A surge in China's oil imports could be a sign of reform in its energy sector, or just another scheme to hide capital flows.
Imports by newly-licensed independent refiners, known as "teapots," spurred a surprising 16.5-percent jump in China's intake of foreign oil in the first five months of the year at a time when the country's economic growth has been slowing down, according to customs data.
The government has allowed some of the independents to import controlled amounts of crude under a quota system only since last July, freeing them from reliance on state-owned national oil companies (NOCs) for supplies to produce products like petrochemicals and fuels.
Since then, teapot refinery imports have soared to as much as 15 percent of China's total crude inflows, according to a Citigroup four-month estimate reported by The Wall Street Journal.
In an "exclusive" report from eastern Shandong province, where most of the teapots are based, the official Xinhua news agency said the refiners had imported nearly 7.5 million metric tons of oil in the first quarter, equal to more than 603,000 barrels per day (bpd).
As of May, 11 out of 18 teapot applicants had secured import quotas, with the remainder expecting approvals and 11 more preparing to apply, local officials said.
The result is that independents could soon account for nearly one-fifth of China's oil imports, according to Xinhua.
The growth has been closely watched by the world oil market for signs of stronger demand and the effect on prices.
The sudden rise of China's teapot imports has been one of the biggest wild cards in recent forecasting, along with questions about how fast the country is filling its Strategic Petroleum Reserve (SPR).
The government is due to release new oil data for June along with first-half economic figures this week.
In May, a Reuters columnist concluded that China must be filling its SPR much faster than the rate of 245,000 bpd suggested by a poll of analysts last December.
Reuters found that some 870,000 bpd was available for storage that was not processed by refineries through April.
It now appears that the rise of teapot imports and refining activity may add uncertainty of a similar magnitude.
"Some analysts now reckon the official data don't capture new teapot activity," The Wall Street Journal said in its Heard on the Street column. "That means refinery runs, and hence underlying demand, could be higher than thought."
Business is said to be booming for the Shandong refiners that have secured import quotas. In the first quarter, revenues for the 11 teapots rose 20.9 percent while profits jumped 622 percent, a local official told Xinhua.
The government has billed the liberalization of imports as a major industry reform and a step toward making the NOCs more competitive on the way to a fully deregulated market.
How quickly this will come about remains to be seen. So far, the government has shied away from reform measures that could lead to mass layoffs by the NOCs, although low oil prices have threatened jobs at some of their higher-cost fields.
One China energy expert, who asked not to be identified, suggested that teapots may not pose as much competition for the state-owned oil giants as expected because of the lower quality of teapot production.
"The output of most teapots is well below the national standards and needs to be sold to the large refineries for further processing," the analyst said.
Fictitious growth in oil imports
But another reading has been suggested that may inject even more uncertainty into the world oil market with suspicions that China's surprising growth in oil imports may be at least partly fictitious.
On June 2, Reuters reported that China's regulators have grown suspicious of the jump in oil imports, citing a statement by a Bank of China official in Shanghai.
"China's State Administration for Foreign Exchange (SAFE) is conducting 'a rather intensive campaign' to verify the authenticity of crude oil trade," Reuters quoted the bank official as saying.
SAFE "has found many trades to be fake," the official said. The agency declined to comment for the report.
The investigation suggests another example of "over- invoicing," the practice of disguising capital outflows for currency speculation under the cover of trade transactions to evade China's capital controls.
Suspicions of over-invoicing have risen as the value of yuan has fallen against the U.S. dollar with predictions of more depreciation to come.
Other recent signs of over-invoicing and speculative outflows have been seen in a tripling of China's customs figures for imports from Hong Kong, which are not reflected in the territory's reported exports.
China's outbound direct investment has also been heavily lopsided with growth of nearly 62 percent through May, according to Ministry of Commerce data, while inbound foreign direct investment rose only 3.8 percent.
The examples seem to follow a pattern, but there may be more reasons for credibility in the teapot refinery numbers.
One possible interpretation of the Shandong teapot figures, which Xinhua said it "learned exclusively from local authorities," is that officials are trying to counter the suspicions that their business is being used as a cover for currency speculation.
Following market opportunities
Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, said that the rising crude imports seem to be following market opportunities in China.
"Oil prices have been going up, and one way to play China's oil pricing system is to anticipate when they're going to allow you to charge more at home," Scissors said.
"There's an incentive to anticipate an increase in domestic oil prices and jam all your imports in as fast as you can," he said.
Evidence in support of that view has been seen in the heavy congestion at Shandong's Qingdao port.
Tanker traffic there has been "unprecedented" this year, Bloomberg News reported, quoting Liu Jin, general manager of Qingdao Shihua Crude Oil Terminal Co.
Construction of a new oil pipeline and a railway link at the port began on June 16, Xinhua said in a separate report.
On June 9, the government raised retail fuel prices, marking the fourth price hike so far this year.
Under mixed market rules that have been revised several times by the National Development and Reform Commission (NDRC), the planning agency is expected to adjust fuel prices when international crude costs would vary prices by more than 50 yuan per metric ton (U.S. $1.02 per barrel) over 10 working days.
In January, the NDRC changed the rules by suspending retail price cuts when crude costs fall below U.S. $40 per barrel (1,960 yuan per ton) in order to protect the NOCs from losses after oil dropped sharply in December.
Since then, the mild recovery in world oil prices to nearly U.S. $50 per barrel (2,450 yuan per ton) has been taking place in parallel with depreciation pressure on the yuan.
At least some of the mystery surrounding the surge in China's oil imports may be clarified with the filling of China's strategic petroleum reserve.
On June 29, analysts at JPMorgan Chase & Co. said that recent imports for the SPR "might be close to the capacity limit," Bloomberg reported, suggesting that one of the major factors in support of higher oil prices on world markets may be on the way out.