By staff reporter Wang Zhen

From the Caijing Annual Conference

The plunge in international crude oil prices to around US$ 40 a barrel now from around US$ 150 per barrel last summer will have positive as well as negative effects on China’s effort to build a sustainable economy, said Fred Hu, China managing director for the U.S. investment firm Goldman Sachs.

Speaking at the Caijing annual conference December 13, Hu said low prices for commodities such as oil will ease inflation pressure in the short term. That’s a plus. Beijing has been applying moderate macroeconomic controls to fight inflation and economic overheating since 2004, when rising prices became a major concern for policymakers and regulators.

“In the past several months, we have seen a significant decline in the inflation rate (and) the main reason is connected with the decline of international crude oil price,” said Hu.

Declining commodity prices have been good for China’s international trade position, too. “As China’s labor-intensive products are sold cheap to other countries, and imports of natural commodities are expensive, the recent overhaul in commodity prices improves our trading conditions,” Hu said.

At the same time, Hu said, China will be challenged in the short term by shrinking overseas demand for its goods, which in turn may affect the way the government reacts to cheaper oil. And this could be a minus.

Export demand also may weaken over the long term, Hu said, and that could prompt Chinese policymakers and regulators to question the idea of bolstering investment in sustainable energy. This reluctance may emerge even though Beijing has declared, over the past two years, an interest in improving the environment through resource efficiency while encouraging environmentally friendly business.

“I worry that with lower prices of crude oil prices and iron ore, both our regulators and policymakers, and companies and consumers, will not be pressured to invest in renewable and sustainable energies.

“We should not be overly happy when a commodity price goes down,” Hu said. “Instead, we should further promote energy efficiency and a sustainable environment. Investment in wind power (and) solar power… should be not only continue, but even expand.”

Meanwhile, Hu said, falling prices may make the next couple of years a good time for Chinese companies to acquire mining ore resources overseas. And this could be a positive development.

“The best investment concept is to buy cheap and sell high,” Hu said. “When a commodity price declines, we should go overseas to acquire natural resources.”