14 months. Industrial production in November posted the first two digits growth since March, according to the National Bureau of Statistics.

Energy consumption is also rising in step with the recovering economic data. Year-on-year growth of Chinese electricity output remained below 3% during the second and third quarter, but it rose to 6.4% in October and to 7.9% in November. It suggests revitalizing industrial activities.

Crude oil processing in China rose only 1.6% from a year ago during the first eight months in this year, but the growth rate increased to 7.0% in September and to 6.7% in October then to 9.1% in November.

Monthly petroleum products output tells us that surging gasoline and gas oil production suggest strong demand from the transportation sector.

Meanwhile, the balance between crude oil supply and processing apparently shows shortage of supply in the past couple of months. This means current increased crude oil processing in China is not a pre-planned activity.

Previously, monthly shortage was solved with averaging with previous and next months. However, recent consecutive shortage is likely reducing crude oil inventories in China.

Crude oil stocks excluding strategic reserve as of the end-October fell 3.5% from a month ago, according to Xinhua News. The inventory level seemed to decrease further in November.

Incidentally, the ample excess supply in the first half of this year was caused by the installation of 80 million barrels strategic reserve into the newly built facilities.

If domestic demand really leads economic recovery, China will have to import more crude oil to meet high processing. Import volumes in December and January may tell us the change.

On the other hand, Chinese government is scheduled to introduce a new petroleum consumption tax on 1st January 2013. The tax rate for fuel is 0.8 RMB per liter. Since current prices of regular gasoline are around 7.5 RMB per liter, pump prices will rise more than 10% after 1st January.

Rush demand before the enforcement of the new tax might be one of the reason of recent high petroleum demand. In that case, the demand is likely to shrink after January.