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1 Mar 22 2012 @ 10:50am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, risk management

A Little Trouble In Big China: The Sequel

Nearly two years (and 200 posts ago) we took a look at A Little Trouble in Big China, as China’s economy was showing signs of slowing. Six hundred and seventy-six days later, signs of slowing are emerging once again, leaving global financial markets to be twitchy and pundits to question whether the engine room of the global economy is heading for a soft or hard landing (soft = landing on both feet; hard = a humpty dumpty-style ending). So here are some key reference points to consider when assessing China, from both an economic and energy perspective.

1) It has been due in part to the weakness in property prices that the latest bout of bearishness towards China has been kick-started. Latest data show house prices in 45 of 70 cities fell last month, while 22 cities saw prices stay the same. (caveat: the government has been on a two-year campaign to rein in escalating house prices).

2) Another contributing factor to rising concerns about China has been due to the adjustment lower of their economic growth target from 8% to 7.5% – the first time it has been moved since 2005. That said, although this news was taken very warily by markets, the reality is that a slower growth target is indicative of a developed (as opposed to a developing) country – a hat-tip towards what China is becoming.

3) And 7.5% growth is none too shabby. Based on this rate, it is still startling the vast share of global consumption that China will make up: be it of raw materials, agriculture, or energy:

4) China also has a strong hand when it comes to natural resources. One issue that is causing increasing concern on a global scale is that China controls 97% of the world’s rare earth metals. Rare earth metals are 17 minerals which are used in key elements of manufacturing (they are used in iPads…need I say more?!), and China holds all the cards on this front (giving them a political bargaining chip).

5) China has the largest global reserves of shale gas (as the graphic on this post shows), and is looking to ramp up domestic production, targeting 6.5 Bcm (= 230 Bcf) by by 2015.

6) Given the extent of these reserves, China has spent the last few years piling money into foreign energy mergers, acquisitions, and joint ventures to cut their teeth on new technologies then take them home (to the tune of $50 billion in the last two years, hark right). Sinopec has been investing in US gas shale while CNOOC seeks to invest more on this front, while Petrochina has been investing in Canadian oil sands. Reciprocal arrangements are springing up, with just this week Total SA striking a deal with Sinopec to explore shale plays in China, while Shell has just signed the first production-sharing contract for shale gas in China.

7) China is both the largest producer and consumer of coal in the world, with approximately 70% of its energy consumption met by the fuel.

8) Economic data, although slowing, is showing strength. Industrial production is up 11.4%% versus last year, while retail sales are up 14.7%. Manufacturing, however, is expanding by the smallest of margins, adding to concerns of a slowdown.

9) Although there is no disputing that the Chinese economy is slowing, the government is being proactive about trying to orchestrate a soft landing. Just yesterday it slashed reserve requirements for agricultural banks so they can increase lending to rural communities. The reserve requirement ratio has already been cut this year for all banks in an attempt to stimulate lending, and hence, the economy, and will likely be cut again.

10) China’s auto sales are set to reach 30 million a year by 2020 as the country becomes less reliant on exports, and more driven by domestic demand. By way of a comparison, auto sales in the US have just hit a 4-yr high at 15 million. The population difference and the closing of the wealth gap explain this away….US population = 311 million, China = 1,388 million. And as another reference, car production in China is going bonkers too, according to BHP Billiton:

11) Finally, China is the second largest oil consumer in the world (behind the US), but is likely to become the largest at some point mid-next decade, as robust annual demand growth continues, while US oil demand growth stagnates.

Two years on, and the analogy in the first post to Brangelina still holds true: we cannot believe the hype or truly know whether everything is as rosy as it seems, but the fact that the two still appear to be strong (Brangelina and China, that is), indicates they are doing something right.

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