Pricey Oil May Be Boon for China

Just when global markets look like they may be about to take another hit on the rising price of oil, investors in China may get a pleasant surprise if black gold goes back to triple digits.

Whereas most indices are weighted in companies that use oil as a cost stream, nearly one-third of the Shanghai Composite Index is made up of those deriving earnings from crude prices. For example, PetroChina's (PTR Quote - Cramer on PTR - Stock Picks) weighting accounts for 18% of the index, while China Petroleum & Chemical (SNP Quote - Cramer on SNP - Stock Picks) constitutes 5.9% of Shanghai's exchange.

China Shenhua Energy(CUAEF Quote - Cramer on CUAEF - Stock Picks), the mainland's largest coal and power conglomerate, which also benefits from rising energy prices, weighs in at 4% of the exchange.

"Whether $100 oil will materialize again is the question of the year," says Steve Rowles, a commodities analyst at CFC Seymour Securities in Hong Kong. "Oil at $100 has not been the chaos we potentially thought it would be. In China the price is heavily subsidized."

Rowles adds that another uptick in the price of oil could also produce a bump in government bond markets in Asia, as countries such as China and India issue more debt in order to offer further subsidies to consumers.

Oil has been rising in recent days, most recently to $93.04 in Asian trading Wednesday, prompted by Venezuela's suspension of commercial relations with Exxon Mobil(XOM Quote - Cramer on XOM - Stock Picks) after the U.S. oil giant won permission to freeze $12 billion in the country's state assets days ago.

Venezuela's Energy Minister Rafael Ramirez most recently commented on the fight as potentially escalating to "economic war."

Previously, when the price of oil has surged, the Shanghai Composite Index has reaped the gains, as the news has cheered investors of China's big oil producers.

The last time oil reached triple digits, in early January, PetroChina jumped 3.6% from its December low, while China Petroleum & Chemical and China Shenhua Energy surged around 16% from the same period. The impact lifted the Shanghai Composite Index around 12.5%, to a peak last month of 5443.78.

Since then, as the oil price has suffered in the wake of fears of a U.S.-led economic slowdown, the Shanghai Composite Index has dropped 21% to 4490, dragged down by the major oil companies that dominate the exchange.

China's largest oil companies -- PetroChina, Sinopec Shanghai Petrochemical(SHI Quote - Cramer on SHI - Stock Picks) and CNOOC(CEO Quote - Cramer on CEO - Stock Picks) -- together have a combined market capitalization of nearly $1 trillion.

But while a rising oil price may mean short-term gains for equity investors, it's likely to have a negative longer-term impact on economic growth, says Zuo Xiaolei, chief economist for Galaxy Securities in Beijing.

Like most mainland polarities, the conflict between potential capital markets growth and an economic slowdown as a result of more expensive oil comes from China's size. While the country is currently the world's second-largest importer of oil, it is also the sixth-biggest global producer.

"China is increasingly importing oil, so rising oil prices increase everyone's costs and push up inflation, which is not a good thing for the Chinese economy," says Zuo.

Also, not all oil companies in China may benefit in the event of another rally, she adds. She expects oil to fall back a little from current levels, which, while bad for the likes of PetroChina and China Petroleum & Chemical, would be a positive for gas station owners like Sinopec Shanghai Petrochemical.

And playing China based on oil may be risky, some observers warn. Even if the price of crude does usually boost Shanghai's index, investors should be aware that the focus of Chinese mainland retail investors hasn't been on blue-chip stocks so far this year, so the gains may be minimal, says Alex Wong, a director of Ample Finance Group in Hong Kong.

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