Research On The Impact Of Rising Oil Prices On China’s Industrial Output

As the largest importer of crude oil,China is faced with huge exposure to international crude oil fluctuation for lacking the equivalent share of pricing power.It has been recognized that rising crude price will cause inflation via industrial chain,boosting liquidity demand and pushing real interest rate to rise,increasing marginal cost of production and hampering industrial output,which are termed with inflation effect,real balance effect and supply shock effect of oil price shock.This paper first constructs an five-variable SVAR model to examine these three effects of oil price shock overall with monthly data from January 2000 to August2020,and then further analyzes 27 industrial sectors’ price,profit and output on rising oil price with VAR models.It is found that,first,rising oil prices directly increases China’s PPI,which is then transmitted to CPI synchronously;Second,real interest rate drops in the short run with increasing inflation,but the decline in real balances leads to an increase in real interest rates later,justifying both the inflation effect and actual balance effect;Third,contrary to the supply shock effect,rising oil prices leads to a higher industrial output in China.By constructing a VAR model with US Dollar Index and crude oil price as supplementary analysis,it is found that crude oil price negatively responds to the change of dollar value.Therefore,it is believed that China’s real industrial output moves in the same way with the economic cycle of its export destination country,mainly EU and America.The results of the study has passed multiple robustness tests.The results of differentiated empirical industrial analysis further show that rising oil prices cause overall PPIs to rise,and the effects gradually decrease from upstream industries to downstream industries.With regard to profit margin and industrial output,when international oil prices rise,upstream industries respond quite differently.For example,the gross margin of crude oil and natural gas extraction industry rises with oil prices,while oil,coal and other fuel processing industries’ profit declines.Impact of oil price rise on the gross profit margin and output of the midstream industries is mainly neutral.For downstream industries,whose profit margin decline first due to lagging price adjustment,in the long run,however,rising oil prices increase their profits and output.To be better prepared for rising oil price shock,it is suggested that China should first speed up RMB internationalization and improve the design of INE crude oil futures contracts to play a more important role in crude pricing,attach greater importance of domestic consumption to to construct a new pattern of development in which both domestic and international cycles promote each other,and apply taxation,subsidies and other policy tools to prevent the long-term investment decline on some upstream industries caused by the cost impact of rising oil prices,so as to ensure the stable development of China’s economy.