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.
The Department of Statistics recently published wealth distribution figures for New Zealand. According to Stats NZ, the median household net worth in the year ended 30 June 2018 was $340,000, up from $289,000 in 2015. The increase was mainly driven by an increase in property values over the last three years.
% of net wealth held by % of Households – 2018
According to the survey, the top ten percent of households hold 53 percent of total wealth in New Zealand, which is unchanged from 2015. The top one percent of households hold 16 percent of total wealth in New Zealand, which is down slightly from 2015. New Zealand’s Gini Coefficient is approximately 0.33.
The Lorenz Curve
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
1 = 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 0.61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 0.49 in 2008 to 0.46 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.
But at the top end you would get the impression that inequality of wealth is extremely high – wealth = what you own, as opposed to what you earn. China has more dollar billionaires (596) than the USA (537). Research has shown that 1% of the population control a 1/3 of China’s assets.
Doing trade barriers with my NCEA Level 2 class and below is a good clip from Al Jazeera about the issues that are arising from it and who will lose the least from a trade war. The last ten years saw a marked improvement in trade between the United States and China. But Trump’s battle of the tariffs is threatening that. And there are fears of an all-out trade war. The U.S. is putting tariffs on 50 billion dollars worth of Chinese imports. The president says he wants a fairer trade with China. But Beijing’s fired back with a tit-for-tat response. It’s published a list of more than 600 American products it plans to hit with its own taxes. Is it a case of who blinks first in this economic brinkmanship? And what will it mean for global trade? The comments by Philippe LeGrain are particularly good.