The slide in oil prices to five-year lows offers China a double benefit as its leadership confronts the weakest expansion in a generation.

Crude prices that have fallen by about 30 percent could add 0.3 to 0.5 percentage point to growth in China, according to Mizuho Bank Ltd. The decline also keeps inflation slow enough to give scope for further easing after last month’s interest-rate cut, says economist Lu Ting at Bank of America Corp.

Greater wherewithal to shore up a growth rate that has weakened toward 7 percent would help China’s leadership as they attempt to reshape the economy. President Xi Jinping, who convenes an economic works conference this month, wants to cut pollution, install professional leadership at state-owned enterprises, elevate the role of market pricing and introduce private-sector competition into the financial sector.

“The drop in oil prices is largely positive for China, although it will do little to cure the economy’s structural ills,” said Frederic Neumann, co-head of Asian economics at HSBC Holdings Plc in Hong Kong. “Lower oil prices also make it easier for the central bank to push ahead with rate cuts next year, providing at least temporary relief for hard-pressed borrowers.”

Brent crude remaining about $70 a barrel next year would mean that consumer-price inflation in China hovers around 1.5 percent to 2 percent, according to Bank of America Merrill Lynch calculations. With a benchmark one-year lending rate at 5.6 percent, the People’s Bank of China has some distance before it hits the zero-bound as some counterparts in developed nations have done.

More Support

“Should the downturn look to become sharper and more prolonged, the authorities may need to step in and provide further policy support” to the economy, said Vincent Conti, a Singapore-based economist at Standard & Poor’s. Disinflation from oil helps “create some space for fiscal and monetary policy stimulus to be more effective,” he said.

Oil prices are set for the biggest annual drop since 2008 as the Organization of Petroleum Exporting Countries resists calls to cut supply, even as it contends with the highest U.S. output in three decades. Brent for January settlement was at $70.54 a barrel on the London-based ICE Futures Europe exchange at the close, down about 33 percent in the past six months.

Worsening economic data from China has fueled speculation the central bank will loosen monetary policy further, with a reduction in lenders’ reserve-requirement ratios.

December Move

“The PBOC has the room for providing ample base money supply,” Bank of America Merrill Lynch analysts including Hong Kong-based Lu and Xiaojia Zhi wrote in a research note. The bank anticipates a reserve-ratio cut in mid-December.

The central bank shifted its strategy last month in reducing the one-year lending rate by 0.4 percentage point, after having relied on targeted injections of liquidity to specific types of banks and loans. Policy makers had held off on broader easing measures as they sought to avoid exacerbating a build-up in non-performing loans.

China’s stimulus followed October data showing that factory output rose at the second-slowest pace since 2009, and that investment in fixed assets such as machinery expanded the least since 2001 from January through October. An official Purchasing Managers’ Index released Dec. 1 indicated that manufacturing expanded in November at the slowest pace in eight months.

Deflation Danger

One danger from reduced oil prices is that the world’s second-largest economy faces excessively low inflation, akin to what’s happened in developed nations including in the euro region. In October, China’s producer-price index dropped 2.2 percent from a year earlier while consumer price gains held at 1.6 percent, the least since 2010.

Slower inflation increases the real burden of debt, at a time when China is contending with the legacy of a record credit boom. Bad loans rose to the highest level since 2008 last quarter, the country’s banking regulatory commission said. A real-estate slowdown has contributed to the jump.

“Deflationary pressures are already mounting in China’s industrial sector,” said Donna Kwok, senior China economist at UBS Group AG. “They will likely intensify as the ongoing property downturn unfolds, so we expect real interest rates to rise even higher going forwards, adding further to corporates’ debt servicing burden.”

Earnings Bump

Even so, Haibin Zhu at JPMorgan Chase & Co. says that disinflation from cheaper oil is a plus for China.

“Given China’s role as a significant net oil importer, PPI deflation arising from an exogenous, supply-side induced decline in global oil prices would lift corporate profits and real household income, supporting economic growth,” Zhu, the bank’s Hong Kong-based chief China economist, wrote in a note released yesterday.

China spent $194.7 billion on imported crude in the first 10 months of this year, according to data released by the Customs General Administration. Along with falling prices for iron, the nation could save a total of $102 billion in import costs next year, extrapolating current trends, Bank of America analysts calculated.

“Falling oil prices, if sustained, could even make China cleaner as China can cut its dependence on burning coal,” the Bank of America analysts wrote. Another plus: it gives policy makers greater flexibility in deregulating utility prices.