US should block CNOOC-Nexen deal until China opens its markets: senator
Washington (Platts)--27Jul2012/1202 pm EDT/1602 GMT
http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Oil/6505286
US Senator Charles Schumer, Democrat-New York, on Friday asked the Obama
administration to withhold approval of the proposed takeover of Canadian
independent producer Nexen by the China National Offshore Oil Company until
China takes steps to open itself to more foreign investment.
Approval by the US of the deal is needed because Nexen has operations in the US Gulf of Mexico. CNOOC announced its deal to buy Nexen for $15.1 billion on Monday.
"It is rare that we have so much leverage to exert upon China," Schumer said in a statement. "We should not let this window of opportunity pass us by. At some point, we have to put our foot down over China's refusal to play by the rules of free trade," Schumer said.
Schumer wrote to US Treasury Secretary Timothy Geithner, who chairs the government's Committee on Foreign Investment in the United States. He said the US should block the deal until China's government "has made tangible, enforceable commitments to ensure US companies reciprocal treatment."
Schumer said he is in favor of the CNOOC-Nexen deal, as well as further investment by China in the US. He urged Geithner to use this opportunity to force China to take concrete steps based on an earlier commitment to open its economy to foreign investment.
"I believe approval of the CNOOC-Nexen transaction should be a test of these reciprocal commitments, and that concrete progress must be made by both sides simultaneously," Schumer wrote.
Approval by the US of the deal is needed because Nexen has operations in the US Gulf of Mexico. CNOOC announced its deal to buy Nexen for $15.1 billion on Monday.
"It is rare that we have so much leverage to exert upon China," Schumer said in a statement. "We should not let this window of opportunity pass us by. At some point, we have to put our foot down over China's refusal to play by the rules of free trade," Schumer said.
Schumer wrote to US Treasury Secretary Timothy Geithner, who chairs the government's Committee on Foreign Investment in the United States. He said the US should block the deal until China's government "has made tangible, enforceable commitments to ensure US companies reciprocal treatment."
Schumer said he is in favor of the CNOOC-Nexen deal, as well as further investment by China in the US. He urged Geithner to use this opportunity to force China to take concrete steps based on an earlier commitment to open its economy to foreign investment.
"I believe approval of the CNOOC-Nexen transaction should be a test of these reciprocal commitments, and that concrete progress must be made by both sides simultaneously," Schumer wrote.
HOW STRONG ECONOMIC CHINA VS USA ?
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Visualizing One Trillion Dollars
One trillion dollars; it’s a number that few people can comprehend, let alone your standard nine digit calculator. There have been attempts to put this number into perspective before. A trillion dollar bills laid end to end would reach the sun or you spend a dollar per second for 32,000 years or one trillion dollars in pennies would weigh as much as 2,755,778 Argentinosauruses (the largest known dinosaur). Fanciful as this may be, the real story behind one trillion dollars is in its economic impact. Let’s investigate what one trillion dollars can do.
For more personal finance visualizations see: WallStats.com
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China vs United States: A Visual Comparison
As we discussed in yesterday’s post,
whether the United States and China like it or not, the economic
futures of both countries are intertwined. Everyone knows that China’s
got more people and that its importance as an economic superpower has
escalated in recent years. What you might not understand is how the
differences between our countries, in economic philosophy, in
population, in geography and in how the military is built and paid for
ultimately play into the entire economic relationship.
For many China remains something of a mystery. In order to help
compare and contrast the economic differences, we have simplified the
data from the CIA World Factbook. For the exact numbers in any category,
check here.
For more personal finance visualizations see: WallStats.com
Trends
US and China — Two Peas in a Pod
(Source:imovermyhead)
From all appearances, the United States and China have an adversarial
relationship. Economically speaking, the former nation has always been a
bastion of capitalism while the latter has introduced sweeping market
reforms into what was a communist system.Leaders from both sides regularly rattle their sabers over political issues and express concerns what the other is doing within its sphere of influence. But appearances, even those maintained over decades can be deceiving. Dig deeper and you will find two nations who have grown so close in the past decade that their economic futures are now to a large extent co-dependent.
Many people in the US are uncomfortable with the fact that China today wields tremendous power, thanks to its more than one trillion dollars invested in US government debt. On the flipside, the health of the US economy is crucial to the success of China’s economic growth, given the demand for cheap goods from American consumers. For more than a decade, both countries have benefited from this arrangement, but now in the midst of the global financial crisis, leaders are raising questions about its long-term viability. Does it make economic sense?
You aren’t the only one worried about your portfolio. In recent weeks, China’s leaders have publicly fretted over the health of their portfolio and their dependency on the US economy. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried,” Chinese Premier Wen Jiabao said, according to comments reported by the New York Times in March.
A Communist leader worried about his investment in the US Economy? What is this world coming to? China’s leaders are freaking out because they fear they have over-invested in the US. And with inflation expected to rise as the result of printing more money to pay for the stimulus plan, China is fearful that its investments portfolio will lose significant value. There are other cries in China to reduce its dependency on the US and to diversify, raising the nightmare scenario of a significant divestment in US assets. While the move may seen logical, it’s unlikely that China will do anything drastic, given the sheer size of its investment in the US and the global consequences that a divestment would cause.
“From an economic aspect, it would be suicidal for them to sell their US assets, which would diminish the value of their portfolio,” said Kathryn Dominguez, professor of economics and public policy at the University of Michigan. “They are in a way stuck because were they to do this it would harm them at least as much as it would the US”. Such is the reality of a globalized economy. Systems are interconnected to the point that drastic moves by one country will have drastic effects on many other countries. Pulling out hundreds of billions of dollars in US Treasury bills would make a serious impact the value of other countries’ holdings.
So far, there are no signs of China pulling out its money en masse, but there is no doubt an easing of China’s appetite for US holdings. The US Treasury released figures showing China increased its Treasury holdings by a mere $4.6 billion between January and February 2009, maintaining a slowdown in China’s appetite for U.S. government securities since the financial crisis hit. Earlier this month, China’s central bank released figures for the first quarter this year showing its foreign holdings increased by $7.7 billion, considerably less than the $153.9 billion surge during the same quarter last year, according to the New York Times.
Dominguez added that China’s investment philosophy prevents it from rocking the boat because the government is more worried about the issues that could arise twenty years from now. Despite its pace of growth, China continues to face many domestic challenges, such as the growing disparity in wealth, a growing population of senior citizens, and potential social upheaval from greater masses of unemployed workers affected by the downturn.
Besides, where else will China put its money? The US Treasury remains a safe haven during these challenging times.
For now, both countries face an urgent need to bolster their economies, and both have launched massive stimulus packages. It remains to be seen whether this cycle of cheap imports and cheap credit needs to change. What’s certain is that the US and China remain reluctant dance partners who can’t find a suitable replacement among the crowd.
Special report: China's economy
Pedalling prosperity
China’s economy is not as precarious as it looks, says Simon Cox. But it still needs to change
May 26th 2012 | from the print edition. http://www.economist.com/node/21555762...
IN 1886 THOMAS STEVENS, a British adventurer (pictured), set off on an unusual bicycle trip. He pedalled from the flower boats of Guangzhou in China's south to the pagodas of Jiujiang about 1,000km (620 miles) to the north. He was disarmed by the scenery (the countryside outside Guangzhou was a “marvellous field-garden”) and disgusted by the squalor (the inhabitants of one town were “scrofulous, sore-eyed, and mangy”). His passage aroused equally strong reactions from the locals: fascination, fear and occasional fury. In one spot a “soul-harrowing” mob pelted him with stones, bruising his body and breaking a couple of his bicycle's spokes.
A century later the bike was no longer alien to China; it had become symbolic of it. The “bicycle kingdom” had more two-wheelers than any other country on Earth. Many of those bikes have since been replaced by cars—one obvious sign of China's rapid development. But even today the bicycle looms large in the battle for China's soul.
For China's fast-diminishing population of poor people, bikes remain an important beast of burden, piled high with recycled junk. For China's fast-expanding population of city slickers, the bicycle represents everything they want to leave behind. “I'd rather cry in the back of your BMW than laugh on the back of your bicycle,” as China's material girls say. Some dreamers in government see a return to the bike as an answer to China's growing problems of prosperity—pollution, traffic and flab. The country's National Development and Reform Commission wants government officials to cycle to work one day a week, though only if the distance is less than 3km.
Even if it is a fading symbol of Chinese society, the bicycle remains a tempting metaphor for its economy. Bikes—especially when heavily laden—are stable only as long as they keep moving. The same is sometimes said about China's economy. If it loses momentum, it will crash. And since growth is the only source of legitimacy for the ruling party, the economy would not be the only thing to wobble. From 1990 to 2008 China's workforce swelled by about 145m people, many of them making the long journey from its rural backwaters to its coastal workshops. Over the same period the productivity of the workforce increased by over 9% a year, according to the Asian Productivity Organisation (APO). Output that used to take 100 people in 1990 required fewer than 20 in 2008. All this meant that growth of 8-10% a year was not a luxury but a necessity.
But the pressure is easing. Last year the ranks of working-age Chinese fell as a percentage of the population. Soon their number will begin to shrink. The minority who remain in China's villages are older and less mobile. Because of this loss of demographic momentum, China no longer needs to grow quite so quickly to keep up. Even the government no longer sees 8% annual growth as an imperative. In March it set a target of 7.5% for this year, consistent with an average of 7% over the course of the five-year plan that ends in 2015. China has been in the habit of surpassing these “targets”, which represent a floor not a ceiling to its aspirations. Nonetheless the lower figure was a sign that the central leadership now sees heedless double-digit growth as a threat to stability, not a guarantee of it.
The penny-farthing theory
Stevens's 1886 journey across south-east China was remarkable not only for the route he took but also for the bike he rode: a “high-wheeler” or “penny-farthing”, with an oversized wheel at the front and a diminutive one at the rear. The contraption is not widely known in China. That is a pity, because it provides the most apt metaphor for China's high-wheeling economy.
The large circumference of the penny-farthing's front wheel carried it farther and faster than anything that preceded it, much as China's economy has grown faster for longer than its predecessors. Asked to name the big wheel that keeps China's economy moving, many foreign commentators would say exports. Outside China, people see only the Chinese goods that appear on their shelves and the factory jobs that disappear from their shores; they do not see the cities China builds or the shopping aisles it fills at home. But the contribution of foreign demand to China's growth has always been exaggerated, and it is now shrinking.
It is investment, not exports, that leads China's economy. Spending on plant, machinery, buildings and infrastructure accounted for about 48% of China's GDP in 2011. Household consumption, supposedly the sole end and purpose of economic activity, accounts for only about a third of GDP (see chart 1). It is like the small farthing wheel bringing up the rear.
But China's economy will not crash. Like the high-wheeled penny-farthing, which rolled serenely over bumps in the road, it is good at absorbing the jolts in the path of any developing country. The state's influence over the allocation of capital is the source of much waste, but it helps keep investment up when private confidence is down. And although China's repressed banking system is inefficient, it is also resilient because most of its vast pool of depositors have nowhere else to go.
Not so fast
The penny-farthing eventually became obsolete, superseded by the more familiar kind of bicycle. The leap was made possible by the invention of the chain-drive, which generated more oomph for every pedal push. China's high-wheeling growth model will also become obsolete in due course. As the country's workforce shrinks and capital accumulates, its saving rate will fall and new investment opportunities will become more elusive. China will have to get more oomph out of its inputs, raising the productivity of capital in particular. That will require a more sophisticated financial system, based on a more complex set of links between savers and investors.
Other innovations will also be needed. China's state-owned enterprises emerged stronger—too strong—from the downsizing of the 1990s, but the country's social safety net never recovered. Thus even as the state invests less in industrial capacity, it will need to spend more on social security, including health care, pensions, housing and poverty relief. That will help boost consumer spending by offering rainy-day protection.
Keep those wheels turning
The chain-drive was not the only invention required to move beyond
the penny-farthing. The new smaller wheels also needed pneumatic tyres
to give cyclists a smoother ride. In the absence of strong investment to
keep employment up and social unrest down, China's state will also need
a new way to protect its citizens from bumps in the road ahead.
from the print edition | Special report
Resilient China
How strong is China’s economy?
Despite a recent slowdown, the world’s second-biggest economy is more resilient than its critics think
May 26th 2012 | from the print edition http://www.economist.com/node/21555915
CHINA'S weight in the global economy means that it commands the world's attention. When its industrial production, house building and electricity output slow sharply, as they did in the year to April, the news weighs on global stockmarkets and commodity prices. When its central bank eases monetary policy, as it did this month, it creates almost as big a stir as a decision by America's Federal Reserve. And when China's prime minister, Wen Jiabao, stresses the need to maintain growth, as he did last weekend, his words carry more weight with the markets than similar homages to growth from Europe's leaders. No previous industrial revolution has been so widely watched.
But rapid development can look messy close up, as our special report this week explains; and there is much that is going wrong with China's economy. It is surprisingly inefficient, and it is not as fair as it should be. But outsiders' principal concern—that its growth will collapse if it suffers a serious blow, such as the collapse of the euro—is not justified. For the moment, it is likely to prove more resilient than its detractors fear. Its difficulties, and they are considerable, will emerge later on.
Unfair, but not unstable
Outsiders tend to regard China as a paragon of export-led efficiency. But that is not the whole story. Investment spending on machinery, buildings and infrastructure accounted for over half of China's growth last year; net exports contributed none of it. Too much of this investment is undertaken by state-owned enterprises (SOEs), which benefit from implicit subsidies, sheltered markets and politically encouraged loans. Examples of waste abound, from a ghost city on China's northern steppe to decadent resorts on its southern shores.
China's economic model is also unfair on its people. Regulated interest rates enable banks to rip off savers, by underpaying them for their deposits. Barriers to competition allow the SOEs to overcharge consumers for their products. China's household-registration system denies equal access to public services for rural migrants, who work in the cities but are registered in the villages. Arbitrary land laws allow local governments to cheat farmers, by underpaying them for the agricultural plots they buy off them for development. And many of the proceeds end up in the pockets of officials.
This cronyism and profligacy leads critics to liken China to other fast-growing economies that subsequently suffered a spectacular downfall. One recent comparison is with the Asian tigers before their financial comeuppance in 1997-98. The tigers' high investment rates powered growth for a while, but they also fostered a financial fragility that was cruelly exposed when exports slowed, investment faltered and foreign capital fled. Critics point out that not only is China investing at a faster rate than the tigers ever did, but its banks and other lenders have also been on an astonishing lending binge, with credit jumping from 122% of GDP in 2008 to 171% in 2010, as the government engineered a bout of “stimulus lending”.
Yet the very unfairness of China's system gives it an unusual resilience. Unlike the tigers, China relies very little on foreign borrowing. Its growth is financed from resources extracted from its own population, not from fickle foreigners free to flee, as happened in South-East Asia (and is happening again in parts of the euro zone). China's saving rate, at 51% of GDP, is even higher than its investment rate. And the repressive state-dominated financial system those savings are kept in is actually well placed to deal with repayment delays and defaults.
Most obviously, China's banks are highly liquid. Their deposit-taking more than matches their loan-making, and they keep a fifth of their deposits in reserve at the central bank. That gives the banks some scope to roll over troublesome loans that may be repaid at a later date, or written off at a more convenient time. But there is also the backstop of the central government, which has formal debts amounting to only about 25% of GDP. Local-government debts might double that proportion, but China plainly has enough fiscal space to recapitalise any bank threatened with insolvency.
That space also gives the government room to stimulate growth again, should exports to Europe fall off a cliff. China's government spent a lot on infrastructure when the credit crunch struck its customers in the West. But there is no shortage of other things it could finance. It could redouble its efforts to expand rural health care, for example. China still has only one family doctor for every 22,000 people. If ordinary Chinese knew that their health would be looked after in their old age, they would save less and spend more. Household consumption accounts for little more than a third of the economy.
Time is on my side
That underlines the longer-term problem China faces. The same quirks and unfairnesses that would help it withstand a shock in the next few years will, over time, work against the country. China's phenomenal saving rate will start falling, as the population ages and workers become more expensive. Capital is also already becoming less captive. Fed up with the miserable returns on their deposits, savers are demanding alternatives. Some are also finding ways to take their money out of the country, contributing to unusual downward pressure on the currency. China's bank deposits grew at their slowest rate on record in the year to April.
So China will have to learn how to use its capital more wisely. That will require it to lift barriers to private investment in lucrative markets still dominated by wasteful SOEs. It will also require a less cosseted banking system and a better social-security net, never mind the political and social reforms that will be needed in the coming decade.
China's reformers have a big job ahead, but they also have some time. Pessimists compare it to Japan, which like China was a creditor nation when its bubble burst in 1991. But Japan did not blow up until its income per head was 120% of America's (at market exchange rates). If China's income per head were to reach that level, its economy would be five times as big as America's. That is a long way off.
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