Chinese oil refineries have suspended exports of petroleum products to markets outside Hong Kong and Macau until further notice from Beijing, in a move aimed at protecting domestic supplies, but it may increase pressure on global fuel markets that are already suffering from a shortage of supplies coming from the Middle East and Russia.
Four people familiar with the matter said that Chinese refining companies have not yet received the green light from the authorities to continue exporting petroleum products to foreign markets, coinciding with the start of the week-long National Day holiday.
PetroChina, one of the country's largest state oil companies, on Wednesday canceled a number of shipments of gasoline and jet fuel that were scheduled to be exported during October, according to three sources.
The company concluded most of the shipping deals that were canceled during the past two weeks. The move indicates that Beijing is giving increasing priority to securing the needs of the local market in light of the uncertainty surrounding global energy markets.
Zhejiang Petrochemical Company, one of the largest private refining companies in China, also refrained from scheduling any shipments of petroleum products during the holiday week, according to an informed source. PetroChina, Zhejiang Petrochemical and the National Development and Reform Commission did not respond to requests for comment, in light of the National Day holiday.
There is still uncertainty surrounding whether Beijing will allow exports to resume after the holiday ends on October 7. The sources said that the decision may depend on the levels of local fuel stocks and the volume of refinery production.
China is the largest oil refining center in the world, and therefore its exports of diesel, gasoline and jet fuel represent an important source of supplies, especially in Asian markets. The continued suspension of shipments would reduce the quantities available for trade at a time when markets are already suffering from supply disruptions from major production areas.
The effects of concerns quickly appeared in the Asian diesel market, as diesel refining margins rose to the highest level in a week at about $75 per barrel. The price difference between October and November contracts also rose to the highest level in two weeks, indicating an increase in the value of spot supplies as fears of a supply shortage grow.
The Chinese move gains additional importance in light of the disruption of flows of petroleum products from the Middle East and Russia. The absence of Chinese shipments for a longer period may lead to intensified competition among Asian buyers for available supplies, and fuel prices in some markets to rise to new levels.
The suspension does not necessarily mean a permanent shift in Beijing's policy towards exports of petroleum products, as the Chinese authorities have been using export quotas for years as a tool to achieve a balance between the needs of the domestic market and the goals of the refining sector. But the timing of the decision makes inventory levels and domestic production the most important factors in the coming days. If authorities see domestic supplies as comfortable after the holiday ends, they may allow exports to resume, while continued concerns about stocks could lead to restrictions being extended.
As for global markets, attention after October 7th will focus on any new directives from Beijing to major refineries. The continued absence of Chinese products, even for a limited period, could further tighten the Asian fuel market, and raise refining margins and prices, at a time when the flexibility of global supplies has become more limited.
A survey showed that growth in the manufacturing sector in the euro zone continued to accelerate in September, recording its fastest pace in more than 4 years, as strong demand pushed new orders and production to levels not seen in the region for years, despite the continuing conflict in the Middle East.
The Eurozone Purchasing Managers' Index for the manufacturing sector, issued by Standard & Poor's Global, rose for the third month in a row, to 52.9 points in September, compared to 52.7 points in August. The index thus reached its highest level since May 2022, exceeding the initial reading of 52.7 points, according to Reuters.
“This recovery is due to increased demand for investment goods, such as machinery and equipment, as production of these capital goods grew in September at the fastest pace since the recovery phase that followed the Covid pandemic 5 years ago,” said Chris Williamson, chief economist at Standard & Poor’s Global Market Intelligence.
He added: “This reflects an increasing demand, especially for equipment related to artificial intelligence and the defense sector.”
Growth included various parts of the economic bloc, with the Netherlands at the forefront of this expansion. Germany, the largest economy in the region, recorded strong growth, while expansion was modest in France, Italy and Spain.
New orders recorded their fastest growth rate since early 2022, supported in part by increased exports, which reached their highest level in more than 4.5 years.
The production sub-index also rose to 53.6 points, recording its highest level in 55 months, which boosted business confidence to its strongest levels since February.
After ending more than three years of job cuts in August, manufacturers ramped up hiring in September, albeit at a modest pace.
However, the increase in prices may pose a threat to the recovery path; Inflation in input costs and prices of final products accelerated over the past month, indicating growing inflationary pressures. Official data scheduled for release on Friday are expected to show the inflation rate rising to 3.6 percent in September, from 3.2 percent in August, to record its highest level since September 2023.
Expectations of continued high inflation have increased the chances of the European Central Bank raising interest rates further, as markets are currently pricing in three interest rate increases by mid-2027.
Williamson added: “Demand for consumer goods is still declining... as high costs of living constitute a burden that limits household spending.”
He continued, saying: “It is therefore worrying to see both input costs and selling prices rise again at an accelerated pace in September, which will fuel speculation about the possibility of the European Central Bank raising interest rates again.”
German manufacturing maintains its momentum
The German manufacturing sector maintained its recovery momentum in September, with production and new orders recording strong growth again, despite renewed inflationary pressures from global energy markets.
The final Standard & Poor's Global Purchasing Managers' Index for the German manufacturing sector fell slightly to 53.9 points in September, from 54.3 points in August, but remained above the initial reading of 53.8 points.
Production rose for the ninth month in a row, slowing only slightly after recording its fastest pace of expansion in more than 4.5 years in August. New orders also increased for the fourth month in a row, with export sales growing again, driven by demand from Asia, Europe and the United States.
Phil Smith, associate director of economics at Standard & Poor's Global Market Intelligence, said these numbers reinforce the prevailing view that economic conditions are holding up better than expected in the face of rising energy prices and rising long-term interest rates.
Cost pressures intensified in September after declining over the previous three months, as input price inflation rose to its highest level since June, while final product price inflation rose slightly to reach its highest level in 3 months.
Producers' expectations for production over the next 12 months also reached their highest level since February.
French manufacturing is expanding
The French manufacturing sector expanded for the second month in a row in September, although the pace of growth slowed due to a decline in new orders.
Standard & Poor's Global reported that the French manufacturing purchasing managers' index fell to 50.6 points in September, from 51.1 points in August.
However, the final reading of the index in September was stronger than the initial reading of 50.3 points. Standard & Poor's Global indicated an increase in industrial production, despite the decline in new orders for the fifth month in a row, adding that inflationary pressures remain a source of concern.
Data published this week showed consumer prices in France rising more than expected, with headline inflation reaching 3.4 percent.
“With rising inflation, a worsening energy market crisis and tightening financial conditions, the French manufacturing sector was able to achieve growth in September,” said Joe Hayes, chief economist at Standard & Poor’s Global Market Intelligence.
He added that this “reflects a remarkable degree of flexibility,” although the decline in new orders, low inventory levels, and weak expectations raise questions about the sustainability of this expansion.
Japanese Prime Minister Sanae Takaichi said that enhancing the competitiveness of the Japanese economy will help consolidate market confidence in the yen, pledging at the same time to set clear priorities for spending and secure the necessary funding sources for financial needs, amid mounting investor fears of a weak currency, rising bond yields, and deteriorating public financial conditions.
Takaichi revealed, in a recorded interview broadcast on the Nippon Television Network on Thursday, that she informed US President Donald Trump during their meeting last month that the depreciation of the yen represented a problem.
She said: “Our economic policy does not aim to manipulate exchange rates,” stressing that the government seeks instead to address the basic economic factors that affect investors’ confidence in the Japanese currency.
She added that her administration aims to raise Japan's growth potential by increasing the productive capacity of the economy through bold investments in crisis management and sectors promising growth. Such efforts, she said, “will enhance Japan’s global competitiveness and thus help ensure markets’ confidence in the yen.”
She also explained that US Treasury Secretary Scott Besent supported Japanese economic policy and did not make specific demands when he held bilateral talks with Finance Minister Satsuki Katayama on August 31.
Takaichi stressed that her government's position has not changed regarding "simultaneously seeking a strong economy and a sustainable fiscal policy."
Her statements come at a time when the interest rate increases implemented by the Bank of Japan, including the increase last September, did not succeed in providing sustainable support for the currency. The weakness of the yen has become a growing concern for policy makers. Because of its impact on the cost of imports of energy and raw materials, and then the transfer of pressures to inflation levels.
But markets also monitor the government's own fiscal policy. Takaichi's ambitious spending plans have raised concerns about the possibility of increased borrowing and bond issuances; Which contributed to pressure on the yen and higher government debt yields.
The total spending requests for the budget for the next fiscal year amounted to about 143 trillion yen (about 903 billion dollars), approaching the high levels that Japan witnessed during the pandemic period. The number may rise further; Because a number of spending items, including on defense, were requested without specifying final values.
The bond market has also grown concerned because the government has not yet provided full details on how to finance the plan to temporarily suspend the food tax, along with the expected increase in defense spending.
But Takaichi stressed that the size of the ministries' requests does not mean that next year's budget will automatically reach 143 trillion yen, stressing that the government will review until the end of the year the necessity and effectiveness of the proposed policies before determining final spending.
“We will set clear priorities,” she said, adding that this comes within the framework of a broader effort to reform the budget preparation process.
She explained that the government will review both aspects of spending and revenues, while monitoring developments in tax revenues, in an attempt to provide the required resources without allowing public finances to deviate from the targeted path.
Takaichi pledged that spending levels would be in line with the government's goal of steadily reducing the public debt-to-GDP ratio, along with "appropriate management" of the volume of government bond issuances.
“Let me be clear,” she added decisively. We will secure financing as we respond to financial needs.”
However, during the interview, the Prime Minister did not repeat a pledge she made last month to target a ceiling of 40 trillion yen for new bond issuances in the next fiscal year’s budget, which may leave the markets awaiting final details on the size of borrowing.
The financial discipline messages come at a time when the Japanese bond market is experiencing mounting pressure. High inflation, expectations that the Bank of Japan will continue to tighten monetary policy, and fears of increasing debt have pushed long-term yields to levels not seen in the country for decades.
The Bank of Japan raised the interest rate last September to 1.25 percent, the highest level in 31 years, while the summary of its last meeting showed that a number of policy makers see the need to continue tightening and perhaps accelerate the rate hike if inflation risks increase.
In doing so, Takaichi is trying to send a coherent message to the currency and bond markets, stating that support for the yen will come from enhancing the productive and competitive capacity of the economy, while spending and borrowing will be controlled in a way that maintains the sustainability of public finances.
The main test of this message will be when the details of the next fiscal year’s budget are revealed, especially how to finance the new plans and the size of bond issues. The government's success in combining growth-supporting investments with clear fiscal discipline will be an important factor in determining the ability of Takaichi's policies to restore investor confidence in the yen and the Japanese debt market.
