Category Archives: Trade

China Looks To Make A Razor-Sharp Deal For Saudi Aramco

Chinese Vice Premier Zhang Gaoli (L) meets with Saudi King Salman bin Abdulaziz Al Saud in Jeddah, Saudi Arabia, Aug. 24, 2017. Photo credit: Xinhua/Wang Ye

THIS BYSTANDER RECALLS a classic television advertisement from the 1970s in which US businessman Victor Kiam said he so loved using a Remington electric razor that he bought the company. China’s state-owned oil companies so love buying Saudi oil they are reportedly thinking of doing the same.

The Reuters news agency recently reported that the kingdom is evaluating the sale of 5% of its state oil company, Saudi Aramco, to a Chinese consortium comprising PetroChina and Sinopec, state-owned banks and China’s sovereign wealth fund. This would be as an alternative, or possibly a precursor to an initial public offering (IPO) of the Aramco’s shares on one or more stock markets, a listing that would likely be the biggest share sale ever and expected to raise $100 billion. The Chinese consortium would presumably have to come close to matching that number.

Ever since the Saudi government said it was looking to sell a small stake in Aramco in 2018 to kick start the funding of its economic diversification programme, Vision 2030, the world’s leading stock exchanges have been bidding for what would be both a large and a prestige bit of business. Some suitors have been ready to turn a blind eye to infringements of their own rules in their desire to get the listing.

A direct sale of a stake to China, the biggest buyer of Saudi oil, would make any eventual listing more likely to happen in Shanghai or Hong Kong than New York or London, which would be a considerable feather in the caps of either exchange.

Such a deal would also strengthen two-way Saudi-China trade and investment ties. In August, the Saudi energy minister said he expected to conclude a deal next year with PetroChina for the Saudis to invest in a new 260,000-barrels-a-day oil refinery in Yunnan that started operations in July. That investment was reported in April to be a 30% stake valued at $2 billion.

A similar arrangement could be struck with China National Offshore Oil Corp, (CNOOC), which is building a 200,000-barrels-a-day refinery in Guangdong province.

Vice Premier Zhang Gaoli (seen above on the left) visited Saudi Arabia in August, meeting Saudi King Salman (on the right) and Crown Prince Mohammed bin Salman in the Red Sea resort of Jeddah. This followed an exchange of official visits in 2016, with the king in March returning a visit by President Xi Jinping in January in which the two countries agreed to upgrade the bilateral ties to a comprehensive strategic partnership.

China is already Saudi Arabia’s largest export market, at $23.6 billion (2016 figures), all but a slither of it crude and refined oil and petrochemical products, and accounting for 15% of Saudi export volumes. China is also the kingdom’s leading source of imports, at $18.7 billion, accounting for 14% of total import volumes. Machinery accounts for 36% of Chinese imports, followed by metals (13%) and textiles (12%).

However, since late 2015, when China changed its rules on where independent refiners could buy crude, Russian suppliers have been vying with the Saudis to be China’s leading source of crude. That generates competition that will be welcome in Beijing for the effect it will have on prices, but another reason that Saudi might be prepared to cut investment deals to secure its exports.

 

Update: Aramco’s chief executive, Amin Nasser, told the US business news TV channel CNBC in an interview broadcast on October 23 that an IPO was on track for the second half of 2018. Nasser also denied a Financial Times report that Aramco was talking to ‘the Chinese or others’ about delaying the share sale. He was not pressed, however, on whether a separate deal with investor groups could co-exist with a public share sale.

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North Korea: Trade, Opportunity And Russia

Rajin Port, North Korea, 2011. Photo credit: Laika ac. Licenced under Creative Commons.

EVEN WITH UN trade sanctions against North Korea in place, China’s trade with North Korea rose 15% in the first five months of this year to just over $2 billion, according to customs data.

China is certainly buying less from North Korea, principally because it suspended coal purchases in February in response to North Korea’s fifth nuclear test in defiance of UN demands. However, it is still importing iron ore.

In the other direction, more Chinese oil (up 18% year-on-year) and goods, notably telephone equipment, textiles, soybean oil and vehicles, are flowing into North Korea.

The first-quarter data, which show a 37.4% rise in total trade, has drawn the predictable irascible tweet from US President Donald Trump, whose administration is showing signs of increasing frustration with Beijing’s attempts to be cooperative in reining in Pyongyang’s nuclear weapons ambitions.

The debate is intensifying in Washington over how honest an ‘honest broker’ Beijing is over North Korea. Is it, too, as frustrated with Pyongyang as its public statements suggest? Or is it less than neutral, still supporting Kim Jong-un’s regime to greater or lesser extent.

The darker conspiracists in Washington believe Beijing is ‘running’ North Korea with the end of keeping the peninsula on the brink of instability to keep US regional allies diverted from China issues while making China, as North Korea’s only ally and main aid donor, the essential partner in any brokered solution that never comes.

This Bystander thinks that a conspiracy theory too far, not least because subcontracting the maintenance of managed instability to the agency of the Kim dynasty seems such a high risk.

More likely, to our mind, China is protecting its red-line position. Beijing does not want the Pyongyang regime to collapse for fear of the outcome being a US-aligned unified Korea on its border, over which an influx of North Korean refugees, possibly starving, will already have poured.

Thus it will lean on Kim, but not heavily enough to topple him. This leaves the United States squeezed between taking direct action — which is everyone’s last resort, though one that Trump may resort to more readily than others — and imposing further sanctions, most likely next targeted at more banks and companies, including Chinese companies, thought to be financing North Korean trade, especially illicit trade.

Remittances by North Koreans working abroad are another potential target. A UN report in 2015 estimated that there were more than 50,000 North Koreans working abroad in mining, logging, textile and construction industries around the world, generating  $2.3 billion a year for the regime.

Which is one of the points where Russia enters the picture. Along with China, Russia is the main employer of North Korean workers. Thirty thousand North Koreans are estimated to work there.

Earlier this month, the Russian ambassador to the UN rejected the United States’ call for new sanctions against North Korea following its latest missile test. Instead, though it supported previous UN sanctions, it repeated China’s calls for restraint on all sides, similarly worried about the risk of instability that could be triggered by a strict sanctions regime.

Washington views the Russian position on North Korea, which is suspects to be opportunistic, sceptically, and as a sanctions busting. Last month, it imposed sanctions on two Russian companies, one for allegedly supplying a North Korean firm involved in the nuclear programme, the other for shipping petroleum products to North Korea.

Russia’s trade with North Korea is minimal: total trade last year was worth $77 million. That is a deceptive figure because much of the trade goes via China. Up to $500 million would be more realistic.

Still relatively tiny (and nothing compared to what it was in Soviet days). However, it jumped in the first quarter of this year, by 85% year-on-year, according to Russia’s customs service. The bulk of this consisted of Russian exports of coal ($26.7 million-worth) and oil ($1.2 million-worth).

Often forgotten, there is a railway that runs from the Russian side of the short Russia-North Korea border across the Tumen river to Rajin (seen above in a 2011 photograph), a North Korean port from which Siberian coal is shipped. New port facilities had been built in a joint venture with the South Koreans until they pulled out last year.

Sanctions-busting fuel deliveries to compensate for those lost from China also get through to North Korea clandestinely via this route. North Korean coal reportedly goes in the opposite direction. The line has four rails to accommodate both Russian and Korean gauge rolling stock.

However, the recent spike in Russian exports goes against the trend of falling exports over the previous three years, a trend mirrored by China, as it happens.

Last week, during President Xi Jinping’s visit to Moscow, he and his Russian counterpart President Vladimir Putin said the two countries would co-operate to defuse the North Korean crisis. Russia will not undercut Beijing’s leadership on the issue, but it is steadily inserting itself into the equation and is likely to be opportunistic, adding a further layer of complexity and uncertainty to an already seemingly intractable situation.

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China Invests Abroad

CHINA IS NOW the second largest investing economy. This reflects Beijing’s ‘Go Global’ policy that delivered a surge of cross-border M&A purchases in manufacturing and services by Chinese firms last year while individuals stepped up their purchases of real estate in developed countries. Chinese firms accounted for 8% of inbound cross-border M&A in the United States last year, worth a record $29 billion.

But China is also the world’s third favourite destination for foreign direct investment (FDI) after the United States and the United Kingdom. According to the UN Conference on Trade and Development (Unctad)’s newly released World Investment Report, 2017, China had FDI inflows of $134 billion last year. That was 1% down on the previous year, mostly because of lower inflows into the financial sector.

However, Unctad notes that:

In non-financial sectors, [China] recorded 27,900 new foreign-invested enterprises (FIEs) in 2016, including 840 with investments above $100 million. In addition, 450 existing FIEs significantly expanded their businesses, undertaking additional investment above $100 million. Non-financial services continued to underpin new FDI, with inflows in the sector growing by 8% while foreign investment into manufacturing continued to shift to higher value added production. In March 2017, for example, Boeing started to build an assembly facility in China, the first such project outside the United States.

Inflows via Hong Kong fell much more sharply, from $174 billion to $108 billion over the same period, though 2015 was an exceptional year and 2016 represented something of a return to trend.

China’s outflows increased to $183 billion in last year from $128 billion in 2015. Those via Hong Kong slowed slightly, from $72 billion to $68 billion.

The Unctad report identifies state-owned multinationals as major players in global FDI. China is home to the most — 257 or 18% of the total, way ahead of second-ranked Malaysia (5%). In 2016, the report notes, greenfield investments announced by state-owned multinationals accounted for 11% of the global total, up from 8% in 2010.

The investments of China’s state-owned multinationals “are instrumental in the country’s outward FDI expansion strategy”, Unctad says. It notes that generally the investments of state-owned multinationals tend to be weighted more heavily in financial services and natural resources than those of multinationals as a whole.

Seven of the 10 largest financial state-owned multinationals are headquartered in China, as are four of the 25 largest non-financial ones — China National Offshore Oil Corp. (CNOOC), China COSCO Shipping Corp., China MinMetals Corp. and China State Construction Engineering Corp. (CSCSC).

China remained the largest investor economy in the least developed economies, far ahead of France and the United States, and showed more interest than most in investing in transition economies, and particularly landlocked ones like Kazakhstan and Ethiopia, though the sums remain relatively small. However, state-owned oil firm Sinopec acquired the local assets of Russian oil company Lukoil for $1.1 billion.

A future focus of China’s investment will be via its One Belt One Road (OBOR) initiative. Beijing has already signed around 50 OBOR-related agreements with other nations, covering six international economic corridors. FDI to Pakistan, for example, rose by 56% year-on-year last year, pulled by China’s rising investment in infrastructure related to the China-Pakistan Economic Corridor, one of the most advanced OBOR initiatives.

Unctad notes:

Stretching from China to Europe, One Belt One Road is by no means a homogenous investment destination. However, investment dynamism has built up rapidly over the past two years, as more and more financial resources are mobilized, including FDI.

A number of countries located along the major economic corridors have started to attract a significant amount of FDI flows from China as a result of their active participation in the initiative.

Central Asia, unsurprisingly, is at the leading edge of this. The implementation of OBOR is generating more FDI from China in industries other than natural resources and diversifying the economies of various host countries.

Chinese companies already own a large part of the FDI stock in extractive industries in countries such as Kazakhstan and Turkmenistan. The ongoing planning of new Chinese investments in the region, however, has focused on building infrastructure facilities and enhancing industrial capacities. In addition, agriculture and related businesses are targeted. For example, Chinese companies are in negotiation with local partners to invest $1.9 billion in Kazakh agriculture, including one project that would relocate tomato processing plants from China.

South Asia benefits from the development of the China-Pakistan Economic Corridor.

This has resulted in a large amount of foreign investment in infrastructure industries, especially electricity generation and transport. For instance, Power Construction Corporation (China) and Al-Mirqab Capital (Qatar) have started to jointly invest in a power plant at Port Qasim, the second largest port in Pakistan. In addition, the State Power Investment Corporation (China) and the local Hub Power Company have initiated the construction of a $2 billion coal-fired plant.

OBOR also stretches to North Africa. Indeed, it seems decreasingly to recognise any geographic limits to its ambition and scope.

Egypt has signed a memorandum of understanding with China, which includes $15 billion in Chinese investment, related to Egypt’s involvement in the initiative. It is undertaking a number of cooperative projects under the One Belt One Road framework, including the establishment of an economic area in the Suez Canal Zone and investments in maritime and land transport facilities.

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Industrial Policy’s Global Return

INDUSTRIAL POLICY HAS long been a strong pillar of China’s economic agenda but a pariah in the Anglo-Saxon economies of the West.

It made a return there last August when the UK’s new Prime Minister Theresa May outlined her vision of a post-Brexit state-boosted industrial renaissance some three decades after the UK’s previous female prime minister, Margaret Thatcher, had killed it off.

Now, in the United States, President-elect Donald Trump is picking up the torch with the creation of a White House National Trade Council to facilitate industrial policy. Peter Navarro, a University of California economist who is a sceptic of trade with China, is its proposed head.

This suggests that a more populist approach to trade and manufacturing is in the offing from the Trump administration. US trade policy will more likely be used to promote domestic production and job creation, particularly in infrastructure and defence, two areas where ‘Buy American, Hire American” is easiest to implement.

That would represent a significant change from international trade as a foreign policy tool that it was under the Obama, Bush and Clinton administrations.

It remains to be seen what this means in practice, and more importantly, where the new council fits into a Washington power structure that has to accommodate on economic matters the National Economic Council, the National Security Council, the Treasury, the U.S. trade representative and the commerce department.

Beijing, already sideswiped by Trump’s election win, will take its time to pick that apart.  Trump’s proposed commerce secretary, Wilbur Ross, the soon to be octogenarian investor who made his billions from corporate restructuring of distressed companies, is this Bystander’s pick to emerge as the key figure among that group. But Navarro’s appointment will not offer Beijing much cheer.

Navarro is also an advocate of the theory, controversial among economists, that trade deficits are a drag on growth. The United States ran a $366 billion merchandise trade deficit with China last year.

This Bystander will be watching carefully for signs of the Trump administration seeking to implement a ‘border tax’. This is taxation regime within corporate tax that Navarro and Ross have argued is needed to offset what they say is the hurt other countries’ domestic tax systems impose on US exports, say through the imposition of value-added-taxes that have no equivalent in the United States.

In short, they argued that a 20% border tax could eliminate the overall US trade deficit (if not all of the one with China). Imports would become 20% more expensive to cover the new corporate tax liability while exports, which would be exempt, would be roughly 12% cheaper because of the tax savings exporters would get.

The net effect of what in effect would be an across the board import tariff of 20% and an export subsidy of 12% would be equivalent to a 15% change in the value of the dollar.

Given that the United States was a $482 billion export market for China last year, that would give a very different hue to the China-US trade relationship. Not surprisingly, talk of a coming China-US trade war is in the air in both countries.

That may be of less import to China than once might have been the case now that it is rebalancing its economy away from cheap-export-led growth and towards domestic consumption, and that trade in services is becoming as important as trade in goods.

Nonetheless, this is probably not a moment to be sanguine about the prospects and the negative impact on China’s growth of a border tax could be material, and felt far wider than in China alone.

However, the new battle lines between Beijing and Washington may be drawn up over national champions as both countries seek to dominate the new industries that will shape the coming global economy. And that will come down to which nation will be better at picking winners — the perennial Achilles Heel of industrial policy.

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Xi Blows Hot And Cold Over Apec

The Asia-Pacific Economic Co-operation Summit (Apec) in Beijing brought together the leaders of the world’s three biggest national economies, President Xi Jinxing, Japan’s Prime Minister Shintaro Abe and U.S. President Barack Obama. It was not a particularly happy confluence.

While Xi and Abe shook hands  — the first meeting of the leaders of China and Japan for more than two years — the rest of the body language was scarcely cordial. Icy, in fact. The tension over the two nations’ maritime territorial dispute in the East China Sea won’t easily be shaken off.

Obama arrived bearing gifts, extensions to the terms of multiple entry visas, from one year to 10 for business people and tourists, and to five years for students. But while China and South Korea agreed to sign their proposed bilateral free-trade agreement (FTA), the U.S-led Trans-Pacific Partnership (TTP) continued to tread water. Nor did the U.S. make any apparent progress in its negotiations to update the 18-year old agreement it has with China on trade in high-tech goods and services.

If anything, in rounding out its FTAs with Japan and the U.S. by signing one with China, South Korea has less need to pursue membership of the TTP with any urgency. While that could be read as score one for Xi, similarly Seoul also has less need to pursue the Beijing-proposed rival to the TTP, the Free Trade Area of the Asia-Pacific (FTAAP). Washington has been, behind the scenes, resisting that determinedly, though it couldn’t prevent Apec leaders agreeing to a two-year study of the scope of an FTAAP. That wasn’t as much movement towards a drawing up a roadmap as Beijing wanted, but it was still more ground than Washington had wanted to yield.

The summit was Xi’s show, his first big international meeting since he assumed power, and an opportunity to show how China is increasingly dictating the region’s pecking order. In the group photograph at the end of the summit, Russia’s Vladimir Putin is standing next to Xi on his right. The two countries signed a big oil-and-gas deal ahead of the summit and promised further cooperation. Obama is down the line to Xi’s left, halfway to the end of the front row. Abe is relegated to the second row.

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China’s February Export Slump: New Year Distortion Or Full-Year Herald?

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LUNAR NEW YEAR always makes forecasting China’s February export numbers something of a lottery. Yet few if any foresaw the 18.1% decline just announced.

Throw in slowing credit growth, the National People’s Congress meeting going as expected — i.e. offering no new answers of how both a 7.5% growth target for the year and reforms to rebalance the economy will be achieved — political tension over Ukraine and the mystery disappearance of the Beijing bound Malaysia Airlines’ passenger jet and it is scant surprise investors, already jittery about growth prospects, have taken umbrage. Shares hit a five year low in Shanghai and the yuan weakened against the dollar, with the ripples being felt in Hong Kong and in U.S markets beyond.

Most forecasters had expected an increase in exports for February, if a modest one. The most recent official purchasing managers index had pointed to weakness in new export orders, thought to be a consequence of the untypically harsh winter in the U.S., China’s second largest export market after the E.U. In addition, exporters tend to front-load their deliveries ahead of the New Year’s holiday when factories are closed for a week or so.

Nonetheless, across January and February taken together exports were down 1.6% while imports rose 10%. That has taken a chunk out of China’s trade surplus. February’s was the largest monthly trade deficit in two years. Across the two months, the surplus was $8.9 billion, down 79.1% on the same period a year earlier.

The question, of course, is whether this is all just a holiday induced blip in long-term deceleration of the growth rate or harbinger of a harder than previously expected braking of the economy. The March trade figures will be looked at closely for clues to the answer.  However, exporters will have to go at it if they are to make good the forecast of the State Information Center, a government think tank affiliated to the top economic planning agency, the National Development and Reform Commission. It is forecasting an 8.1% growth in exports in the first quarter, and about 7.5% GDP growth. Investors would be delighted, and surprised.

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China tightens clampdown on fake trade invoicing

HOT MONEY COMING into China in pursuit of rising property prices and in expectation of further yuan appreciation has long concerned authorities for fear it will help inflate bubbles. Periodic efforts are made to clampdown on those speculators skirting the rules for legitimate foreign exchange transactions. In the latest one, the State Administration of Foreign Exchange (SAFE) says it is looking into trade financing to ensure there is real trade behind the foreign exchange being requested.

In July, it was revealed that some Chinese export companies were in effect disguising hot money as trade payments, writing up fake invoices so they could skirt capital controls and make a fast buck speculating on the yuan’s rise. This was going on on a sufficient scale to be affecting the official trade figures.

SAFE cracked down on those, warning trading houses that were cooking their books to get them in order in short order. But it is clear the chicanery, or something like it, is continuing. SAFE lambasted the commercial banks for not being sufficiently vigilant in rooting out the practice among their customers, saying it would now carry out its own assessments. State media says penalties for abuses will be increased — and imposed on both the companies and their bankers.

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