Shanghai is one of the world’s busiest ports and is usually a well-choreographed operation. Containers ships drop off component parts, empty containers and pick-up exports etc. However with the port in total lockdown the number of ships waiting offshore to be loaded and offloaded of goods is quite staggering – see image from Scott Gottlieb (Twitter).
This is the accumulation of 3 weeks when the port is not operational – workers are in lockdown. The effect of this will be to clog up other ports as ships arrive at the same time and are completely out of sync with what is normal.
The graph below shows that twice as many ships are waiting near Shanghai ports as opposed to last year, which was already above average.
Although consumer and business spending has remained strong, the delays will add to inflationary pressure as goods arriving late from China will mean a short supply in the shops. Add to this the Ukraine war and rising energy and food prices and we have a major inflationary problem on our hands. It’s time to ‘batten down the hatches’.
Source: Thoughts from the Frontline – 23rd April 2022
Most people will be aware of China’s presence in global trade but its growing influence in international finance seems to be relatively unknown mainly due to a lack of transparency and data. The vast majority of lending to Low Middle Income Countries (LMIC) is focused on infrastructure projects but China’s lending policy is obscure for a variety of reasons.
There is no published report of the China’s lending activity
As China is not a member of the Paris Club that shares bilateral lending and trade credit flows
The Paris Club is a group of 22 major creditor countries who try to find sustainable solutions to the payment difficulties experienced by debtor countries.
Features of Chinese loans
China by far the world’s largest official creditor, with outstanding claims in 2017 surpassing the loan books of the IMF, World Bank and of all other 22 Paris Club governments combined. see graph.
Features of Chinese loans:
China lends at commercial rates – approx 4% – which is four times than that of a loan from the World Bank or an individual country.
China’s repayment period is generally shorter – less than 10 years which compares to approx 28 years for other lenders’ loans to LMIC.
China’s state-owned lenders require borrowers to maintain an offshore account which they have access to as security. This saves China having to go through the judicial process to recover funds.
Some countries are fast accumulating debt to China and for a lot of them the amount of debt owed has increased from less than 1% of debtor country GDP in 2005 to more than 15% in 2017. A dozen of these countries now owe debt of at least 20% of their nominal GDP to China.
Is China setting up debt traps? There are mixed views on whether China keeps lending money to countries that can’t afford the repayment. This can result in China gaining part ownership of foreign assets as compensation for non-payment of a loan. Sri Lanka has been cited as an example of this in which there was considerable Chinese investment in a port project. However using loans and contractors from China proved contentious and Sri Lanka was left with growing debts. In 2017 consensus was reached which gave state-owned China Merchants a controlling 70% stake in the port on a 99-year lease in return for further Chinese investment.
However some reports suggest that the deal was driven by local political motivations, and China never took formal ownership of the port. In fact there are no instances of China seizing a major asset in the event of a loan default – AidData.
Why is there underreported debt? According to the China Africa Research Initiative there are five main reasons why countries have not reported debts to the World Bank.
World Bank rules on debt reporting only apply to countries actually borrowing from the World Bank. For instance when President Hugo Chavez of Venezuela pulled out of the World Bank after paying off loans, China then lent Venezuela US$90bn (21.1% of its GDP) which Venezuela was not required to disclose to the World Bank
Geopolitics also influences a country’s decision to disclose its debt. As well as Venezuela, Russia doesn’t report fully to the World Bank. For instance sanctions against a country will limit its ability to borrow from the World Bank.
Weak government capacities – if a country is afflicted by civil war they are often unable to report their borrowing. Sudan – overrun by conflict – stopped reporting loan commitments by China after 2010.
Deliberate hiding of foreign borrowing – loans to a country’s SOE’s may not be reported to the World Bank as domestic accounting systems keep SOE debt distinct from central government public debt. Mozambique has deliberately hidden loans from Swiss and Russian banks.
Chinese loan contracts – confidentiality clauses in them prevent borrower governments revealing the terms or even the existence of debt. Although more evidence is needed to prove this claim.
Why does underreported debt matter? For policymakers in LMIC’s underreported debt is worthy of attention for the following reasons:
It can displace other public spending priorities that were planned and budgeted.
If a central government has a high level of debt exposure and this is underreported it will continue to borrow from lenders who are unaware of the risks. This can lead to an unsustainable accumulation of public debt.
It becomes very hard for for countries to resolve their debt crisis when they have such high underreported debt exposure. Creditors are likely to be less sympathetic to country’s who have underreported their debt exposure leading to litigation.
What is the Real Story of China’s “Hidden Debt”? by Deborah Brautigam and Yufan Huang. China Africa Research Initiative No. 6 2021.
China: Is it burdening poor countries with unsustainable debt? by Kai Wang – BBC Reality Check January 2022
Banking on the Belt and Road: Insights from a new global dataset of 13,427 Chinese development projects. Sep 29, 2021. Aid Data
Very good FT video with Martin Sandbu and James Kynge discussing the fact that although the Chinese economy has grown at an alarming rate over the last 40 years, will it become the global superpower? Some of the main points:
Global economy is now becoming more regionalised
From 1979 to 2018 China’s GDP growth rate averaged 9.5%
2,000 years ago everyone was poor – centre of gravity of global economy followed population size
Key change in the mid ’90s, when China began to allow the sons and daughters of farmers to migrate from the village to these big factory towns.
Liberalised global trade in 1980’s helped China access markets
China still very much a developing nations – ranks 61st in terms average per-capita income but got an excellent infrastructure.
China’s middle class approx 400m but that means approx 1bn of the population are poor
Middle income trap – getting from poor to middle income is a very different process from getting to middle income to high income.
Economy needs to change from a growth model based on accumulating labour and capital to a growth model led by technological development and technological progress.
China is either a global leader or at least close to the cutting edge, wind and solar power, online payment systems, digital currencies, aspects of artificial intelligence, 5G telecoms, drones, ultra-high-voltage power transmission.
Three major trading hubs – EU, US and China – with trade being more regionalised. China reluctant to lose export markets in EU and US as they are big drivers of exports
Three trading blocs will lead to protectionism and decoupling of supply chains. unless the EU, the US, and China can sort out their differences.
Over the last couple of decades property has been a significant driver of Chinese growth. The dependence on real estate is shown below and it is interesting to note that China was more dependent on housing construction than Ireland and Spain prior to the Global Financial Crisis.
Real estate related activities’ share of GDP by country, 1997-2017
Real estate has impacted consumer spending, employment of workers, investment and demand for raw materials. Investment in property has increased by 5% of GDP in 1995 to 13% in 2019 – 70% of which was residential. As for household consumption 23% is spent on real estate. How do you work out the value of output for residential investment and is there a problem with double counting?
GDP andthe Output Approach
Gross domestic product (GDP) is defined as the value of output produced within the domestic boundaries of a country over a given period of time, usually a year. It includes the output of foreign owned firms that are located in that country, such as the majority of trading banks in the market. It does not include output of firms that are located abroad. There are three ways of calculating the value of GDP all of which should sum to the same amount since by identity:
NATIONAL OUTPUT = NATIONAL INCOME = NATIONAL EXPENDITURE
The output approach is the value of output produced by each of the productive sectors in the economy (primary, secondary and tertiary) using the concept of value added.
Value added is the increase in the value of a product at each successive stage of the production process. For example, if the raw materials and components used to make a car cost $16,000 and the final selling price of the car is $20,000, then the value added from the production process is $4,000. We use this approach to avoid the problems of double-counting the value of intermediate inputs. GDP will, therefore, be equal to the sum of each individual producer’s value added.
The Economist look at a simple example of calculating the output approach using a house. House is built and makes up the whole economy. It is made of steel which is made from iron ore.
House is sold – $1m Steel is sold – $600,000 Iron ore is sold – $500,00
How significant is the construction industry? As the builders add $400,000 to the value – 40% of GDP. But if the whole economy is the house is it 100% as the iron ore is an ingredient of the steel that is bought by the builder.
The Economist mention a paper by Kenneth Rogoff and Yuanchen Yang “Has China’s Housing Production Peaked?” in which they take a different view on calculating the value of property. They use the input-output total requirement matrix with the economy divided into 17 industries – manufacture of machinery, construction, transport etc. The coefficients indicate the production required directly and indirectly in each sector when the final demand for domestic production increases by one unit. By adding up the coefficients corresponding to the construction industry they found that 1 unit of increase in the construction sector requires 2.12 units of inputs from forward (other contractors) and backward (raw materials) industries. In breaking down the construction and installation as part of Chinese real estate, investment is RMB 7,630 bn. Thus 2.12 x 7,630 = RMB 16,176 which is the total value.
Therefore in the original option the Rogoff and Yang model would include the iron ore and not the value of the house or the $400,000 value added by the construction industry. Therefore:
Steel $600,000 + Iron ore $500,00 – $1.1m
There way of removing double counting is unusual as if you add the construction output $1m, steel output $600,000 and iron ore output $500,000 there is a double and triple counting:
x2 = Steel – counted twice – purchase of steel and when house is sold x3 = Iron ore – counted three times – purchased in raw material form, when used to produce steel and when house is sold.
The way that is normally talked about in textbooks is to only count the added value at each stage of production. Iron ore $500,000 + steel $100,000 + $400,000 construction costs – $1m = 100% of GDP in a one-house economy.
Sources: China & World Economy / 1–31, Vol. 29, No. 1, 2021. Has China’s Housing Production Peaked? Kenneth Rogoff, Yuanchen Yang
The Economist: Free Exchange – A universe of worry. November 27th 2021
The presence of technology in rural China is evidence that it is not just the booming cities that are the sources of growth. Furthermore, it suggests that inequality which has been symbolised by the ‘country versus city’ divide is now starting to decline.
Since the 1980’s China has gone through massive growth but it hasn’t been evenly shared. Income inequality is traditionally measured by using the Gini coefficient.
The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg. Area between the Lorenz Curve and the 45° line ÷ Total area below the 45° line
The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
100 = maximum inequality where all the income of the economy is acquired by a single recipient.
* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.
In 2010 China’s Gini coefficient was 61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 49 in 2008 to 046 in 2015. Rural incomes have grown more quickly that their urban counterparts – in 2009 the average urban income was 3.3 times that of a rural worker but now it is 2.7 times. Many of those living in rural areas actually work in cities but are prevented from living there because of the strict residency system. Also companies have now been looking to the rural areas for cheap labour. However, in 2019 China’s official Gini is 46.5 (see graph), meaning that the expected gap will be 93% (ie, twice the Gini) of China’s average disposable income. Since average disposable income was 30,733 yuan ($4,449) in 2019, the expected gap would be about $4,138.
Since the economic reforms initiated by Deng Xiaoping over 30 years ago the Chinese economy has relied on investment growth to drive its economy. The World Bank has estimated that China’s annual growth rate over the last ten years has averaged approximately 9.8% of which expenditure on investment accounts for 6-8%. For future growth China cannot be dependent on this model of investment growth as, not only is it unsustainable, but the carbon footprint will become increasingly intolerable.
Between 1995 and 2010 China’s average growth rate was 9.9% but total investment in infrastructure and real-estate projects rose on average by 20% each year accounting for approximately 42% of GDP. In 2018 as a % GDP (5.57%), China’s average infrastructure spending in 2018 was 10 times higher than that of the United States and significantly higher than anywhere else in the world. What also has been increasing China’s investment rate is the declining efficiency of investment capital which is reflected in its high incremental capita-output ratio – annual investment divided by annual output growth.
Too much supply With the increased investment by companies too, there is an issue with overproduction in which producers tend to look to international markets as domestic demand has been exhausted. This assumes that the international market for goods and services is buoyant, but the impact of global financial crisis in 2008 resulted in surplus products, lower prices and falling profits. As with many developed countries, China has expanded credit in order to maintain demand, but this can lead to a repeat of what caused the crisis originally.
Evergrande Corporate sector debt in 2011 was 108% of GDP but this increased to over 160% in 2020. Most of the debt been brought about by new development including housing. This sounded alarm bells as the return on this investment will take a lot longer than planned when you consider that the occupancy rate of apartments is approximately 25%.
But an even more important reason behind the continued insistence on superblock planning is the reliance of Chinese city governments on land lease revenue. Sincethe tax-sharing reform of 1994, cities have been obliged to fork over an enormous percentage of their tax revenue to the central government. In order to generate enough revenue to cover social services and other costs, cities have come to rely heavily on China’s land-lease mechanism that allows the city to rent parcels of land to private developers for a period of 70 years. Thoughts from the Frontline
Evergrande and similar building developments have maintained social order and geared the revenue that officials have wanted. Capitalism with Chinese characteristics?
Unfortunately this building boom has led to many Ghost Cities in China where apartments lay empty and have done so for many years. Below you can see what one developer did when he ran out of money in 2013 – the empty towers were imploded in Kunming this year.
In a response to changes in both domestic and international economic developments, China will need to create a new growth model and ensure that development is based on improved quality and performance. An integral part of this development is to support and guide the private sector and ensure that it can enjoy an equal chance of success in competing against government-run organisations. By enlarging domestic demand and science and technological innovation there is more likelihood of acquiring a sustainable economic model that is not dependent on infrastructure development, housing and export markets.
Source: Thoughts from the Frontline – Xi’s Changing Plan. John Mauldin – 2-10-21
Below is a very good video with FT’s global China editor James Kynge and FT economics commentator Martin Sandbu. They discuss whether China will dominate global commerce or whether the world economy could split along regional lines. They also give a good account of the growth of China since the 1970’s. The main points from the video follow.:
China – major player in the global economy forever more but not the centre of a global economy, partly because other parts of the world will not be keen to let it and global economy starting to become more regionalised rather than globalised.
China growth – 1979 to 2018, GDP growth averaged 9.5 per cent a year.
Global centre of gravity – last 40 years has moved towards China
How did China grow? – late ‘70s market reforms and attracting foreign direct investment. Significant reason was in mid ‘90s, when the sons and daughters of farmers were allowed to migrate from the village to big factory towns. Western countries were pursuing globalisation at the time so China’s cheap production costs were a popular option
China still a poor country – ranks 61st and the world in terms of countries by their average per-capita incomes. China is still very much a developing nation. But it’s a very different type of economy, from the type of developed country that we can see elsewhere in the world. China’s middle class – 400m people. But there are a billion Chinese that are much less well-off.
China and the middle income trap – getting from poor to middle income is a very different process from getting to middle income to high income.
Chinese consumers last year spent about $7.3tn – greater than the entire GDP of the Japanese economy. But now I think we’re entering a very different phase. And that one is characterised by China’s emergence as a technological power.
China leads the world in many technologies. – wind and solar power, online payment systems, digital currencies, aspects of artificial intelligence, 5G telecoms, ultra-high-voltage power transmission.
Within the world trading system there are three hubs – Germany – China – USA. However trade relationships seem to be more regional within these hubs and it is suggested that China will become more dominant on a regional basis rather than global.
Concerned with a dependence on the Chinese market for its exports, New Zealand has agreed to the implementation of trade deals with the UK and the EU. Negotiations have been going in the background of rising tensions in the Pacific especially between China and Australia. However being too reliant on one market is a risky business as is depending on one resource to generate export income – the resource curse.
Background to New Zealand’s trade with China On 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China. However this is not the only first with regard to the relationship between the two countries. New Zealand was the first to negotiate a WTO accession agreement with China as well as the first to recognise China as a “market economy”. With this in mind, the Chinese government have acknowledged the support of New Zealand by granting them the first bi-lateral agreement with a western nation.
Today China is New Zealand’s largest trade partner, accounting for NZ$19bn (US$13.5bn) exports in the year to the end of March, a quarter of its total exports. The deal with the UK would involve tariff cuts on New Zealand farm exports including dairy, lamb and beef but this would be a concern for UK farmers especially as they have now left the protectionist EU subsidies.
New Zealand trade destinations – March 2020 – March 2021
Useful video from DW which looks at China which over 40 Years ago opened up its economy to the rest of the world. Although Chinese President Xi Jinping vowed to press ahead with economic reforms he made it clear that Beijing will not deviate from its one-party system or take orders from any other country. China has a system of market socialism in which the political system of communism exists in parallel with market capitalism and private ownership. The Irish Times Beijing correspondent Clifford Coonan makes some very good points.
On 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China, an economy which in the 1970’s was one of the poorest countries in the global economy. Today China is the world’s second largest economy and the fastest growing at a rate around 7% per year. China is now comfortably New Zealand’s largest export market, accounting for the largest share of our exports in all but a few sectors.
In 2017, China surpassed Australia and became our largest export market. But as exporters’ focus has switched to China, New Zealand’s exports have become less diversified, exposing exporters to concentration risk.
Westpac Bank reported in their November 2020 Quarterly Overview that while the New Zealand-China trade relationship is strong, China could in the future choose to disrupt New Zealand exports. Recently Australian exports into China had the following restrictions imposed on them:
80% tariff on Australian barley exports
ban on Australia’s biggest grain exporter
suspension of beef imports from five major meat-processing plants
China has also launched an anti-dumping investigation into Australian wine exports
Chinese cotton mills were told not to process Australian imports
At a high level, NZ-China trade flows reflect each economy’s comparative advantage and because of this trade relationship New Zealand faces less risk exposure. The risk exposure really depends on how important New Zealand’s export supply is to China and the other markets where the product/service can be sourced which includes other countries as well as domestically.
More Options = More Risk
China exposure risk by export sector
High risk It seems that tourism, seafood, and gold kiwifruit have the highest exposure. For these exports, essentially China has options (including domestically) for alternate supply. Education (universities and English language schools) also faces similarly high risk.
Also kiwifruit as New Zealand only account for 4.5% of China’s total fruit imports. China does have a competitive domestic horticulture industry which has started to grow Zespri’s Sungold kiwifruit variety.
Medium risk Wood and wider fruit sectors – have medium exposure risk. New Zealand accounts for a relatively significant share of global meat and wood exports, so China is reliant on New Zealand. Meat – China also recognises New Zealand as a reliable and safe exporter. Looking at the wider fruit sector, exporters remain relatively diversified and thus less reliant on China.
Low risk Dairy – in a strong position as China imports around 50% of its dairy produce from New Zealand. Wine – China is a small market for New Zealand, so the sector’s reliance on China is also small.
Overall the complementary nature of the NZ China trade relationship means New Zealand’s risk exposure is less than the outright level of exports would suggest. Chinaneeds New Zealand’s food (and wood) as it cannot produce enough (efficiently) on its own – while New Zealand remains the most competitive supplier. New Zealand needs China’s manufactured goods – while China remains the most competitive supplier.
Source: New Zealand’s exports to China: where is New Zealand most exposed? Westpac Economic Bulletin – 8 October 2020
I have blogged quite a bit on this topic and refer back to a very good video clip from PBS Newshour on how the Chinese authorities influenced the value of the yuan back in 2010.
Basically at 9.15am the Peoples Bank of China (Central Bank) and the SAFE (State Administration for Foreign Exchange) issues a circular to all the trading banks stating that this is the exchange of the Renminbi to the US$ for today. When companies sell goods overseas the US$ etc that they acquire are then exchanged for Renminbi with the Central Bank – therefore the Central Bank accumulates significant amounts of US$.
Today it could be said that China has done well economically relative to other countries largely due to its large trade surplus. However one would think that with a large trade surplus the yuan would increase in value as there is a greater demand for the currency in order to buy China’s exports. This raises the question as to whether China has been manipulated its currency in order to maintain its competitive edge in the export market.
When a country’s currency is getting too strong the governments/central banks sells its own currency and buys foreign currency – usually US$.
When a country’s currency is getting too weak the governments/central banks sells its foreign currency – usually US$- and buys its own currency.
For two decades until mid-2014 China’s prodigious accumulation of foreign-exchange reserves was the clear by-product of actions to restrain the yuan, as the central bank bought up cash flowing into the country. A sharp drop in reserves in 2015-16 was evidence of its intervention on the other side, propping up the yuan when investors rushed out. Since then, China’s reserves have been uncannily steady. This year they have risen by just 1%. Taken at face value, the central bank seems to have refrained from intervening. That is certainly what it wants to convey, regularly describing supply and demand for the yuan as “basically balanced”. Source: The Economist – “Caveat victor” – October 31st 2020
With the surge in China’s trade surplus the yuan has remained fairly stable and with this you would expect that there would be an increase in foreign exchange reserves with Chinese authorities buying foreign exchange with yuan.
A couple reasons why this may not be the case:
Commercial banks foreign assets have increased by US$125bn since April. The commercial banks are state owned so it is plausible that the government has used them as a substitute. Adding these foreign reserves to the offical figures suggests invention to keep the yuan at an artificially lower rate. There is the possibility that the central bank has special trading accounts at the state banks. Also exporters have wanted to keep their US$ as they are worried that the disharmony with the US could damage the yuan.
The central bank made it cheaper to short the yuan in forward trades – shorting a currency means that the trader believes that the currency will go down compared to another currency.
Chinese officials want the yuan to be volatile but within a narrow range in order to convince other countries that they are not intervening whilst persuading people in the market that they will intervene if necessary.
Caught between a rock and a hard place
The Peoples Bank of China (PBOC) are trying to protect domestic producers by keeping a weak yuan so to make Chinese products attractive to overseas buyers. At the same time they are trying to prevent domestic capital from flowing too quickly out of China to stronger currencies. However a longer term scenario is that China would like the yuan to be more prevalent as a currency in the global market. The yuan currently accounts for approximately 2% of global foreign exchange reserves, although by 2030 it is estimated that it will account for 5% to 10% of global foreign exchange reserve assets.
Source: The Economist – “Caveat victor” – October 31st 2020
Neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. While China’s economy is synonymous with exports, private consumption has been the largest component of Chinese GDP growth since 2014. With household spending at 39% of GDP in 2018, compared with nearer 70% for more developed economies such as the U.S. and the U.K., it also has considerable potential for further growth. Remember that Aggregate Demand = C+I+G+(X-M).
At the annual planning meeting last month China decided to focus on expanding domestic demand and achieving a major breakthroughs in core technologies. President Xi Jinping’s administration is looking at being self-sufficient in a range of technologies that have in the past been dominated by US firms. An obvious reason for the switch to domestic consumers is that with COVID-19 there is increasing instability and uncertainty around the international environment. A temporarily suspended trade war with the US has emphasised the importance of ending its dependence on foreign technology supplies. President Xi Jinping outlined a new dual circulation economic strategy which came about with the potential decoupling with the US and deglobalisation which would negatively impact the demand for Chinese exports. The dual circulation economic strategy consists of:
The importance of strengthening domestic demand
Technological innovation over closer integration with the outside world
Growth targets China has set targets for economic growth in its 5 year plans – this is its 14th 5 year plan. It is expected that annual average growth to be around 5% down from previous years where it was expected to be 6.5% – 7.5%.
Final thought China needs a lot more domestic consumption as newly produced goods will just become surplus to requirements. This will also mean increased levels of corporate debt.
Since 2010 there has been a significant increase in US oil production which has made them much less reliant on other oil producers – oil and gas production has increased over 50% and the US is the biggest producer of both. Being less reliant on oil imports means that the US can now have greater power of nations that they used to import oil from – Iran, Venezuela and Russia. According to The Economist being the biggest producer of gas and oil doesn’t mean as much today for three reasons:
There is no longer fossil fuel scarcity as the demand for oil might have already peaked and with an abundance of supply prices have dropped significantly.
Countries that are reliant on fossil fuels now realise that for the sake of climate change they need to change their energy source to a more natural option of power.
Solar panels and wind turbines generate electricity instantly whilst fossil fuels provide energy to a medium which then generates the electricity.
In considering the above this paradigm shift does more for China than the USA. Even though China is the biggest importer of fossil fuels it is a leading exponent of renewable energy at gigawatt scales. However China is in a very good position to secure oil imports as:
The increase in supply from new sources – Brazil, Guyana, Australia (LPG), and shale from the US – has meant a buyers market and this has suited the Chinese.
China is also in a very strong position with those struggling oil producing countries in that it has given them oil-backed loans.
China Development Bank lent two state-controlled Russian companies, Rosneft, an oil producer, and Transneft, a pipeline builder and operator, $25bn in exchange for developing new fields and building a pipeline which would supply China with 300,000 barrels of oil a day.
China energy sources:
Coal-fired – more than 1,000 gigawatts (GW) of generating capacity which makes it the world’s biggest carbon-dioxide emitter. Coal use is set to expand in the years to come.
Wind and solar capacity – 445GW, vast though it is by most standards, But China also has Hydropower capacity – 356GW of more than the next four countries combined.
Nuclear power – building plants faster than any other country; nuclear, which now produces less than 5% of the country’s electricity, is set to produce more than 15% by 2050.
Wind and Solar
Both wind and solar power require raw materials to be functional – non-ferrous metals like copper. Batteries require zinc, manganese and potassium. Although there is a lot of supply of these commodities it is the difficulty of getting them to the market that is the problem. China has helped here through domestic investment – it now produces 60% of world’s ‘rare earths’. It now looks overseas to Chile to secure lithium on which batteries now depend on.
China – produces more than 70% of the world’s solar modules and can produce over 50% of its production of wind turbines. It dominates the supply chain for lithium-ion batteries – 77% of cell capacity and 60% of component manufacturing. In 2019 China eased restrictions on foreign battery-makers – costs of solar panels and batteries have dropped by more than 85% in the past decade.
To maximise its electrostate power China needs to combine its renewable, and possibly nuclear, manufacturing muscle with deals that let its companies supply electricity in a large number of countries.
Source: The Economist – The changing geopolitics of energy. 17th September 2020
In doing most introductory courses in economics you will have come across the four functions of money which are:
Medium of exchange
Unit of Account
Store of Value
Means of deferred payment
Since the Bretton Woods Agreement in 1944 the US dollar was nominated as the world’s reserve currency and ranks highly compared to other currencies in the above functions. As a medium of exchange the US dollar is very prevalent:
60% of the world’s currency reserves are in US dollars
50% of cross-border interbank claims
After the GFC, purchases of the US dollar increased significantly – store of value.
Around 90% of forex trading involves the US dollar
Approximately 40% of the world’s debt is issued in dollars
n 2018 banks of Germany, France, and the UK held more liabilities in US dollars than in their own domestic currencies.
So why therefore is there pressure on the US dollar as the reserve currency?
The COVID-19 pandemic has closed borders and will inevitably lead to more regionalised trade, migration and money flows which suggests a greater use of local currencies. However China has made its intention clear that the Yuan should become a more universal currency. Some interesting facts:
Deposits in yuan = 1trn yuan = US$144bn
Yuan transactions have grown in Taiwan, Singapore, Hong Kong and London.
Investment by Chinese firms into Belt and Road project = US$3.75bn which was in yuan
China settles 15% of its foreign trade in yuan
France settles 20% of its trade with China in yuan
The IMF suggest that the ‘yuan bloc’ accounts for 30% of Global GDP – the US$ = 40%
However if the past is anything to go by the US economy has gone through some very turbulent times but the US dollar has remained firm. This suggests that how we perceive the US economy doesn’t seem to relate to the value of its currency.
Source: The Economist – China wants to make the yuan a central-bank favourite 7th May 2020
Like after the GFC in 2008 can China kick start the world economy? The FT’s global China editor James Kynge explains why China’s indebtedness means it is probably both unwilling and unable to launch a stimulus package like that of 2009. A lot depends on how quickly their own economy can bounce back and if it is a L U V W shaped recovery. Also can it act as a locomotive for the rest of the world. The video below contains some excellent graphs concerning China’s debt problem.
Although from 2011 the video below from the PBS Newshour shows reporter Paul Solman and Simon Johnson – former IMF economist and now at MIT. Johnson explains the different types of recoveries – L U V W shapes.
Below is a very good video from the FT outlining the latest disagreement between the USA and Saudi Arabia. Since 2017 both Saudi Arabia and Russia have been working together to prop up oil prices but have had a falling out over Saudi Arabia’s insistence on cutting oil supplies by 1.5 million barrels per day.
China the biggest importer of oil has cut back on oil consumption because of the coronavirus outbreak was bringing the economy to a standstill. Oil prices had their biggest one-day fall since the 1991 Gulf Crisis – some are expecting prices to go to $20 a barrel. What is at the heart of the fallout? Russia’s anger over sanctions targeted at its oil giant, Rosneft Trading. Washington imposed the sanctions last month over its continued support in selling Venezuela’s oil. Moscow was hoping to get Riyadh on its side to inflict economic pain on US shale producers, who Moscow feels have been getting a free ride on the back of OPEC+ production cuts. Shale production has pushed the United States into the number one spot as the world’s biggest producer of oil. Moscow hopes it could lead to the collapse of some of those businesses, if oil prices remain below $40 a barrel.
Below is a graph from the FT site that shows growth rates in leading developing countries and it makes a good comparison with the Eurozone and the World. Some emerging economies have, nevertheless, achieved high economic growth rates in recent years. China has witnessed particularly rapid economic growth and has become the second largest economy in the world behind the US. China’s increase in output has been driven by increases in investment and exports. This has been helped by a fall in the renminbi which makes Chinese exports cheaper. India’s growth rates has also been significant because of an increase in the labour force and advances in IT. Remember that ‘economic development’ is the process of improving people’s economic well-being and quality of life whilst economic growth is an increase in an economy’s output and the economic growth rate is the annual percentage change in output.
Here is a very good explanation from the FT on China’s exchange rate and the fact that the US no longer sees China as a manipulator of its currency – the Renminbi.
In May 2019 with the threat of US tariffs on Chinese goods the Renminbi depreciated in value – notice the chart is inverted which means that 1 US$ buys more Renminbi and the value of the currency falls. To look at it another way it takes more Renminbi to buy 1US$. This makes Chinese exports cheaper in the US.
In August 2019 when the US came good on their threat to impose tariffs the Renminbi fell below 7 Renminbi / US$ in order to protect its exports to the US. Below 7 Renminbi / US$ is seen as a major threshold – the last time this happened was after the GFC.
How do China authorities intervene to manipulate the Renminbi?
The Renminbi is not a floating exchange rate which it is not determined by supply and demand. The government manages its exchange rate in two ways:
Peoples Bank of China (Central Bank) can or sell US$ on the foreign exchange market – this depends on what they wish for the value of the Renminbi against the US dollar
People’s Bank of China permits the Renminbi to trade 2 per cent on either side of a daily midpoint set by the. Basically at 9.15am the Peoples Bank of China and the SAFE (State Administration for Foreign Exchange) issues a circular to all the trading banks stating that this is the exchange of the Renminbi to the US$. It is then permitted to trade 2 per cent on either side of the midpoint rate.
But is China a currency manipulator? According to the US Treasury a country is a currency manipulator when it does the following 3 things:
A significant bilateral trade surplus with the US.
A material current account surplus of more than 3% of GDP.
Persistent one-sided intervention in its currency market.
But in August the Chinese economy was slowing down and the Peoples Bank of China (Central Bank) provided stimulus to the economy which would depreciate the currency anyway. However with more trade talks between the US and China and both agreeing to no more tariffs and phase one of a trade deal, the value of the Renminbi against the dollar starts to appreciate. Although the US has no longer called China a currency manipulator it seems that it didn’t have the grounds to do so. This must be a concern for other trading partners with the US.
I have blogged quite a few times about the ‘Resource Curse’ but what about the ‘Trade Partner Curse’? New Zealand has been renowned for its primary exports but is it a concern that a third of every dollar earned in the primary sector comes from China. Dr Robert Hamlin (University of Otago) stated that based on experience no more than 20% of revenue should be earned from one source to ensure a buffer against changes in terms of trade and the economic conditions in the favoured country of destination.
Higher Terms of Trade – would be beneficial because the country needs fewer exports to buy a given number of imports. Lower Terms of Trade – country must export a greater number of units to purchase the same number of imports.
New Zealand which is traditionally dependant on primary exports usually faces instability which arises from inelastic and unstable global demand especially from China. By relying on the Chinese market, New Zealand exposes itself to greater risk of recessions in that market which may reduce in the demand for New Zealand products. Having numerous export markets means that there isn’t such exposure to economic volatility. Furthermore, countries that are commodity dependent or have a narrow export basket usually faces export instability which arises from inelastic and unstable global demand. The 2018-19 Ministry for Primary Industries’ Situation and Outlook report stated that from the year to June 2019 – total primary exports = $46.3bn but when you look at the breakdown from which country you get the worrying sign that more trade is going to China and less to other countries – essentially China is crowding out other markets:
China – $14.4bn Australia – $4.5bn USA – $4.2bn EU – $3.1bn Japan – $2.6bn
In 2017 China accounted for 24% of all New Zealand’s trade exports (see above). China also was the top export destination for New Zealand primary sector – 24% of primary sector exports went to China – by value: 25% of dairy, 43% of forestry, 31% of seafood and 21% of red meat.
China is taking a long-term approach to secure food supplies for its growing population by also buying NZ processing companies, giving it control of the supply chain. The reliance on China comes with risks that its economy remains strong. A downturn in their economy could have implications for New Zealand’s primary sector so it is important to have a diversified portfolio.