Schumacher
Senior Member
I like the weatherman analogy.
What Karabell says is true, too many 'analysis' of China's economy is clouded by wishful & closed ideological thinking rather than based on real world facts.
Chinese Economics Thread
- Thread starter Norfolk
- Start date
I like the weatherman analogy.
What Karabell says is true, too many 'analysis' of China's economy is clouded by wishful & closed ideological thinking rather than based on real world facts.
Looks like Chinese companies are fully appreciating the Complexities of Iraq
from
Sinopec, Addax and a New Iraqi Quagmire
By staff reporter Chen Zhu
(Caijing Magazine) China Petrochemical Group (Sinopec) recently completed the largest overseas takeover ever for a Chinese petroleum enterprise. Since then, rather than savor the success, the company has been mired in time-consuming complications that threaten to dash its hopes for future oil business in Iraq.
The trouble began when the central government of Iraq decided to strip Sinopec of the right to bid for postwar oil and gas service contracts. The decision came two months after the Chinese company in August bought Switzerland-based Addax Petroleum (Addax) for US$ 7.2 billion.
The acquisition angered the Baghdad government because Addax controls oil interests in northern Iraq's semi-autonomous Kurdish region.
Later, an announcement on October 13 seemed again to reflect the Iraqi government's suspicious attitude: The Iraqi Oil Ministry promised to hand development rights for Iraq's fourth largest oilfield Zubair to Italian conglomerate ENI Group -- but only if ENI cast off its consortium partner Sinopec and bid as an individual firm.
The ENI decision clearly worried Sinopec. During an October 15 phone interview with Caijing, Sinopec International President Zhou Yuqi repeatedly stressed the company's strong interest in participating in bidding for Iraqi government oil contracts.
"We fully value this opportunity," said Zhou.
Since then, Sinopec has been trying to use alternative channels to seek face-to-face contact with officials at the Iraqi Oil Ministry. Company officials hope to explain their position and win the ministry's understanding.
Beyond the public relations crisis, Sinopec is in a race against time for access to valuable resources. According to the ministry's plan, a second round of oilfield bidding is scheduled to begin at the end of this year. A number of contracts from the first round of bidding will likely be settled, one by one, in the next few months.
Risky Path
Sinopec and Addax, which controls abundant oil interests in the Middle East and West Africa, have worked together in Nigeria, and the companies know each other well. So reaching their agreement was remarkably simple, taking only six months.
But things apparently went too well. On October 19, a Reuters report quoted Abudul-Mahdy al-Ameedi, an official responsible for oil contracts at the oil ministry, as saying his office "has been waiting for some time for Sinopec to explain themselves in terms of their acquisition of Addax."
Sinopec sent a letter to the ministry no later than September 16 saying it had gone through international capital markets to acquire Addax, and that the interests in Iraq's Kurdish region were part of the deal. Sinopec also said Addax's assets in the region were comparatively "miniscule."
Some non-Chinese media speculated that the company was planning to use Addax's resources in the Kurdish area for a foothold in Iraq. But most of Addax's core assets are in Nigeria and Gabon. According to Addax's second quarter financial report, the company's crude oil output was 143,000 barrels per day, of which 72.2 percent came from Nigeria. Only 8.3 percent came from the Kurdish region.
As of mid-October, Sinopec had not received a formal written reply from the ministry and sensed the gravity of the situation. If the ministry had taken a moderate view of the acquisition, it would not have demanded ENI drop its consortium partner Sinopec and undertake oil field development in Zubair on its own.
"Normally, Sinopec would not make this kind of mistake," said an official at another Chinese energy company who has managed overseas projects for years, speaking with Caijing.
In February 2007, Iraqi Oil Minister Hussein Shahristani declared oil contracts negotiated between the Kurdish regional government (KRG) and foreign oil companies as illegal. He also said all foreign oil companies that sign contracts with KRG would lose the opportunity to participate in future bidding organized by the oil ministry.
Iraqi authorities view this provision as a matter of principle. Even western oil companies have been forced to resist the temptation of rich oil resources and withdraw from the Kurdish area. Presently, most of those engaging in exploration and drilling in the area are small, independent oil companies. Many brokers have promoted Kurdish oil projects to other Chinese oil companies, but most have been too worried about political ramifications to seriously consider the offers.
A source who had been close to Addax during the early stages of the Sinopec deal told Caijing that, while considering the acquisition, the Chinese company's management did consider the sensitivity of Addax's oil interests in the Kurdish region.
"However, possibly because there was a general feeling within the company to leave some things to luck and take a gamble, Sinopec officials assumed they could resolve any issues through diplomacy and that Iraq's central authorities would approve of the deal in the end," the source said.
The source went a step further, saying before Sinopec made the decision to buy Addax, it consulted numerous concerned parties including Addax shareholders and management, investors, consulting companies, China's Ministry of Foreign Affairs and Iraq's central and local governments.
"Perhaps during the talks, one or more party gave Sinopec a relatively positive signal," the source said. "Or maybe during this process, Sinopec just failed to find the right direction."
Supporting the positive signal theory was an incident last spring June in Iraq. In May, to increase revenues, the oil ministry officially approved oil export rights for the Kurdish region, and on June 1, President Jalal Talabani attended a ceremonial oil valve event with KRG President Massoud Barzani. Their mutual attendance was read by some as a sign that the Iraqi government and KRG had reached an understanding on controlling oil resources.
If this was indeed reconciliation, then Sinopec's acquisition of Addax and subsequent entry into Kurdistan would make sense. The Chinese oil giant could have been the early bird catching the worm.
Caijing found that two of six oilfields offered for bidding by the oil ministry June 30 were located in disputed regions: the Kirkuk and Bai Hassan fields between Kurdistan and Baghdad. KRG holds the position that it has shared rights to the oilfields, and if Iraq's central government individually enters into agreements with foreign companies, KRG would likely not acknowledge them.
Taking this into consideration, while China National Petroleum Corp. (CNPC) was sifting through potential projects, they removed Kirkuk and Bai Hassan from the list. Later, however, Sinopec coincidentally participated in bidding for these oilfields. Sinopec, Conoco Phillips and China National Offshore Oil Corp. (CNOOC) formed an allied consortium to bid on the contract for Bai Hassan, while Sinopec, Shell and CNPC formed an allied consortium to bid on the Kirkuk contract.
If this was not a coincidence, Sinopec must have seen a coexistence of challenge and opportunity offered by the Kurdish region and surrounding areas. And as soon as they received approval from Iraq's central and local governments, they may have thought, all risk and anguish would translate into high returns.
Some analysts doubt Sinopec's current lobbying efforts will succeed. Not only are there complex internal interests in Iraq, but Sinopec's competitors -- especially international energy companies left empty-handed after the first round of bidding -- are closely watching the oil ministry's every move.
Watermelon or Sesame
Reactions to the oil ministry's decisions have met with mixed reactions at Sinopec. Some think it's not worth dropping a watermelon to pick up a sesame seed, as the Chinese saying goes.
For example, an official at Sinopec's Economics and Development Research Institute said it would be better for the company to consider selling Addax's interests in Kurdistan as a way to maintain long-term prospects in Iraq.
On the other hand, some so-called pragmatists find it difficult to differentiate between the watermelon and sesame seed. An analyst at an international energy consulting organization told Caijing that Sinopec "might as well give up on the second round of bidding for Iraq's oil contracts" because "they are the same as the first round, and the new round of bidding still includes service contracts with meager rewards for each barrel, accompanied by high risk."
In the first round of bidding after CNPC won the Rumaila oilfield contracts, the company was surprised to discover that there were no bidders for seven subsequent contracts, the analyst said. "Now it looks as if Iraq is not a grand banquet after all, but rather a difficult place to actually earn a profit.
"If a company reaches its scheduled output quota, the rewards are meager. And if the company cannot meet minimum output standards, it will be penalized."
Another analyst at an international consultant in Beijing told Caijing profits derived from oil projects are often directly correlated with the economic model. Under the Rumaila contract, the Iraqi government cut the payment offer from US$ 3.99 per barrel to US$ 2. This meant "the entire project's schedule and development plan needed to be readjusted."
The low cost of CNPC's service team and the company's ability to rapidly readjust have become critical factors in terms of the company's ability to turn a profit.
"With this project, time equals money," the analyst said "And if CNPC can meet minimum output standards a year early, overall cash flow will greatly improve, and the company will gain added flexibility with regard to bidding service fees."
The deal's potential may not be as promising as CNPC hoped. The Iraqi government has considered using protectionist measures, while restricting labor imports. And if CNPC cannot rapidly put together strong exploration and drilling teams, a big question mark will be left hanging over the project's profitability.
Moreover, even though costs for oil exploration in Iraq are low, much of the country's oil equipment was destroyed in the long war or as a result of international sanctions. Other equipment is seriously outdated, or poses a target for insurgents.
If Sinopec participates in the bidding process, it will come face-to-face with these kinds of issues. Iraq's central government has already clearly expressed that it will not make any substantial compromises in the second round of bidding in terms of the contract structure and per-barrel payments.
One analyst thinks oil interests in Kurdistan that Sinopec inherited from Addax are small compared with other Iraqi Oil Ministry projects up for bid. Yet progress in tapping the oilfield has been smooth, and Sinopec can profit. Thus, the analyst said, abandoning the Kurdish interests would be unfortunate.
"Actually, Sinopec can also put their energy into continuing to develop their business in Western Africa," said the analyst. "This approach would definitely be better than taking a huge risk by entering Iraq.
"Moreover, from a China national strategic standpoint, CNPC already has a considerable foothold in the market," said the analyst.
Advancing, Retreating
The question remains, Will Sinopec participate in the second round of bidding?
"We participated in the first round of bidding in Iraq, and Sinopec's name is on the roster for the second round as well," said Zhou Yuqi, head of Sinopec's overseas exploration and production unit, in an interview with Caijing. "We are still actively preparing for the second round of bidding."
In the end, China's oil industry policymakers will likely ignore short term gains and losses when weighing the value of a particular project. A high-level CNPC official responsible for overseas operations told Caijing: "From a strategic standpoint, even if we have low profits or a losing situation, we still must enter the market. Only if we put our foot in and hold our ground is there any hope for us to gain more interests in the future.
"Our strategic intent is very clear, and that is that we must gain a strong foothold in the market."
The CNPC official thinks China has to participate in contract activities or risk being excluded from the inner circle of companies doing business in postwar Iraq. CNPC set an example: After winning a bid, it has gradually integrated exploration, drilling and pipeline construction tasks.
"Postwar Iraq left many issues that must be dealt with, and it is a huge market," the official said. "Many Middle Eastern countries' oil resources are still undeveloped. If Iraq wasn't so heavily engaged in postwar reconstruction and desperate for foreign capital to raise oil output levels, these kinds of opportunities wouldn't exist."
Sinopec has also taken Iraq's development status into consideration. But in terms of developing interests overseas, it is under more pressure than CNPC. As Asia's biggest oil refiner, the company controls only one-fifth the reserves held by CNPC. Currently, Sinopec must buy 75 percent of its refined fuel oil from other companies.
Company President Wang Tianpu said September 21 that Sinopec's "in-house resources are insufficient, and it is becoming more difficult to stockpile reserves. In the future the company's degree of self-sufficiency in terms of crude oil will continue to decline" and the company "urgently needs to expand its resource base."
Associate Director of Sinopec's Strategy and Development Research Institute Chang Liliang told Caijing that, considering Sinopec's relatively weak position domestically, the company has to purchase from abroad. He said Sinopec has a bold plan for realizing total output from overseas interests of 100 million tons of oil per year by 2015.
The total 2008 output from China's overseas oil interests was 40 million tons, with CNPC contributing 30 million tons and Sinopec contributing more than 9 million tons. Increasing total output from overseas interests by 10 times in seven years cannot be accomplished by following a conservative path, so Sinopec will have to continue looking at all available opportunities.
The international consultant expert said if Sinopec doesn't want to miss the second round of bidding in Iraq, though, the company must quickly resolve the issue over Addax's interests.
One option could be to directly engage with Iraqi authorities and take an initiative by accepting fines and paying additional reparations. If this solution doesn't satisfy the Iraqi government, Sinopec would have no choice but to sell the interests or enter into an exchange agreement with another energy company to avoid further angering the Iraqis.
Reuters quoted an executive at a Western oil company bidding on Iraq's oil contracts as saying that if Sinopec wants to return to the negotiating table, Beijing may have to get involved. "Government-to-government negotiating might resolve the situation easier," the executive said.
Another insider refuted this statement, though, saying government intervention "will only complicate matters."
Now, the final decision rests with Sinopec, for whom the clock is ticking.
Full article in Chinese:
from
Sinopec, Addax and a New Iraqi Quagmire
By staff reporter Chen Zhu
(Caijing Magazine) China Petrochemical Group (Sinopec) recently completed the largest overseas takeover ever for a Chinese petroleum enterprise. Since then, rather than savor the success, the company has been mired in time-consuming complications that threaten to dash its hopes for future oil business in Iraq.
The trouble began when the central government of Iraq decided to strip Sinopec of the right to bid for postwar oil and gas service contracts. The decision came two months after the Chinese company in August bought Switzerland-based Addax Petroleum (Addax) for US$ 7.2 billion.
The acquisition angered the Baghdad government because Addax controls oil interests in northern Iraq's semi-autonomous Kurdish region.
Later, an announcement on October 13 seemed again to reflect the Iraqi government's suspicious attitude: The Iraqi Oil Ministry promised to hand development rights for Iraq's fourth largest oilfield Zubair to Italian conglomerate ENI Group -- but only if ENI cast off its consortium partner Sinopec and bid as an individual firm.
The ENI decision clearly worried Sinopec. During an October 15 phone interview with Caijing, Sinopec International President Zhou Yuqi repeatedly stressed the company's strong interest in participating in bidding for Iraqi government oil contracts.
"We fully value this opportunity," said Zhou.
Since then, Sinopec has been trying to use alternative channels to seek face-to-face contact with officials at the Iraqi Oil Ministry. Company officials hope to explain their position and win the ministry's understanding.
Beyond the public relations crisis, Sinopec is in a race against time for access to valuable resources. According to the ministry's plan, a second round of oilfield bidding is scheduled to begin at the end of this year. A number of contracts from the first round of bidding will likely be settled, one by one, in the next few months.
Risky Path
Sinopec and Addax, which controls abundant oil interests in the Middle East and West Africa, have worked together in Nigeria, and the companies know each other well. So reaching their agreement was remarkably simple, taking only six months.
But things apparently went too well. On October 19, a Reuters report quoted Abudul-Mahdy al-Ameedi, an official responsible for oil contracts at the oil ministry, as saying his office "has been waiting for some time for Sinopec to explain themselves in terms of their acquisition of Addax."
Sinopec sent a letter to the ministry no later than September 16 saying it had gone through international capital markets to acquire Addax, and that the interests in Iraq's Kurdish region were part of the deal. Sinopec also said Addax's assets in the region were comparatively "miniscule."
Some non-Chinese media speculated that the company was planning to use Addax's resources in the Kurdish area for a foothold in Iraq. But most of Addax's core assets are in Nigeria and Gabon. According to Addax's second quarter financial report, the company's crude oil output was 143,000 barrels per day, of which 72.2 percent came from Nigeria. Only 8.3 percent came from the Kurdish region.
As of mid-October, Sinopec had not received a formal written reply from the ministry and sensed the gravity of the situation. If the ministry had taken a moderate view of the acquisition, it would not have demanded ENI drop its consortium partner Sinopec and undertake oil field development in Zubair on its own.
"Normally, Sinopec would not make this kind of mistake," said an official at another Chinese energy company who has managed overseas projects for years, speaking with Caijing.
In February 2007, Iraqi Oil Minister Hussein Shahristani declared oil contracts negotiated between the Kurdish regional government (KRG) and foreign oil companies as illegal. He also said all foreign oil companies that sign contracts with KRG would lose the opportunity to participate in future bidding organized by the oil ministry.
Iraqi authorities view this provision as a matter of principle. Even western oil companies have been forced to resist the temptation of rich oil resources and withdraw from the Kurdish area. Presently, most of those engaging in exploration and drilling in the area are small, independent oil companies. Many brokers have promoted Kurdish oil projects to other Chinese oil companies, but most have been too worried about political ramifications to seriously consider the offers.
A source who had been close to Addax during the early stages of the Sinopec deal told Caijing that, while considering the acquisition, the Chinese company's management did consider the sensitivity of Addax's oil interests in the Kurdish region.
"However, possibly because there was a general feeling within the company to leave some things to luck and take a gamble, Sinopec officials assumed they could resolve any issues through diplomacy and that Iraq's central authorities would approve of the deal in the end," the source said.
The source went a step further, saying before Sinopec made the decision to buy Addax, it consulted numerous concerned parties including Addax shareholders and management, investors, consulting companies, China's Ministry of Foreign Affairs and Iraq's central and local governments.
"Perhaps during the talks, one or more party gave Sinopec a relatively positive signal," the source said. "Or maybe during this process, Sinopec just failed to find the right direction."
Supporting the positive signal theory was an incident last spring June in Iraq. In May, to increase revenues, the oil ministry officially approved oil export rights for the Kurdish region, and on June 1, President Jalal Talabani attended a ceremonial oil valve event with KRG President Massoud Barzani. Their mutual attendance was read by some as a sign that the Iraqi government and KRG had reached an understanding on controlling oil resources.
If this was indeed reconciliation, then Sinopec's acquisition of Addax and subsequent entry into Kurdistan would make sense. The Chinese oil giant could have been the early bird catching the worm.
Caijing found that two of six oilfields offered for bidding by the oil ministry June 30 were located in disputed regions: the Kirkuk and Bai Hassan fields between Kurdistan and Baghdad. KRG holds the position that it has shared rights to the oilfields, and if Iraq's central government individually enters into agreements with foreign companies, KRG would likely not acknowledge them.
Taking this into consideration, while China National Petroleum Corp. (CNPC) was sifting through potential projects, they removed Kirkuk and Bai Hassan from the list. Later, however, Sinopec coincidentally participated in bidding for these oilfields. Sinopec, Conoco Phillips and China National Offshore Oil Corp. (CNOOC) formed an allied consortium to bid on the contract for Bai Hassan, while Sinopec, Shell and CNPC formed an allied consortium to bid on the Kirkuk contract.
If this was not a coincidence, Sinopec must have seen a coexistence of challenge and opportunity offered by the Kurdish region and surrounding areas. And as soon as they received approval from Iraq's central and local governments, they may have thought, all risk and anguish would translate into high returns.
Some analysts doubt Sinopec's current lobbying efforts will succeed. Not only are there complex internal interests in Iraq, but Sinopec's competitors -- especially international energy companies left empty-handed after the first round of bidding -- are closely watching the oil ministry's every move.
Watermelon or Sesame
Reactions to the oil ministry's decisions have met with mixed reactions at Sinopec. Some think it's not worth dropping a watermelon to pick up a sesame seed, as the Chinese saying goes.
For example, an official at Sinopec's Economics and Development Research Institute said it would be better for the company to consider selling Addax's interests in Kurdistan as a way to maintain long-term prospects in Iraq.
On the other hand, some so-called pragmatists find it difficult to differentiate between the watermelon and sesame seed. An analyst at an international energy consulting organization told Caijing that Sinopec "might as well give up on the second round of bidding for Iraq's oil contracts" because "they are the same as the first round, and the new round of bidding still includes service contracts with meager rewards for each barrel, accompanied by high risk."
In the first round of bidding after CNPC won the Rumaila oilfield contracts, the company was surprised to discover that there were no bidders for seven subsequent contracts, the analyst said. "Now it looks as if Iraq is not a grand banquet after all, but rather a difficult place to actually earn a profit.
"If a company reaches its scheduled output quota, the rewards are meager. And if the company cannot meet minimum output standards, it will be penalized."
Another analyst at an international consultant in Beijing told Caijing profits derived from oil projects are often directly correlated with the economic model. Under the Rumaila contract, the Iraqi government cut the payment offer from US$ 3.99 per barrel to US$ 2. This meant "the entire project's schedule and development plan needed to be readjusted."
The low cost of CNPC's service team and the company's ability to rapidly readjust have become critical factors in terms of the company's ability to turn a profit.
"With this project, time equals money," the analyst said "And if CNPC can meet minimum output standards a year early, overall cash flow will greatly improve, and the company will gain added flexibility with regard to bidding service fees."
The deal's potential may not be as promising as CNPC hoped. The Iraqi government has considered using protectionist measures, while restricting labor imports. And if CNPC cannot rapidly put together strong exploration and drilling teams, a big question mark will be left hanging over the project's profitability.
Moreover, even though costs for oil exploration in Iraq are low, much of the country's oil equipment was destroyed in the long war or as a result of international sanctions. Other equipment is seriously outdated, or poses a target for insurgents.
If Sinopec participates in the bidding process, it will come face-to-face with these kinds of issues. Iraq's central government has already clearly expressed that it will not make any substantial compromises in the second round of bidding in terms of the contract structure and per-barrel payments.
One analyst thinks oil interests in Kurdistan that Sinopec inherited from Addax are small compared with other Iraqi Oil Ministry projects up for bid. Yet progress in tapping the oilfield has been smooth, and Sinopec can profit. Thus, the analyst said, abandoning the Kurdish interests would be unfortunate.
"Actually, Sinopec can also put their energy into continuing to develop their business in Western Africa," said the analyst. "This approach would definitely be better than taking a huge risk by entering Iraq.
"Moreover, from a China national strategic standpoint, CNPC already has a considerable foothold in the market," said the analyst.
Advancing, Retreating
The question remains, Will Sinopec participate in the second round of bidding?
"We participated in the first round of bidding in Iraq, and Sinopec's name is on the roster for the second round as well," said Zhou Yuqi, head of Sinopec's overseas exploration and production unit, in an interview with Caijing. "We are still actively preparing for the second round of bidding."
In the end, China's oil industry policymakers will likely ignore short term gains and losses when weighing the value of a particular project. A high-level CNPC official responsible for overseas operations told Caijing: "From a strategic standpoint, even if we have low profits or a losing situation, we still must enter the market. Only if we put our foot in and hold our ground is there any hope for us to gain more interests in the future.
"Our strategic intent is very clear, and that is that we must gain a strong foothold in the market."
The CNPC official thinks China has to participate in contract activities or risk being excluded from the inner circle of companies doing business in postwar Iraq. CNPC set an example: After winning a bid, it has gradually integrated exploration, drilling and pipeline construction tasks.
"Postwar Iraq left many issues that must be dealt with, and it is a huge market," the official said. "Many Middle Eastern countries' oil resources are still undeveloped. If Iraq wasn't so heavily engaged in postwar reconstruction and desperate for foreign capital to raise oil output levels, these kinds of opportunities wouldn't exist."
Sinopec has also taken Iraq's development status into consideration. But in terms of developing interests overseas, it is under more pressure than CNPC. As Asia's biggest oil refiner, the company controls only one-fifth the reserves held by CNPC. Currently, Sinopec must buy 75 percent of its refined fuel oil from other companies.
Company President Wang Tianpu said September 21 that Sinopec's "in-house resources are insufficient, and it is becoming more difficult to stockpile reserves. In the future the company's degree of self-sufficiency in terms of crude oil will continue to decline" and the company "urgently needs to expand its resource base."
Associate Director of Sinopec's Strategy and Development Research Institute Chang Liliang told Caijing that, considering Sinopec's relatively weak position domestically, the company has to purchase from abroad. He said Sinopec has a bold plan for realizing total output from overseas interests of 100 million tons of oil per year by 2015.
The total 2008 output from China's overseas oil interests was 40 million tons, with CNPC contributing 30 million tons and Sinopec contributing more than 9 million tons. Increasing total output from overseas interests by 10 times in seven years cannot be accomplished by following a conservative path, so Sinopec will have to continue looking at all available opportunities.
The international consultant expert said if Sinopec doesn't want to miss the second round of bidding in Iraq, though, the company must quickly resolve the issue over Addax's interests.
One option could be to directly engage with Iraqi authorities and take an initiative by accepting fines and paying additional reparations. If this solution doesn't satisfy the Iraqi government, Sinopec would have no choice but to sell the interests or enter into an exchange agreement with another energy company to avoid further angering the Iraqis.
Reuters quoted an executive at a Western oil company bidding on Iraq's oil contracts as saying that if Sinopec wants to return to the negotiating table, Beijing may have to get involved. "Government-to-government negotiating might resolve the situation easier," the executive said.
Another insider refuted this statement, though, saying government intervention "will only complicate matters."
Now, the final decision rests with Sinopec, for whom the clock is ticking.
Full article in Chinese:
LMAO this is what happens when you are drilling oil in a country that is controlled by the US...i am sure US companies can get better deals if they bid for it.
nonetheless its still a good deal to get in right now, doesnt matter that no one else wants it, iraq has huge potentials (if it can retain stability that is), and once it gets to the point where everyone wants in, it'd be a bit late for China to enter anyways.
nonetheless its still a good deal to get in right now, doesnt matter that no one else wants it, iraq has huge potentials (if it can retain stability that is), and once it gets to the point where everyone wants in, it'd be a bit late for China to enter anyways.
Schumacher
Senior Member
An excellent read that deals with another one of the many myths about China's economy, ie that China's growth and investments are very 'inefficient' that will lead to problems like bad debts etc.
Secret sauce
Nov 12th 2009
From The Economist print edition
China’s rapid growth is due not just to heavy investment, but also to the world’s fastest productivity gains
PRODUCTIVITY growth is perhaps the single most important gauge of an economy’s health. Nothing matters more for long-term living standards than improvements in the efficiency with which an economy combines capital and labour. Unfortunately, productivity growth is itself often inefficiently measured. Most analysts focus on labour productivity, which is usually calculated by dividing total output by the number of workers, or the number of hours worked. According to new figures published on November 5th, America’s output per hour worked has increased by 4.3% over the past year, thanks to big job cuts. Even more impressive is China, where labour productivity has risen by 7-8%.
The snag is that labour productivity is an incomplete gauge of efficiency. Firms can boost output per man-hour by investing more and equipping workers with better machinery. But once the extra capital spending is taken into account there may be little or no gain in overall economic efficiency. Part of the jump in America’s labour productivity during the “new economy” era of the late 1990s reflected a rise in investment as a share of GDP. The huge increase in China’s labour productivity in recent years is partly due to heavy investment rather than true efficiency gains.
A better gauge of an economy’s use of resources is “total factor productivity” (TFP), which tries to assess the efficiency with which both capital and labour are used. Once a country’s labour force stops growing and an increasing capital stock causes the return on new investment to decline, TFP becomes the main source of future economic growth. Unfortunately TFP is much harder to measure than labour productivity. It is calculated as the percentage increase in output that is not accounted for by changes in the volume of inputs of capital and labour. So if the capital stock and the workforce both rise by 2% and output rises by 3%, TFP goes up by 1%. Measuring hours worked is fairly easy, but different ways of valuing a country’s capital stock can produce different results.
The OECD publishes figures for its rich-country members. These show that since 1990, average TFP growth has been remarkably similar in America, Japan, Germany, Britain and France, at around 1% a year. A recent report by Andrew Cates, an economist at UBS, attempts to estimate TFP growth in emerging economies over the past two decades (see chart). He calculates that China has had by far the fastest annual rate of TFP growth, at around 4%. Probably no other country in history has enjoyed such rapid efficiency gains. India and other Asian emerging economies have also enjoyed faster productivity growth than other developing or developed regions. In contrast, productivity in Brazil and Russia has risen more slowly than in rich economies.
These figures undermine a common claim—that China’s rapid growth has been based solely on overinvestment. Sceptics like to compare China with the Soviet Union, where heavy investment also produced rapid rates of growth for many years before it collapsed. But the big difference is that TFP in the Soviet Union actually fell by an annual average of 1% over 30 years to 1988. In contrast China’s productivity has been lifted by a massive expansion of private enterprise, and a shift of labour out of agricultural work and into more productive jobs in industry. China’s average return on physical capital is now well above the global average, according to Goldman Sachs. A decade ago it was less than half the world average.
Why have the Asian economies led the pack? The most important determinants of longer-term productivity growth are the rate of adoption of existing and new technologies, the pace of domestic scientific innovation and changes in the organisation of production. These, in turn, depend on factors such as the openness of an economy to foreign direct investment and trade, education and the flexibility of labour markets.
Using a composite index of technology penetration and innovation (including, for instance, computers and mobile phones per head), Mr Cates finds a strong link between the rate of increase in an economy’s technological progress and its productivity growth. China’s level of technology is still well behind that in America, but it has seen by far the fastest rate of improvement over the past decade. This is not just because China started from such a low base but also because it is more open to foreign investment than many other emerging economies, including Japan and South Korea when they were at similar stages of development. China’s TFP growth is almost twice as fast as that of Japan and South Korea during their periods of peak economic growth.
An emerging advantage
UBS’s analysis suggests that the financial health of firms and governments also matters for productivity growth. Although TFP measures the extra gain in economic efficiency after taking account of the direct impact of a larger capital stock, weak balance-sheets constrain the availability of capital for new technology and innovation. The financial crisis may therefore reduce TFP growth in many rich countries. Some analysts also worry that future productivity growth in emerging economies will be curbed by slower growth in world trade and capital flows. But Mr Cates argues that healthier domestic balance-sheets in most emerging economies, along with continued rapid adoption of old and new technologies, should support robust productivity gains. He thinks that China, India, Indonesia and Brazil look particularly well placed. China’s surge in infrastructure spending will also help.
That said, even if China’s productivity growth remains faster than that of the developed world, it is likely to slow unless the government pushes ahead with bolder reforms. China’s growth is still too capital-intensive. Opening up the service sector to private firms and making it easier for workers to shift from rural to urban areas would result in a better allocation of labour and capital. That would help sustain rapid growth but would also make it more job-intensive. The resulting fall in labour-productivity growth might cause alarm among some analysts, but TFP would remain strong.
Secret sauce
Nov 12th 2009
From The Economist print edition
China’s rapid growth is due not just to heavy investment, but also to the world’s fastest productivity gains
PRODUCTIVITY growth is perhaps the single most important gauge of an economy’s health. Nothing matters more for long-term living standards than improvements in the efficiency with which an economy combines capital and labour. Unfortunately, productivity growth is itself often inefficiently measured. Most analysts focus on labour productivity, which is usually calculated by dividing total output by the number of workers, or the number of hours worked. According to new figures published on November 5th, America’s output per hour worked has increased by 4.3% over the past year, thanks to big job cuts. Even more impressive is China, where labour productivity has risen by 7-8%.
The snag is that labour productivity is an incomplete gauge of efficiency. Firms can boost output per man-hour by investing more and equipping workers with better machinery. But once the extra capital spending is taken into account there may be little or no gain in overall economic efficiency. Part of the jump in America’s labour productivity during the “new economy” era of the late 1990s reflected a rise in investment as a share of GDP. The huge increase in China’s labour productivity in recent years is partly due to heavy investment rather than true efficiency gains.
A better gauge of an economy’s use of resources is “total factor productivity” (TFP), which tries to assess the efficiency with which both capital and labour are used. Once a country’s labour force stops growing and an increasing capital stock causes the return on new investment to decline, TFP becomes the main source of future economic growth. Unfortunately TFP is much harder to measure than labour productivity. It is calculated as the percentage increase in output that is not accounted for by changes in the volume of inputs of capital and labour. So if the capital stock and the workforce both rise by 2% and output rises by 3%, TFP goes up by 1%. Measuring hours worked is fairly easy, but different ways of valuing a country’s capital stock can produce different results.
The OECD publishes figures for its rich-country members. These show that since 1990, average TFP growth has been remarkably similar in America, Japan, Germany, Britain and France, at around 1% a year. A recent report by Andrew Cates, an economist at UBS, attempts to estimate TFP growth in emerging economies over the past two decades (see chart). He calculates that China has had by far the fastest annual rate of TFP growth, at around 4%. Probably no other country in history has enjoyed such rapid efficiency gains. India and other Asian emerging economies have also enjoyed faster productivity growth than other developing or developed regions. In contrast, productivity in Brazil and Russia has risen more slowly than in rich economies.
These figures undermine a common claim—that China’s rapid growth has been based solely on overinvestment. Sceptics like to compare China with the Soviet Union, where heavy investment also produced rapid rates of growth for many years before it collapsed. But the big difference is that TFP in the Soviet Union actually fell by an annual average of 1% over 30 years to 1988. In contrast China’s productivity has been lifted by a massive expansion of private enterprise, and a shift of labour out of agricultural work and into more productive jobs in industry. China’s average return on physical capital is now well above the global average, according to Goldman Sachs. A decade ago it was less than half the world average.
Why have the Asian economies led the pack? The most important determinants of longer-term productivity growth are the rate of adoption of existing and new technologies, the pace of domestic scientific innovation and changes in the organisation of production. These, in turn, depend on factors such as the openness of an economy to foreign direct investment and trade, education and the flexibility of labour markets.
Using a composite index of technology penetration and innovation (including, for instance, computers and mobile phones per head), Mr Cates finds a strong link between the rate of increase in an economy’s technological progress and its productivity growth. China’s level of technology is still well behind that in America, but it has seen by far the fastest rate of improvement over the past decade. This is not just because China started from such a low base but also because it is more open to foreign investment than many other emerging economies, including Japan and South Korea when they were at similar stages of development. China’s TFP growth is almost twice as fast as that of Japan and South Korea during their periods of peak economic growth.
An emerging advantage
UBS’s analysis suggests that the financial health of firms and governments also matters for productivity growth. Although TFP measures the extra gain in economic efficiency after taking account of the direct impact of a larger capital stock, weak balance-sheets constrain the availability of capital for new technology and innovation. The financial crisis may therefore reduce TFP growth in many rich countries. Some analysts also worry that future productivity growth in emerging economies will be curbed by slower growth in world trade and capital flows. But Mr Cates argues that healthier domestic balance-sheets in most emerging economies, along with continued rapid adoption of old and new technologies, should support robust productivity gains. He thinks that China, India, Indonesia and Brazil look particularly well placed. China’s surge in infrastructure spending will also help.
That said, even if China’s productivity growth remains faster than that of the developed world, it is likely to slow unless the government pushes ahead with bolder reforms. China’s growth is still too capital-intensive. Opening up the service sector to private firms and making it easier for workers to shift from rural to urban areas would result in a better allocation of labour and capital. That would help sustain rapid growth but would also make it more job-intensive. The resulting fall in labour-productivity growth might cause alarm among some analysts, but TFP would remain strong.
bladerunner
Banned Idiot
Schumacher
Senior Member
bladerunner, don't know why you say they're at the forefront of doubting China's figures, don't remember seeing them making a big deal out of it at all.
bladerunner
Banned Idiot
Its the opinion I formed over a period of years , when articles Ive read on China's economic performance casts some doubt in the figures. The Economist is a good magazine and IMO their comments on China's economy is more often than not rather reserved, with praise grudgingly given and often with riders. So I find it rather ironic that they publish something like this.
They don't make a big deal out of it, as it's rarely more than a couple of sentences tucked away in the middle of the passage and sometimes rather subtle, perhaps the articles are written by different people.
One phrase Ive seen them use amongst other innuendoes is " Conventional economics suggest China will/ should be........." So does'nt this suggest an element of doubt?
So on that basis if I was to draw up a list of magazines that cast doubt on China's numbers "The Economist" would be amongst them, though not necessarily at the top.
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solarz
Brigadier
This is why I think economics is a hack science. Why is building infrastructure a bad thing? When you develop a network of highways, trade and tourism will naturally pick up, and even if an economic recession occurs, your infrastructures will remain, unlike "consumer spending".
Even the extravagant olympic venues, they will still be there decades from now, contributing to both economy and society through sporting events and tourism.