China’s CNPC Takes Advantage Of Total Retreat From Iran

WITH WASHINGTON AGAIN turning the financial screws on Iran, China stands to pick up a lot of the pieces that will get broken in the process.

The Iranian state news agency yesterday announced that China National Petroleum Corp. (CNPC) would take over Total’s 50.1% share of the $4.8 billion Phase 11 (of 24) development of the giant South Pars gas field, the world’s largest unitary gas reserve.

Terms, including financial ones, are unknown. Neither Total nor CNPC has made a public comment at this point. Confusingly, the Iranian oil ministry subsequently said that the terms of the contract remain formally unchanged, though that is not necessarily inconsistent with CNPC taking over.

Last year, in signing on, the French energy company became the first sizeable Western oil and gas company to invest in Iran following the lifting of sanctions on Tehran the previous year.

Now the Trump administration has pulled out of the nuclear agreement that enabled those sanctions to be lifted, fresh US sanctions have been imposed that force companies to choose between trading with Iran and trading with the United States.

For most Western companies, it is no choice at all. Total had already indicated that it would have to walk away from the South Pars project in the new circumstances.

CNPC, which has had a presence in Iran since 2004, already had a 30% stake in Phase 11. Iranian state-owned Petropars owns the rest.

The project is intended to supply gas to the domestic Iranian market from 2021 with excess to that requirement being exported, now assuredly eastwards rather than westwards. That gas could either be shipped or sent to China via the network of pipelines existant, under construction or planned across Central Asia and Pakistan.

China is already the largest market for Iran’s exports of crude oil and condensates, taking 24% of the total last year.

In addition, Chinese banks have extended $25 billion in credit lines for infrastructure investment, suggesting Chinese firms will easily be able to slip into the spaces vacated by Western multinationals and be in a position to negotiate favourable terms now they will be the only game in town for Tehran.

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Trump’s 3-D Re-engagement with Asia: Development, Defence and Diplomacy

THE BELT AND Road Initiative and the United States’ vision for the Indo-Pacific have a common end if different means.

Both are critical components of establishing the two powers’ respective influence over a region that is already well on its way to becoming the world’s economic centre. The former uses state-led infrastructure; the latter seeks to unleash the commercial might of private business, primarily US private business.

The Trump administration’s withdrawal from the Trans-Pacific Partnership, one of its earliest acts, cemented regional fears among the United States’ allies that the ‘America First’ rhetoric of the Trump campaign in 2016 presaged US withdrawal from the region, leaving a vacuum that China would need little encouragement to fill.

Whatever the validity of that fear — and US commercial imperatives were always going to mitigate against significant disengagement — Washington has had a struggle to reassure its traditional regional allies, who, after all, still have to live cheek-by-jowl with their huge neighbour, regardless of the tweet-du-jour coming from Washington.

The uncertainty surrounding the outcome of both Trump’s putative trade war with Beijing and his intervention in North Korea through a summit with North Korean leader Kim Jong-un have kept nerves taught.

While the political scientists hijacked the term Indo-Pacific from the marine biologists and oceanographers slightly more than a decade ago, it has only been over the past five years than it has gained currency with political leaders in the four key Into-Pacific powers, the United States, India, Japan and Australia. In the past year, it has started to take shape as an economic entity.

Today, US Secretary of State, Mike Pompeo, put some more flesh on those bones by announcing $113 million of investment in technology, energy and infrastructure investments in the region. This was, he said, a ‘down payment’ on a new era of US economic commitment to peace and prosperity in the region.

US officials say that this commitment is not aimed at countering the Belt and Road Initiative, but the underlining of the transparent and commercially led nature of the investments and the choice of phrases such as ‘strategic partnerships, not strategic dependence’ speak for themselves, as does Pompeo’s assertion that the United States would oppose any country that sought to dominate the region.

The money will go to improving partner countries’ digital connectivity and expanding US technology exports to the region ($25 million), helping regional energy production and storage (some $50 million) and creating a US government agency to support infrastructure development ($30 million). Much of the remainder of the money will go to a fund to let regional nations access US private legal and financial advisory services.

There will not be, it seems, a return of the United States to TPP. Pompeo said that the Trump administration would only be doing bilateral trade deals in the region.

He did, though, trail a coming announcement by US President Donald Trump on regional security assistance, reaffirming the administration’s emerging three-D approach to the region: development, diplomacy and defence.

Compared to, say, the $62 billion that China is providing for the China-Pakistan Economic Corridor and the estimated $1 trillion of Belt and Road Initiative projects underway, $113 million looks like small beer, and especially as much of the money will end up delivering export sales of goods and services to US firms. An America First foreign policy is still an America First policy.

The question becomes then, can US business leverage that into a credible competitive alternative model for regional development. Washington’s traditional regional allies will still take some convincing as much as they would like to have a strong counterweight in the United States to China’s growing regional power and influence.

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China’s P2P Lenders Are Failing At An Accelerating Pace

REGARDLESS OF MEASURES to ease credit markets to offset any slowing of GDP growth, authorities continue to crack down on the more risky parts of the financial system.

Few pieces of it are as hazardous and ill-regulated as peer-to-peer (P2P) lending.

China has the world’s largest P2P lending industry, worth approaching $200 billion (assets, i.e. loans outstanding) flowing through (now) some 2,000 platforms with 50 million registered users.

The ranks of the P2P platforms are thinning fast, as individual operations fail — some 80 in June (a then monthly record) and around a further 120 so far this month, taking the cumulative number of failures since 2013 above 4,000 according to the Yingcan Group, a Shanghai-based research firm that tracks P2P finance.

Savers are pulling their money from many of the remainder and investors have little confidence many will survive, both factors compounding the accelerating pace of failures. Meanwhile, authorities will be worried about the pick up in the pace of failures over the past week.

Their challenge is to stop a so-far contained panic spilling over into other parts of the $10 trillion shadow banking industry and thence into the main financial system.

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US States Most Hit By Chinese Tariffs May Not Matter Much Electorally

IT FITS WITH US President Donald Trump’s maximalist approach to most things that he has now said he is ready to impose tariffs on everything China sells to the United States — all $500 billion worth.

For those keeping score at home, Washington has currently announced tariffs on $200 billion of China’s exports, to be imposed in September, having started at $3 billion-worth introduced in March, followed by $46 billion announced in April and imposed in July, with $50 million in effect currently.

Beijing, for its part, has retaliated with tariffs on $50-billion of US exports, of which $34 billion have been in place since July 6.

It has been often said that Beijing has targeted US goods for political impact at the state level to apply leverage against the Republican administration. However, our man in Washington points out that those US states that are most affected by the tariffs imposed so far by China are not especially salient to Republicans’s prospects in November’s midterm Congressional elections in the United States, as the table below shows.

State % total exports affected by Chinese tariffs to date Senate House: No of Republicans at risk
Alaska 16.1 No election 0
Alabama 11.2 No election 0
Louisiana 10.0 No election 0
South Carolina 8.0 No election 0
Washington 6.9 Safe Dem 1
Illinois 3.2 No election 2
Kentucky 3.0 No election 1
Virginia 2.6 Safe Dem 4
California 2.3 Leans Dem 0
Maine 2.2 Safe Ind/Dem 0

Such is the scale of US-China trade that there is, of course, much scope for that pressure point to be intensified, and it may be that the impact of US tariffs on US multinationals’ supply chains will prove more politically impactful in Washington.

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Trade Tension And A Less Certain Outlook Cloud China’s Economy

THE INTERNATIONAL MONETARY FUND has held its growth projections for China unchanged even as it warned of growing downside risks to the global outlook.

The newly published July update to its World Economic Outlook puts its forecast GDP growth at 6.6% for this year and 6.4% for next. It cites softening world demand and regulatory and financial tightening as the reasons why.

The Fund’s forecast is in line with official figures for the second quarter released today by the the National Bureau of Statistics showing the economy growing by 6.7% year-on-year in the second quarter, the twelfth consecutive quarter of 6.7-6.9% growth.

Rebalancing, evidenced by private and public consumption contributing a record 78.5% of January-June GDP growth, continues as does excess-capacity reduction; mining sector output grew by at less than a quarter of the pace of overall industrial output.

Net export volumes shaved 0.7 of a percentage point off first-half growth as exporters and importers raced to beat the imposition of US tariffs. The effect of those are likely to be felt more severely in the second half of this year.

For its part, the IMF notes:

The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity and by raising uncertainty and taking a toll on investment.

To trade tensions, the Fund adds rising US interest rates and commodity prices, notably oil, as among the most concerning downside risks to the global economy.

The Fund’s prescription that ‘avoiding protectionist measures and finding a cooperative solution that promotes continued growth in goods and services trade remain essential to preserve the global expansion’ may find more resonance in Beijing that Washington these days, as will its call to preserve global economic integration under an open, rules-based multilateral trade system.

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China’s Western March Into The Middle East

President Xi Jinping (C, front) poses for group photos with Kuwaiti Emir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (6th L, front) and heads of delegations to the eighth ministerial meeting of the China-Arab States Cooperation Forum in Beijing, July 10, 2018. Photo credit: Xinhua.

CHINA’S INTERESTS IN the Middle East are quietly expanding, driven by the region’s growing role as a source of energy and as a recipient of Belt and Road Initiative (BRI) investment.

The eighth meeting of the China Arab States Cooperation Forum, (pictured above) held with some fanfare in Beijing this month, brought that into focus, with Beijing promising $23 billion of funding to its guests.

Such large-headline-number funding packages (not that $23 billion is that large by the standards of these things) tend to comprise money already spent or committed and money that will never materialise. But $150 million that will likely be shelled out is the sum allocated to ‘social stability’. As in Africa, Chinese investments in the Middle East are at risk from social and political developments in the region. (See Libya, Zambia and Angola for precedents.)

That $150 million promise will probably manifest itself as sales of Chinese security equipment and the training to use it. Afghanistan provides a rudimentary model.

And, as in Afghanistan, China is recognizing it has to play a more active diplomatic and security role in the Middle East, and has been doing so — incrementally — since at least 2012-16, part of the ‘March West’ to counter the ‘Pivot East’ of the then US administration of Barak Obama. This was outlined in a policy paper published at the start of 2016.

The bulk of the latest tranche of offerings, $20 billion, is earmarked for loans for reconstruction and development, though that is a relatively modest sum in overall BRI investment. What the money also does is help Beijing straddle the historical rift in the region between Saudi Arabia and Iran.

China is unlikely to break its ties with Tehran and will continue to be a market for Iranian oil as restored and new US sanctions cut off sales to the West. The Trump administration’s withdrawal from the Iran nuclear deal, which Beijing played an instrumental role in setting up, is likely to leave Chinese firms better positioned commercially than they were on the ‘last man standing’ principle as Western firms are driven to retreat from Iranian business by Trump’s reversal of policy.

But equally, China needs good working relations with Riyadh and its allies, whose influence in northern and eastern Africa touches directly on China’s greater economic interests in those regions, too (from oil fields and copper mines to China’s first overseas military base in Djibouti and anti-piracy operations off the Horn of Africa).

Outreach to the Gulf States also balances within the Arab world China’s long-standing relationship with Egypt. The $65 billion memorandum of understanding for investment cooperation that Saudi King Salman signed during a visit to Beijing in March last year had already underlined this.

China sells Saudi Arabia the weapons and military kit that the United States will not out of deference to Israeli objections. One of only thee Chinese armed-drones manufacturing plants outside of China is in Saudi Arabia.

One complication for the countries of the Middle East is Beijing’s repressive treatment of its Muslim minority, and particularly the Uighers. However, few Middle Eastern leaders have spoken out publicly on this — a sign of the importance of the growing ties in other areas and China’s ability to use its economic clout to dampen international criticism of its domestic policies.

The more significant issue for Beijing in the region will be the one that has confronted the other outside powers that came before it: it is difficult to maintain a neutral position in a part of the world where there are so many overlapping and longstanding rivalries and conflicts while stepping up diplomatic and security engagement beyond the purely mercantilist.

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No Endgame In Sight As China-US Trade Tension Escalates

THE SLIDE IN commodity prices over the recent day or so portends investor concern about the prospects for and impacts of a US-China trade war that has yet entirely to materialise in currency and equities markets.

Energy markets, in particular, are skittish. Between them, China and the United States account for one-third of world oil demand, which will fall if the spillover from the trade measures taken so far slows global economic growth. Traders are also starting to speculate about the possibility of a seismic realignment of global energy markets should China price US energy out of its market.

Metals markets were also hit, as China is the biggest consumer of most metals, used as raw materials for its exports. Similarly, agricultural commodities, such as soybeans.

The White House announced on Wednesday an additional $200 billion-worth of tariffs to be introduced in September at 10% on for the most part Chinese consumer-goods exports, but also components and semi-manufactures.

Beijing’s reaction was predictably along the lines that Washington’s trade actions would hurt everyone; seventy of the top 100 exporters from China are foreign companies, Zhu Haibin, chief China economist at JPMorgan, told the Financial Times.

The commerce ministry said that it would have no choice but to respond to the latest US move. It also said that it would take the matter to the World Trade Organization, a jibe at US President Donald Trump’s reported wish to remove the United States from the world trade body but not one that veers too far from the generally measured tone taken so far (to the point of sanctimoniousness).

A question for this Bystander is, what is the Trump administration’s real endgame?

It says the tariffs are to get China to end its ‘unfair’ trade practices and open its markets. But the president in his public comments has fixated on the size of the US merchandise trade deficit with China. That would imply a grand trade deal between the two nations that would reduce the headline number of that deficit.

That would give the US president a trade war win that would be straightforward to promote to his electoral base. However, there is no sign at this point of such a deal being in the making.

But it would not solve the other complaint that the United States has against China, over technology transfer, both as a quid pro quo required by China for foreign firms for market access or through straightforward theft of intellectual property.

Washington has a legitimate case on both fronts. It might be able to use its trade war as leverage to get concessions on the first, under the rubric of a deal over market opening.

However, tariffs do little to remedy the second. With technology development so fundamental to China’s economic future, Beijing will hold out to the last over striking any deal that would be effective in curtailing something that it anyway denies doing.

In 2015, President Xi Jinping reached a ‘common understanding’ with Trump’s predecessor President Barack Obama that their governments would hold back on cybertheft of intellectual property for commercial gain.

The formulation was always vague — Xi’s definition of its scope was much narrower than Obama’s — and there was no formal mechanism of verification or enforcement. Both that and its provenance would prevent its embrace by the current US president.

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