Chinese Economics Thread
- Thread starter Norfolk
- Start date
Hendrik_2000
Lieutenant General
And yet year after year the consumer part of GDP keep growing So what!
Debt as percentage of GDP the lowest among industrial coutry
Debt as percentage of GDP the lowest among industrial coutry
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broadsword
Brigadier
This simply means the "rebalancing from investment and export" doesn't worked well in 2017.
Add this to the exploding Chinese customer debt, and it will become visible the cellphone/car / showing that the cusomer spending hit the peak.
I mean, check this 43.2->46.8 in one year , means 5.6% consumer debt increase.5.6% GDP growth comming from consumer debt increase.
This is quater over quarter.
Compare the above to this:
In the past years aprox 5 % of the GDP growth come from the consumption financed from loans.
It means that as soon as the consumers start to decrease the loan ballances this will decrease the GDP growth.
See?
Without increasing consumer debt the Chinese GDP increase should be 1% in 2017.
As soon as the consumers start to deleverage ,like is UK ,the decreasing debt will deduct from the GDP grwoth.
Example the UK GDP growth was 11% smaller due to the consumer deleveraging between 2010-2016.
It is the news of the year : )
The whole Chinese story hit the wall .
They failed to ballance the growth, all that they did was to throw under the bus the middle class, and give bit more wealth to the goverment officials and to the business owners.
Now the only way out from this is same massive weapon / military program
Or deep political/economy changes.
Or whatever. I think they have very restricted freedom of move politicaly.
You cherry pick the data you want to paint a gloomy picture of China. No one doubts that China's growth will plateau in future, but you seem to base your forecast on dubious logic.
So, China's consumption of pork, cellphones and pork has hit a wall. And because of that, a crisis is brewing, leading to a slowdown in GDP growth? I am not saying GDP will slow down, it has been slowing down. But eating less pork is not going to make a difference to the economy because people substitute other items for pork.
I don't know about the spending habits of the people where you live, but he Chinese people's expenditure do not consist of cellphone, cars and pork only. There are many other goods and services that drive the economy and that is why you get ever increasing annual increase in retail sales. As for household debt, there are other factors to consider, especially employment. And it is still below Germany's, far below UK's and the US'.
I want to point out car sales slowed because the preceding year saw a surge in demand due to increase in car tax the following year. More cars were bought that year to avoid having to pay tax the following year. And what you get is a high base for that year.
Your pessimism is similar to that naysayers over the years who called hard landings after hard landings. Too soon and too little understanding of China's economy.
You seem to think that if household debt to GDP were to be frozen, the economy will go into crisis. What has that got to do with the middle class?
Based on your logic, the regimes in Europe should have adopted China's style of communism that has uplfited hundreds of millions out of poverty and continued to defy doooomsayers over the past twenty years.
It pains you that the time has not arrived for China to hard-land.
Hendrik_2000
Lieutenant General
Exactly the smart phone sales goes down because this year model only offer modest improvement over last year model
Pork prices goes up because the government shut down thousands of backyard pork producer since they cannot met a stricter environment standard and has no capital to modernized
Small pig farm is the major contributor of water degradation since they directly discharge to the river
So the government want to rationalized and modernized the pig farm industry
China supersizes pig farms to cut costs in world's top pork market
WUXUAN COUNTY, China (Reuters) - Surrounded by mountains in a remote part of southwestern China, Xinguangan’s first large-scale, modern pig farm is getting ready to produce its first offspring.pigs are seen on a family farm in Xiaoxinzhuang village, Hebei province, China January 25, 2018. REUTERS/Dominique Patton
By the end of the year, 10,000 sows will live inside two huge barns on this 73-hectare (180-acre) site, producing up to 280,000 piglets annually, or about 20,000 tonnes of pork.
The farm, big even by American standards, is one of a record number of large-scale projects that will be built in China this year as it shifts a big chunk of its pork production from backyard pig pens to automated, intensive hog barns of the kind widely used in the United States.
Some in the industry estimate it could build several hundred sow farms with about 5,000-8,000 head this year, even more than last year, accelerating the transformation of the world’s biggest pork industry.
Larger, more standardised farms are also paving the way to a more sophisticated market, with China approving this week a live hog futures contract to help farmers hedge price risks.
But there are also doubts about China’s ability to pull off such a rapid leap from age-old traditional methods to cutting-edge industrial production, given the shortage of experienced people and the high risk of disease.
“Industrialization has never been this big before,” said Martin Jensen, executive partner at Carthage & MHJ Agritech Consulting, which runs large farms for Chinese clients and trains staff.
The overhaul comes as hundreds of thousands of backyard farms are shuttered, too small to bear the cost of meeting new pollution standards. This is opening up room for megafarms using new methods and imported genetics to boost productivity and cut costs.
Higher output from these farms will tame China’s notorious pork price volatility, raise food safety standards, and improve the environment, say experts.
In the long-term, it also could turn China’s pork producers into international competitors, offering quality, competitively priced meat to regional markets.
“As more large firms enter the market, food safety will increase and costs will drop. Global competitiveness will increase and China will certainly export,” said Fang Shijun, chief researcher at research firm Huitong Data.
Fang predicts a growing surplus of pork from 2018 to 2020, as production grows amid slowing domestic demand.
INDUSTRY UPHEAVAL
Modernizing China’s pig farms is a massive undertaking. More than half the country’s almost 700 million pigs are produced on family farms, which slaughter fewer than 500 a year. Though many have switched from feeding kitchen scraps to protein-rich soymeal, productivity still lags Western farms.
Costs are among the world’s highest, thanks to heavy dependence on imported soybeans.
Recent policy has driven many small farms out however, exacerbating an earlier market rout. A nationwide crackdown on farm pollution intensified during 2017, forcing hundreds of thousands of pig farms to shut. Many were smaller farms without the funds or land to build waste treatment facilities.
“We didn’t expect it (to be so strict),” said Wang Chuduan, animal science professor at China Agriculture University. “The impact was very obvious.”
A government blueprint for the industry’s development also encouraged expansion in the northeastern corn belt while restricting livestock farming in populous coastal regions. That further encouraged more intensive production by China’s new corporate farmers, flush with money raised on the stock market and fueled by 2016’s record hog prices.
Since 2016, almost 70 billion yuan ($10.94 billion) in new farm investment has been announced by 26 listed companies, according to analysts at ZhuE, a trade website.
NEW GENETICS, EQUIPMENT
Pigs are seen on a family farm in Xiaoxinzhuang village, Hebei province, China January 25, 2018. REUTERS/Dominique Patton
Imported genetics are boosting productivity. Breeding pigs supplied by U.K.-based Genus and others from Canada, France and the United States produce a higher number of piglets per litter, more lean meat and grow faster than China’s once-common native breeds.
Genus, which sells its PIC-brand pigs to firms like Xinguangan, reported an 80 percent jump in profits from the China market in its 2017 financial year, and is currently stocking a new breeding farm in southern China to add to three others it runs in the country.
“We’re behind demand. The orders people are asking for, no-one can really do it,” said David Casey, product performance director for Asia at Genus.
He cited a new client who wants to build eight 5,000-head sow farms this year, requiring 35,000 young sows in September.
Getting the best out of the genetics requires following best practices. On the Wuxuan farm, technicians in an on-site laboratory scrutinize samples from every batch of semen collected from boars, checking motility levels and other indicators that boost chances of pregnancy.
Boars in well-run facilities can service up to 200 sows, twice as many as the average farm in China, said Casey, thanks to work done in such labs.
Slideshow (7 Images)
Fast-expanding pig firm Guangxi Yangxiang is replacing male breeding stock at the end of every year, instead of every two to three years like many others.
“That guarantees that the genetics we’re using are the newest. Genetics are continually improving,” said Guangxi Yangxiang Co Ltd Vice President Gao Yuanfei.
STEEP LEARNING CURVE
Such rapid scaling up faces many potential pitfalls however. Investment costs are high, particularly under new environmental laws. Farms will spend 30 yuan per sow on waste treatment alone, said Professor Wang.
Preventing disease is challenging in China, where diseases already eradicated in other countries are still prevalent, and the huge number of livestock and its proximity to people raises the risk of contamination. Once disease enters an intensive farm, it can kill hundreds of animals in days.
Even farms supplying new farms with young sows have been hit by disease, reducing already short supplies.
Most daunting perhaps is the shortage of trained workers.
“Raising pigs is no longer how it was in the past, for farmers with no professional knowledge,” said Fang, the analyst.
Most of Xinguangan’s staff are university graduates but even so, awareness of animal health is low, said Hong Haozhou, consulting vet from Carthage & MHJ Agritech. Drugs are not always issued in the right way and biosecurity measures do not always focus on the biggest risks.
“From the hardware perspective, there’s not much difference (from Western farms),” said Hong. “You’ve got automatic feeders, temperature control systems, automatic fans, everything is the same as international farms. But it’s the internal problems, like insufficient understanding of healthy development of pigs.”
For now, Xinguangan is managing to keep disease at bay. Workers spend 48 hours in quarantine before entering the farm to prevent transmission of disease, and then live on site for weeks at a time.
Like in the United States, feed trucks deliver meal over a fence to stop vehicles from contaminating the site with disease from other farms.
Offspring from the sow farm will go to separate locations for fattening to reduce the risk of spreading disease between animals, adding extra complexity to managing the operation.
“Our construction model and our production process is completely based on studying the U.S.,” said Chen Gang, who oversees Xinguangan’s pig farming operations in the Guangxi region.
Pork prices goes up because the government shut down thousands of backyard pork producer since they cannot met a stricter environment standard and has no capital to modernized
Small pig farm is the major contributor of water degradation since they directly discharge to the river
So the government want to rationalized and modernized the pig farm industry
China supersizes pig farms to cut costs in world's top pork market
WUXUAN COUNTY, China (Reuters) - Surrounded by mountains in a remote part of southwestern China, Xinguangan’s first large-scale, modern pig farm is getting ready to produce its first offspring.pigs are seen on a family farm in Xiaoxinzhuang village, Hebei province, China January 25, 2018. REUTERS/Dominique Patton
By the end of the year, 10,000 sows will live inside two huge barns on this 73-hectare (180-acre) site, producing up to 280,000 piglets annually, or about 20,000 tonnes of pork.
The farm, big even by American standards, is one of a record number of large-scale projects that will be built in China this year as it shifts a big chunk of its pork production from backyard pig pens to automated, intensive hog barns of the kind widely used in the United States.
Some in the industry estimate it could build several hundred sow farms with about 5,000-8,000 head this year, even more than last year, accelerating the transformation of the world’s biggest pork industry.
Larger, more standardised farms are also paving the way to a more sophisticated market, with China approving this week a live hog futures contract to help farmers hedge price risks.
But there are also doubts about China’s ability to pull off such a rapid leap from age-old traditional methods to cutting-edge industrial production, given the shortage of experienced people and the high risk of disease.
“Industrialization has never been this big before,” said Martin Jensen, executive partner at Carthage & MHJ Agritech Consulting, which runs large farms for Chinese clients and trains staff.
The overhaul comes as hundreds of thousands of backyard farms are shuttered, too small to bear the cost of meeting new pollution standards. This is opening up room for megafarms using new methods and imported genetics to boost productivity and cut costs.
Higher output from these farms will tame China’s notorious pork price volatility, raise food safety standards, and improve the environment, say experts.
In the long-term, it also could turn China’s pork producers into international competitors, offering quality, competitively priced meat to regional markets.
“As more large firms enter the market, food safety will increase and costs will drop. Global competitiveness will increase and China will certainly export,” said Fang Shijun, chief researcher at research firm Huitong Data.
Fang predicts a growing surplus of pork from 2018 to 2020, as production grows amid slowing domestic demand.
INDUSTRY UPHEAVAL
Modernizing China’s pig farms is a massive undertaking. More than half the country’s almost 700 million pigs are produced on family farms, which slaughter fewer than 500 a year. Though many have switched from feeding kitchen scraps to protein-rich soymeal, productivity still lags Western farms.
Costs are among the world’s highest, thanks to heavy dependence on imported soybeans.
Recent policy has driven many small farms out however, exacerbating an earlier market rout. A nationwide crackdown on farm pollution intensified during 2017, forcing hundreds of thousands of pig farms to shut. Many were smaller farms without the funds or land to build waste treatment facilities.
“We didn’t expect it (to be so strict),” said Wang Chuduan, animal science professor at China Agriculture University. “The impact was very obvious.”
A government blueprint for the industry’s development also encouraged expansion in the northeastern corn belt while restricting livestock farming in populous coastal regions. That further encouraged more intensive production by China’s new corporate farmers, flush with money raised on the stock market and fueled by 2016’s record hog prices.
Since 2016, almost 70 billion yuan ($10.94 billion) in new farm investment has been announced by 26 listed companies, according to analysts at ZhuE, a trade website.
NEW GENETICS, EQUIPMENT
Pigs are seen on a family farm in Xiaoxinzhuang village, Hebei province, China January 25, 2018. REUTERS/Dominique Patton
Imported genetics are boosting productivity. Breeding pigs supplied by U.K.-based Genus and others from Canada, France and the United States produce a higher number of piglets per litter, more lean meat and grow faster than China’s once-common native breeds.
Genus, which sells its PIC-brand pigs to firms like Xinguangan, reported an 80 percent jump in profits from the China market in its 2017 financial year, and is currently stocking a new breeding farm in southern China to add to three others it runs in the country.
“We’re behind demand. The orders people are asking for, no-one can really do it,” said David Casey, product performance director for Asia at Genus.
He cited a new client who wants to build eight 5,000-head sow farms this year, requiring 35,000 young sows in September.
Getting the best out of the genetics requires following best practices. On the Wuxuan farm, technicians in an on-site laboratory scrutinize samples from every batch of semen collected from boars, checking motility levels and other indicators that boost chances of pregnancy.
Boars in well-run facilities can service up to 200 sows, twice as many as the average farm in China, said Casey, thanks to work done in such labs.
Slideshow (7 Images)
Fast-expanding pig firm Guangxi Yangxiang is replacing male breeding stock at the end of every year, instead of every two to three years like many others.
“That guarantees that the genetics we’re using are the newest. Genetics are continually improving,” said Guangxi Yangxiang Co Ltd Vice President Gao Yuanfei.
STEEP LEARNING CURVE
Such rapid scaling up faces many potential pitfalls however. Investment costs are high, particularly under new environmental laws. Farms will spend 30 yuan per sow on waste treatment alone, said Professor Wang.
Preventing disease is challenging in China, where diseases already eradicated in other countries are still prevalent, and the huge number of livestock and its proximity to people raises the risk of contamination. Once disease enters an intensive farm, it can kill hundreds of animals in days.
Even farms supplying new farms with young sows have been hit by disease, reducing already short supplies.
Most daunting perhaps is the shortage of trained workers.
“Raising pigs is no longer how it was in the past, for farmers with no professional knowledge,” said Fang, the analyst.
Most of Xinguangan’s staff are university graduates but even so, awareness of animal health is low, said Hong Haozhou, consulting vet from Carthage & MHJ Agritech. Drugs are not always issued in the right way and biosecurity measures do not always focus on the biggest risks.
“From the hardware perspective, there’s not much difference (from Western farms),” said Hong. “You’ve got automatic feeders, temperature control systems, automatic fans, everything is the same as international farms. But it’s the internal problems, like insufficient understanding of healthy development of pigs.”
For now, Xinguangan is managing to keep disease at bay. Workers spend 48 hours in quarantine before entering the farm to prevent transmission of disease, and then live on site for weeks at a time.
Like in the United States, feed trucks deliver meal over a fence to stop vehicles from contaminating the site with disease from other farms.
Offspring from the sow farm will go to separate locations for fattening to reduce the risk of spreading disease between animals, adding extra complexity to managing the operation.
“Our construction model and our production process is completely based on studying the U.S.,” said Chen Gang, who oversees Xinguangan’s pig farming operations in the Guangxi region.
manqiangrexue
Brigadier
First of all, why do you make me so right? LOL I said Europeans have no future so all they can do is hate on successful economies and this is really all you do for today's posts? Haha
There is no evidence that the rebalancing is not working. All you are doing is picking on some markets that didn't expand this year and saying that represents ALL of China when in fact, most of the markets are expanding and China's total market is expanding. I also see how you hope other people can't read as you cited an article that says that pork sales in China are peaked because Chinese people are eating more vegetables and healthy food so you want to spin that article to mean that the entire Chinese market has peaked? Did you think that with the Chinese population evening out, you'd see 10% increased pork-eating every year indefinitely?? LOL You are funny, but clearly not smart.
China is not Poland, Hungary, Japan, Germany, or the Soviet Union. None of these countries can come close to what China has already done not to mention what it is ready to do. When these small countries run into a wall, they are stopped. When China runs into the "wall", the wall is broken. That is exactly why, as Hendrik_2000 has pointed out, there are Gordon Chang like-predictions like the exact garbage that you are writing every year and every year, China grows by another astounding amount. It's never-ending; in 2050, you will still be saying that China will be ready for crisis and collapse and China will still be growing and blowing away Western expectations.
What is your plan when China grows 6.5% next year and EU grows somewhere between 2 and -2 percent? Look for more "evidence" to say that next year, China will finally hit that wall? Your life is sad; must be hard to be jealous all the time and making excuses. Are most Europeans grinchy like you or do they kinda just accepted that they're not competitive anymore and just relax? I think latter, right?
There is no evidence that the rebalancing is not working. All you are doing is picking on some markets that didn't expand this year and saying that represents ALL of China when in fact, most of the markets are expanding and China's total market is expanding. I also see how you hope other people can't read as you cited an article that says that pork sales in China are peaked because Chinese people are eating more vegetables and healthy food so you want to spin that article to mean that the entire Chinese market has peaked? Did you think that with the Chinese population evening out, you'd see 10% increased pork-eating every year indefinitely?? LOL You are funny, but clearly not smart.
China is not Poland, Hungary, Japan, Germany, or the Soviet Union. None of these countries can come close to what China has already done not to mention what it is ready to do. When these small countries run into a wall, they are stopped. When China runs into the "wall", the wall is broken. That is exactly why, as Hendrik_2000 has pointed out, there are Gordon Chang like-predictions like the exact garbage that you are writing every year and every year, China grows by another astounding amount. It's never-ending; in 2050, you will still be saying that China will be ready for crisis and collapse and China will still be growing and blowing away Western expectations.
What is your plan when China grows 6.5% next year and EU grows somewhere between 2 and -2 percent? Look for more "evidence" to say that next year, China will finally hit that wall? Your life is sad; must be hard to be jealous all the time and making excuses. Are most Europeans grinchy like you or do they kinda just accepted that they're not competitive anymore and just relax? I think latter, right?
Consumption increasing, imports and exports both increasing, vehicle production increasing, and you think this is a "dead fish?" Do dead fish in Europe grow by 7% annually? Biologically speaking, I'm trying to understand the term LOL. What does that make the EU, with an economy smaller in 2018 than 2008? Fossil fish? Haha
broadsword
Brigadier
His judgement is blinded by his hatred and jealousy.
manqiangrexue
Brigadier
Nah, we're troll-hunting. We got a little fella from an economy with negative average 10 year growth who apparently doesn't even know that the EU is not the world's largest economy by either nominal nor PPP and he wants to Gordon Chang (verb) here LOL. So we're gonna gonna put him in his place everyday for fun.
He's just trying to stop himself from feeling crummy all the time. He was proud of his heritage, proud of Europe when this discussion started, claiming it was so successful in the past and that it's economy is the largest in the world and it's an environment for diversified fast growth! Then, I showed him that historically, Europe suffered more mismanagement and famines than China by far, its GDP is smaller than China's (PPP) and the US' (nominal), and that there is in fact negative growth in the EU in for the last decade, causing him to want to disband the EU LOLOL. The lil fella doesn't even believe in who he is anymore and he's not thinking straight. ("Your consumption is growing, imports growing, exports growing, production growing, means you're a DEAD FISH!" LOLOL) He so desperately wants to tear someone else down because misery loves company but in that respect, it's better that he just hang out with other Europeans, not the Chinese.
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Petro-Yuan coming soon.
February 8, 2018 10:00 am JST
China is ready for its own, yuan-based oil benchmark
The Shanghai futures exchange is welcoming all parties wanting to break with U.S. dominance
YUSHO CHO and TAKESHI KUMON, Nikkei staff writers
SHANGHAI/TOKYO China is almost ready for its next step toward full-fledged superpower status: launching crude oil futures trading.
Final preparations are underway at the Shanghai International Energy Exchange, or INE, in the city's pilot free trade zone. After five system tests in 2017, the trading platform has had small glitches but is nearly set to go, according to Tang Yun, an assistant to the president of Shanghai-based East Asia Futures. Trading in yuan could start by March, once the authorities give the go-ahead.
While China mostly prohibits foreign investors from trading commodity futures on its soil -- to prevent a flood of speculative funds -- it is opening its doors wide for crude. Jiang Yang, vice chairman of the China Securities Regulatory Commission, on Jan. 15 said China will welcome both domestic and overseas investors.
Simply put, the government is determined to turn the INE's crude oil futures into a global benchmark, and to do so it needs to get large numbers of traders involved. The more participants a market attracts, the more liquid it will be, and the more it will inspire confidence.
This is not China's first attempt at handling oil futures. It launched trading in 1993, only to shut down the operation about one-and-a-half years later due to volatility and other issues.
Now China is calling on oil producers and consumers -- from global majors to its own big players -- to participate in the new market. The INE plans to handle seven kinds of Middle Eastern crude, including Basra Light produced in Iraq, Dubai crude and Oman crude. , or Sinopec, and other state-owned Chinese companies that import large volumes from the Middle East are expected to make use of the market.
So are small and midsize refineries. The government has been working to liberalize the business and in 2015 started assigning oil import quotas to "teapots" -- small, independent refineries. The teapots see the INE as a place to hedge the risk of price swings on Middle Eastern imports.
What China is doing is challenging the U.S.-led world order.
Although oil demand has shifted toward Asia, the world's leading benchmarks are still West Texas Intermediate in the U.S. and Brent crude in London.
Dubai crude, a benchmark for Asia, is mainly traded on a spot basis, while futures trading in Tokyo and elsewhere is sluggish. In reality, Dubai crude prices are influenced by Brent futures.
In 2017, China imported 8.4 million barrels of crude per day. That made it the world's top importer, ahead of the U.S. at 7.9 million barrels. Over the past decade China's oil imports have surged 200%.
"Crude Oil Futures Q&A," a leaflet released by the INE last May, expresses China's discontent with the oil market's Western tilt. It notes that while the U.S. and Europe have mature futures markets, it is difficult for prices in these markets to properly reflect Asia-Pacific supply and demand. The WTI and Brent prices have retreated quickly in recent trading sessions, dragged down by the sudden turmoil in the broader financial system.
China aims to gain control of crude price-setting by taking advantage of its buying power. "The government must have thought the futures market has a chance of success, given the size of the country's economy and actual demand [for crude oil] now," said Taro Oki, president of Okachi (Shanghai), who helped design the crude futures framework around 2012-2013 at the request of the Shanghai Futures Exchange, the INE's parent.
The government's other ambition is to challenge the dollar with oil futures traded in yuan. Virtually all global crude oil trading is in dollars, barring an estimated 1% in other currencies. It forms the backbone of U.S. dominance in the world economy. China wants to make the yuan a global currency, and its massive crude oil trading could help build momentum.
WINNING FRIENDS China has said it will increase imports from countries that are willing to sell crude for yuan. If such transactions grow, the yuan's liquidity will also grow in global markets. In turn, this would make futures trading in yuan more appealing to buyers and sellers of crude, as a price hedge.
To create this virtuous cycle, China is looking to countries that are on unfriendly terms with the U.S., such as Russia and Iran. Since 2015, China and Russia have been using yuan to settle some oil transactions.
February 8, 2018 10:00 am JST
China is ready for its own, yuan-based oil benchmark
The Shanghai futures exchange is welcoming all parties wanting to break with U.S. dominance
YUSHO CHO and TAKESHI KUMON, Nikkei staff writers
SHANGHAI/TOKYO China is almost ready for its next step toward full-fledged superpower status: launching crude oil futures trading.
Final preparations are underway at the Shanghai International Energy Exchange, or INE, in the city's pilot free trade zone. After five system tests in 2017, the trading platform has had small glitches but is nearly set to go, according to Tang Yun, an assistant to the president of Shanghai-based East Asia Futures. Trading in yuan could start by March, once the authorities give the go-ahead.
While China mostly prohibits foreign investors from trading commodity futures on its soil -- to prevent a flood of speculative funds -- it is opening its doors wide for crude. Jiang Yang, vice chairman of the China Securities Regulatory Commission, on Jan. 15 said China will welcome both domestic and overseas investors.
Simply put, the government is determined to turn the INE's crude oil futures into a global benchmark, and to do so it needs to get large numbers of traders involved. The more participants a market attracts, the more liquid it will be, and the more it will inspire confidence.
This is not China's first attempt at handling oil futures. It launched trading in 1993, only to shut down the operation about one-and-a-half years later due to volatility and other issues.
Now China is calling on oil producers and consumers -- from global majors to its own big players -- to participate in the new market. The INE plans to handle seven kinds of Middle Eastern crude, including Basra Light produced in Iraq, Dubai crude and Oman crude. , or Sinopec, and other state-owned Chinese companies that import large volumes from the Middle East are expected to make use of the market.
So are small and midsize refineries. The government has been working to liberalize the business and in 2015 started assigning oil import quotas to "teapots" -- small, independent refineries. The teapots see the INE as a place to hedge the risk of price swings on Middle Eastern imports.
What China is doing is challenging the U.S.-led world order.
Although oil demand has shifted toward Asia, the world's leading benchmarks are still West Texas Intermediate in the U.S. and Brent crude in London.
Dubai crude, a benchmark for Asia, is mainly traded on a spot basis, while futures trading in Tokyo and elsewhere is sluggish. In reality, Dubai crude prices are influenced by Brent futures.
In 2017, China imported 8.4 million barrels of crude per day. That made it the world's top importer, ahead of the U.S. at 7.9 million barrels. Over the past decade China's oil imports have surged 200%.
"Crude Oil Futures Q&A," a leaflet released by the INE last May, expresses China's discontent with the oil market's Western tilt. It notes that while the U.S. and Europe have mature futures markets, it is difficult for prices in these markets to properly reflect Asia-Pacific supply and demand. The WTI and Brent prices have retreated quickly in recent trading sessions, dragged down by the sudden turmoil in the broader financial system.
China aims to gain control of crude price-setting by taking advantage of its buying power. "The government must have thought the futures market has a chance of success, given the size of the country's economy and actual demand [for crude oil] now," said Taro Oki, president of Okachi (Shanghai), who helped design the crude futures framework around 2012-2013 at the request of the Shanghai Futures Exchange, the INE's parent.
The government's other ambition is to challenge the dollar with oil futures traded in yuan. Virtually all global crude oil trading is in dollars, barring an estimated 1% in other currencies. It forms the backbone of U.S. dominance in the world economy. China wants to make the yuan a global currency, and its massive crude oil trading could help build momentum.
WINNING FRIENDS China has said it will increase imports from countries that are willing to sell crude for yuan. If such transactions grow, the yuan's liquidity will also grow in global markets. In turn, this would make futures trading in yuan more appealing to buyers and sellers of crude, as a price hedge.
To create this virtuous cycle, China is looking to countries that are on unfriendly terms with the U.S., such as Russia and Iran. Since 2015, China and Russia have been using yuan to settle some oil transactions.
Cont.
"Our priority area of cooperation is energy," Russian President Vladimir Putin told his Chinese counterpart, Xi Jinping, when he welcomed him at the Kremlin last July. "Russia is a leading oil supplier to China."
Energy is a major focus of cooperation between China and Russia. © Kremlin via REUTERS
In fact, Russia became the No. 1 oil exporter to China in 2016, surpassing Saudi Arabia.
"China remains Russia's biggest trade partner," Xi replied. "Our trade parameters are continuously improving."
In November, Putin and Xi met on the sidelines of the Asia-Pacific Economic Cooperation summit in Vietnam. Two days later, Russia completed the expansion of its Eastern Siberia-Pacific Ocean, or ESPO, pipeline for China. The pipeline connects Skovorodino in eastern Siberia and Daqing in China to supply crude to refineries in northeastern China.
As of January, Russia's annual capacity to export oil to China stood at 30 million tons, double the figure a year earlier. That translates to about 600,000 barrels a day.
China's eagerness to settle trade in yuan comes at the perfect time for Russia. The U.S. has imposed economic sanctions against state oil giant Rosneft and other energy companies, making it difficult for them to carry out transactions and financing in dollars. Iran was in a similar boat until 2016, facing tough U.S. sanctions over its nuclear program. To offset a steep fall in exports to customers such as Japan, Iran increased shipments to China, in some cases accepting yuan in return.
Venezuela is also keen to play along.
Head of Russian state oil firm Rosneft Igor Sechin (left, standing) shakes hands with Venezuela's Oil Minister and President of the Venezuelan state oil company PDVSA Manuel Quevedo, in front of Venezuela's President Nicolas Maduro, in Maiquetia, Venezuela on Dec. 16. © Reuters
"Venezuela is going to implement a new system of international payments and will create a basket of currencies to free us from the dollar," President Nicolas Maduro said in September. The following week, he announced a sale price for crude oil in yuan. Plagued by economic turmoil, Maduro clearly intends to rely more on crude exports to China.
Saudi Arabia is the big X factor. The kingdom is weighing locations for an initial public offering of Saudi Arabian Oil, the state company better known as Saudi Aramco. There is a possibility that Riyadh might agree to settle some trade in yuan to pave the way for a listing in China.
"Our priority area of cooperation is energy," Russian President Vladimir Putin told his Chinese counterpart, Xi Jinping, when he welcomed him at the Kremlin last July. "Russia is a leading oil supplier to China."
Energy is a major focus of cooperation between China and Russia. © Kremlin via REUTERS
In fact, Russia became the No. 1 oil exporter to China in 2016, surpassing Saudi Arabia.
"China remains Russia's biggest trade partner," Xi replied. "Our trade parameters are continuously improving."
In November, Putin and Xi met on the sidelines of the Asia-Pacific Economic Cooperation summit in Vietnam. Two days later, Russia completed the expansion of its Eastern Siberia-Pacific Ocean, or ESPO, pipeline for China. The pipeline connects Skovorodino in eastern Siberia and Daqing in China to supply crude to refineries in northeastern China.
As of January, Russia's annual capacity to export oil to China stood at 30 million tons, double the figure a year earlier. That translates to about 600,000 barrels a day.
China's eagerness to settle trade in yuan comes at the perfect time for Russia. The U.S. has imposed economic sanctions against state oil giant Rosneft and other energy companies, making it difficult for them to carry out transactions and financing in dollars. Iran was in a similar boat until 2016, facing tough U.S. sanctions over its nuclear program. To offset a steep fall in exports to customers such as Japan, Iran increased shipments to China, in some cases accepting yuan in return.
Venezuela is also keen to play along.
Head of Russian state oil firm Rosneft Igor Sechin (left, standing) shakes hands with Venezuela's Oil Minister and President of the Venezuelan state oil company PDVSA Manuel Quevedo, in front of Venezuela's President Nicolas Maduro, in Maiquetia, Venezuela on Dec. 16. © Reuters
"Venezuela is going to implement a new system of international payments and will create a basket of currencies to free us from the dollar," President Nicolas Maduro said in September. The following week, he announced a sale price for crude oil in yuan. Plagued by economic turmoil, Maduro clearly intends to rely more on crude exports to China.
Saudi Arabia is the big X factor. The kingdom is weighing locations for an initial public offering of Saudi Arabian Oil, the state company better known as Saudi Aramco. There is a possibility that Riyadh might agree to settle some trade in yuan to pave the way for a listing in China.