There is no US consumer recovery...implications for China

Last week's Flow of Funds report from the US Federal Reserve showed that US total credit expansion, or the relative lack of it, continued to disappear down the plughole despite the government's mighty efforts to put the country back on the path to prosperity (see chart below).

The current recovery, based in very large part to manufacturers starting to ramp up their inventories, simply cannot be sustained while credit is disappearing at this debilitating rate.
















The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row.

Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row. The government's creation of credit, or stimulus, as big as it has been is barely propping up the whole economy overall.

Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was enough to stir the government into rapid response mode with quick relief measures.

The omens are not good for China's exporters. 15 months after the height of the financial crisis, the trend is now clear. US consumers who make up 70% of US GDP are just not in the mood to spend. No wonder the Chinese premier is reluctant to let the value of the yuan appreciate significantly. This will put pressure on the exporters to raise their prices to the buyers and could be the final straw that leads to bankruptcy and spills more unemployed factory workers onto the city streets.

With demand conditions probably permanently stuck in a rut, who dares to prick any of the current China bubbles ranging from property to stockmarkets?

China's global shopping spree for oil

China is hunting for resources from Canada to Nigeria to support expansion in the world’s fastest growing major economy. It's global pursuit of oil and gas has grown to a crescendo. China's state oil giants are stepping up their pursuit of overseas assets as domestic oil output stagnates and supply of natural gas fails to keep pace with the growth in demand. Yet their aggressive moves are getting precious little media attention.

Since 1993, right about the time that China started importing oil, the big three petroleum companies have started a major push in foreign countries through equity-type investment and contractual management. The first salvo was on September 6, 1994 when CNOOC (China National Offshore Oil Corporation) acquired 33% of Arco’s share at the Malacca oil field in Indonesia. After the Chinese oil companies became publicly traded in 2000 and 2001 their acquisition of foreign oil and gas assets has become more vigorous. By September 2009, China’s oversea oil and gas investments were spread among 28 countries and 73 projects.

China’s latest purchase came last month in February when PetroChina (part of CNPC)paid US$1.7 billion to buy a 60% stake in a Canadian oil sands operation from Athabasca Oil Sands Corp. The production from the oil sands investment is expected to be as high as 500,000 barrels per day under full development. The Canadian acquisition is among the latest in China’s shopping spree for global oil and gas assets. Those purchases are further increasing the size of China’s biggest oil companies - CNPC (China National Petroleum Corporation), Sinopec and CNOOC which are now among the largest oil companies in the world. Last November, Petroleum Intelligence Weekly published its list of the world’s 50 biggest petroleum companies. China’s three biggest energy companies were ranked, respectively, as number 5, 25, and 48.

China has seized the opportunity of the global economic crisis and the decline in oil prices to solidify its energy security. It sees access to foreign oil as a crucial element of its economic future. Last year, the country imported 50% of its oil for the first time.

Furthermore, in 2009, production by Chinese companies operating overseas oil and gas fields exceeded 800 million barrels (2.2 million barrels per day, about 57% of total imports). Meanwhile, China has become the biggest buyer in the global oil and gas M&A (mergers & acquistions) market. Chinese companies announced 11 acquisitions with a total value of $16 billion. The biggest deal was Sinopec’s purchase of Swiss-based Addax Petroleum for US$7.5 billion in June 2009, by far the biggest acquisition in China’s oil and gas trading history.

Other important highlights of recent Chinese overseas oil and gas purchases include:
- 2006-09: CNOOC and Sinopec’s acquisition of three blocks in Angola for US$1.8 billion
- Apr.2009: Xinjiang Guanghui Group US$44 million acquisition of 49% stake of Kazakhstan TBM Co. to jointly develop the eastern Kazakh oil and gas blocks in the Zaysanskaya region;
- May 2009: China Development Bank’s $10 billion contract with Brazilian state oil company Petrobas for “petroleum and loan exchange” which allows China to get 150,000 barrels per day for 10 years;
- May 2009: PetroChina’s US$ 1 billion acquisition of 45.5% percent of Singapore Petroleum Co., Ltd;
- Sept./Oct. 2009: China Investment Co.’s US$939 million for a 11% stake of global depositary receipts of Kazakhstan's national oil company and US$300 million for a 45%stake of the Russian Nobel Oil Group;

Through these deals, China has steadfastly increased its potential oil supply by about 1.5 million barrels per day.

To facilitate oil and gas imports, China is building pipelines. Under construction or already under partial operation are the China-Russia crude oil pipeline, China-Myanmar oil and gas pipelines, and Central Asia gas pipelines. It is clear that the building of the necessary infrastructure, coupled with China’s aggressive global acquisition spree is part of a deliberate effort to increase the country’s energy security.