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Energy, Environment, and Economy

Refining a Relationship: Venezuela and China

Hugo Chavez and Hu Jintao met on September 24, 2008 and signed 12 cooperative deals dealing with “trade, oil, finance, education, justice, telecommunications, infrastructure, sports and cultural relics” (Xinhua). The  economic and oil agreements appear to be the most politically important since Venezuela is aggressively attempting to diversity its options in dispersing its abundant supplies of heavy crude oil.

Below, I explore possible effects of Chavez’s goal to ship 1,000,000 barrels of oil a day to China by 2012.

Amount of Trade / Growing Cooperation.

In 2001, China and Venezuela established a joint trade “committee [that] aims at consolidating and strengthening trade cooperation. “ (Xinhua), which helped China become one of Venezula’s five largest trading partners. The US, Brazil, and Colombia are among the others.  China’s money, however, mostly travels toward the EU, the US, Japan, and the ASEAN nations (People’s Daily).

Year on year, China’s trade with Venezuela is steadily increasing. “Bilateral trade in the first seven months reached $6.23 billion, compared with $5.9 billion for all of 2007, Foreign Ministry spokeswoman Jiang Yu said” (Bodzin and Wang, Bloomberg).

Below is a chart examining the rise in trade between China and Venezuela.

Year

Total Exports to China

Total Imports From China

Oil To China

2000 >200 million total from (p202)
2001 >350 million total
from (p202-3)
2002 400-500 million total from (p202)
2003 543 million 199 million
2004 738 million 596 million 12,300 b/ day
2005 1,234 million 908 million 50,000 b/day (est.)
2006 2,622 million 1,698 million ~150,000 b/day
2007 3,014 million 2,835 million 200,000 b/day
2008 6.23 billion total Through July (Bloomberg) 364,000 b/day
2009 (est) > 8 billion total est. 500,000 b/day

(Unless otherwise indicated, data is from China Daily July 5, 2008; figures in USD.)

“Heavy” New Agreements

In the September 25th agreements, “Hu said China would like to deepen “all-phase and integrated” oil cooperation with Venezuela, encourage businesses to invest in Venezuela and establish a trade zone. China will also participate in building Venezuela’s infrastructures, including railway system, telecommunications network, social housing and hydro-power” (Xinhua). Additionally, China and Venezuela plan to construct two refineries, one in each country (Oil and Gas Journal).

Venezuela hopes to make 1,000,000 barrels/day in oil deliveries to China by 2012. The Venezuelans have been working diligently toward that goal; “In the first 7 months of 2008, Venezuela exported 5.18 million tons, or 38 million bbl, of crude to China—an increase of 93.8% over 2007.” (Oil and Gas Journal).

To facilitate cooperation and investment, China and Venezuela set up the “Joint Financing Fund, also known as the “heavy fund”” in early 2008 with capital of $6 billion (China Daily) [$4 billion of which was provided by China]. On September 25th, the countries agreed to double the investment to $12 billion (Shanghai Daily).

A market research report by Business Monitor International expects Venezuela will increase its 2008 production from 2.75 million b/day in 2008 to oil and gas liquids production of 2.93 million b/d by 2012. Internally, “[c]onsumption is forecast to increase by around 3% per annum to 2012, implying [domestic] demand of 675,000 b/d by this point. The export capability would thus be about 2.26mn b/d by 2012” (*A).

Crude Predictions / Feasibility

Logistics of shipping the distance from South America to China will be important to overcome. To in-part facilitate this obstacle, “the two have a shipping joint venture that will build the shared very large crude carrier” (Guardian). Still, according to the Heritage Foundation, the largest supertankers cannot pass through the Panama Canal, which increases costs of oil transport from Venezuela to China. Expansion of the Panama Canal should be completed by 2014. Expansion will expand the current locks from “33 metres (108 feet) wide” “The new locks would be 50 metres (150 feet). A third lane of traffic would be able to handle the wider loads” (BBC; also “Brazil’s Passage To China“).

It is important to retain a sense of perspective about Venezuela’s importance to China. China wants Venezuela’s oil, but Venezuela currently supplies only 4 percent of China’s total oil imports, according to a quotation by a Chinese government official on Bloomberg, but from data elsewhere it appears the number is closer to 10 percent. [Forbes clarifies that Bloomberg misunderstood the quotation- China receives 4% of Venezuela’s crude exports.] China imports about 46% of its oil needs (Xinhua).

In 2007-08, China mainly imported oil from Saudi Arabia (656,000 b/d, 17.92%of its total oil imports) and Iran (433,000 b/d, 11.83%) among others (Shichor, Jamestown).

In 2006, China’s oil imports mainly came from; Angola (~500,000 b/day), Saudi Arabia (~470,000 b/day), Iran (~350,000 b/day), Russia (~350,000 b/day), and Oman (~220,000 b/day). At that time, Venezuela’s supplies of oil did not even rank among China’s top five suppliers. (Data from the EIA).

Zweig, David and Bi Jianhai’s important article; “China’s Global Hunt for Energy.” (Foreign Affairs. Sep./Oct. 2005. 28.)  noted that, as of 2004/5, China had relatively diverse sources of oil imports. China’s largest four oil suppliers accounted for the following percentages of China’s imported oil; Saudi Arabia (14%), Oman (13.3%), Angola (13.2%), and Iran (10.8%)).

Still, China’s oil import demands are rising and were up 14.7% in 2007. Every year, Venezuela supplies greater and greater amounts of oil to China, from a mere 50,000 b/day in 2005 to over 300,000 b/day in 2008.

Consequences. Can Hugo Shift to China?

Hugo Chavez needs other places to sell his oil if he plans to act on his anti-American rhetoric (PINR). Currently, though, the US is very important to Venezuela’s economy. “The U.S. buys about two-thirds of Venezuela’s daily exports of 2 million barrels,” which works out to about 1.3 million-1.5 million b/day (Bodzin and Wang, Bloomberg). As of 2005, over 60% of Venezuela’s oil exports went to the United States and was the United States’ fourth-largest oil supplier (Bajpaee, Jamestown). Interestingly, however, “U.S. imports of Venezuelan oil fell by 11.7 percent to a five-year low in the first four months of the year” (IHT).

The US is Venezuela’s largest trading partner, and Venezuela is the US’s 9th largest trading partner in terms of imports in 2006 and 2007. Venezuela accounted for over 37,000 million in trade in 2006 and 39,000 million in trade in 2007. In 2008, partially due to oil’s price spike, trade was up 58.5% to 32,000 million by July 2008, according to the Industry Trade Association of the US Dept. of Commerce.

China’s purchases of 364,000 b/day from Venezuela is about 1/4th of US purchases. Currently the United States is more attractive for Venezuela to ship to because the US has refineries which can deal with heavy Venezuelan crude, and the United States is much closer and cost-effective for Venezuela to ship toward.

Chavez interestingly claims that “Venezuela won’t suspend crude exports to the U.S. on increased supplies to China” (Bloomberg). If both the Chinese and the Venezuelans make significant investments in developing Venezuela’s oil fields, this will be possible. In fact, “PDVSA hopes that Chinese oil companies [alone] will produce at least 400,000 barrels of crude a day in Venezuela by 2011.”

However, President Chavez’s highly socialist economic policies might cripple indigenous Venezuela PDVSA investment into oil field development and refining. Although Venezuela may intend a “win-win” situation, the reality might turn into a zero-sum game where Venezuela gradually decouples crude shipments away from the United States’ heavy oil refineries (which refine nearly a third of Venezuelan heavy crude), and directs them toward domestic and Chinese refineries.

It is important to note that with expected growth of only 200,000 additional barrels/day expected by 2012, Venezuela may redirect oil and further decouple its economy from the United States in order to meet its self-imposed ship-to-China obligations.

Last Words

As a result of its closer economic relationship with China, Venezuela appears to be purchasing political “cover.” The less its economy is dependent on America’s, Venezuela can more deeply pursue Chavez’s Bolivarian Revolution. It seems this deal mainly benefits Venezuela in its short term goals of independence from American economics.

In the long term, China gains a diplomatic ally, influence in South America, a guaranteed crude supply (because few countries can process Venezuela’s heavy crude), respect as an international economic leader, and gains expertise in heavy crude refining.

Otherwise Notable

* China and Venezuela political relations (until 2003) from China’s Consulate in New Zealand.

* China Daily’s China-Venezuela Special (July 5, 2008).

* Another EIA article on Venezuela, with information on refining capacity (October 2007).

* (Added October 12) Forbes looks at China-Chavez relations (Oct 1, 2008)

(*A) Also of note; “Between 2007 and 2018, we are forecasting an increase in Venezuelan oil production of 23.2%, with liquids volumes rising steadily from 2.72mn b/d to 3.35mn b/d.” Business Monitor International Report.

2 October, 2008 Posted by | China Diplomacy, China Energy, China Future | , , , , , | 1 Comment

The Visible Hand of China in Latin America

Off the Shelf:

The Visible Hand of China in Latin America (2007), edited by Javier Santiso of the OECD, is a great pamphlet with a lot of hard data about China’s role in that part of the world.

While much is often stated of China’s trade surplus with the rest of the world, China actually ran a trade deficit with Latin America for much of the 2000s. China is the continent’s third largest trading partner, after the United States.

Eduardo Lora opens the book with a discussion on whether Latin America should fear China. From the data he presents, the answer appears to be “not yet.” He points out several economic weaknesses faced by China.

1.) Allegedly, China still has poor corporate governance and inefficient state-owned companies. Lora notes that the amount of state-run underperforming assets has massively declined over the years, but he makes much of the nonperforming loans and debt that burdened Chinese banks until restructuring and bank sheet balancing resulted in NPLs at only 9.5% as of late 2006. Considering how flush with reserves, investment and other cash China currently is, and how their companies are modernizing business practices, I do not think corporate governance questions is necessarily a crippling problem for China to overcome with investments in Latin America… especially when compared to indigenous Latin American companies’ problems with inefficiency and corruption.

To back up his assertion, Lora goes on to argue (27) that the three largest firms in main economic sectors are state owned and that China is propping up 30-50% of those firms as “national champions” by giving them loads of state support so they will become globally competitive multinationals by 2010 (27). He argues this will lead to inefficiencies.

For comparison for how strong China’s companies are. As of 2007, China managed to get eight companies into Fortune 500’s World’s Most Admired Companies (The US had 135; Japan, 61; Britain, France, and Germany, 26 apiece) . A good amount of the top companies, however, are state owned. [I find it odd though that Huawei, Lenovo, Haier, Baidu, and Galanz were not listed as admired companies– a lot can be said for them as Donald Sull (2005) discussed in Made In China.] And indeed, being listed on Interbrand’s listing of Top Global Brands still escapes Chinese companies. As of 2007, China still had no companies on the list (Here’s the report). The Best China brands are examined here. An easy chart of them is here.

2.) Lora gets a bit technical by discussing how China’s financial system is still undeveloped (28-30). Keep in mind though that a lot he discusses as being undeveloped has evolved since his article was written (in late 2006). He complains how until 2006, foreigners could only buy nonvoting B-shares in several sectors (infrastructure, utilities, and finiancials). Now, he says foreigners can purchase A shares, but to ensure stability they are required to buy over 10% of shares and hold for longer than 3 years. Lora argues this lack of easy-foreign investment will eventually damage Chinese companies’ ability to efficiently expand. (Then again, China has a lot of money even within its country, so maybe it will escape these problems.)

3.) Allegedly 50% of GDP (31) is locked up in savings and investments. Lora states this could be good, but it prevents capital and labor from moving to the most efficient sectors.

4.) Lora points out that 40% of private entrepreneurs with companies that have incomes over $120,000 USD are CCP members (31). This could be a neutral comment, or it could imply possibility that corruption rather than efficiency might govern China’s future capital markets.

Lora then discusses weaknesses that are shared between the countries:

5.) Weak higher education. (More on that in a later article)

6.) Corruption/Weak Rule of Law

As of 2007 there were 122,000 Chinese lawyers at one per 10,650 people [In the US the ratio is 1 per 270]  (“Chinese Seek a Day in Court”, WSJ, July 1, A12) but most judges are retired from the PLA and lack legal expertise.

I don’t particularly believe Lora’s view that China’s companies are doomed to not meet expectations of world-dominance, since China is confronting many troubles he identifies. However, the points he raises have at times been overlooked by people willing to too-quickly crown China the next world hegemon.

Chapter 2, by Jorge Blázquez-Lidoy, Javier Rodríguez and Javier Santiso discuss whether China’s markets complement or threaten Latin America’s.

China’s export-mix competes the most with Thailand, Hungary, and Mexican goods (53). Costa Rica also, to a lesser degree, faces competition (54).

Brazil and China are highly complementary in trade (55).

In a chart on (54), Santiso excellently documents, through use of his own data tables, how Venezuela, Peru, Chile, Columbia and Argentina have very little competitive overlap with China.

Mexico and China share interest in IT, consumer electronics, clothes, and manufacturing. Transportation equipment is Mexico’s only advantage.

Latin America allegedly has too inefficient ports, so they cannot gain in transport cheapness vis-a-vis China in trade with other countries and regions. Customs are too slow, taking up to seven days on average to clear across the region. However, Latin America will still not be overly burdened by China competition since the two regions specialize in different products.

Latin America, for example, gains in trade to China by sending copper, oil, soybeans, and coffee.

According to the article, “in 2004, 1/2 of Chinese FDI went to Latin America, exceeding the 30 per cent that went to Asia (70).” I’m not sure that’s completely true and will have to consult my other sources, but it bears examining, because it’s quite interesting, given all the media attention lavished on China-Africa relations.

In essence, Santiso concludes that “China will benefit other emerging economies in [Latin America in] the long term.” “Latin America faces few if any short-term trade costs” (55), except in Mexico and Costa Rica, of course.

Chapters 3-5 were okay, but didn’t reveal too much of immediate interest. The pamphlet-book is a good read, and I’ll recommend it even though it is fast getting out of date. There simply aren’t that many good articles/books written on China-Latin America relations, but of the ones that do exist, Santiso’s is certainly a gem.

OTHER RESOURCES

* Mohan Malik, writing for PINR has a digestable version of Sino-Latin American Relations.

* There is a 2005 CRS Congressional report on China’s influence in Latin America.

* PBS had a radio program on China-Latin America ties. One Brazilian disagreed with Santiso’s statement that China benefitted the Brazilian economy. He called attention to textile competition.

2 July, 2008 Posted by | Book Review, China Business, China Economy, China Future | , , , , , | Leave a comment

Off the Shelf: China’s Economic Influence

The April 2008 CRS American government report I mentioned before in “China’s Soft Power” dredged up some good statistical data regarding China’s economic reach. However, the CRS analysis fell flat by not including Hong Kong’s FDI in the full calculation of China’s FDI and influence on foreign countries.  

China’s 2007 stock of FDI abroad is either $93.7 billion (according to the CIA), or $73.3 billion (according to the report; CRS, 22) or $292 billion (according to UNCTAD); but if you add Hong Kong there is an additional $534 billion or $769 billion in FDI stocks to be accounted (according to the CIA and UNCTAD respectively), or $43 billion in same-year 2006 FDI flows, according to UNCTAD.

Because Hong Kong’s FDI is omitted, the CRS report understates much of China’s world-wide influence.

Of course, much of Hong Kong’s $534 billion in FDI is reinvested back in the mainland.

Many factors can be evaluated when considering China’s worldwide economic influence. Here, I highlight two main ideas touched on in the report; China’ Foreign Trade, and its FDI.

CHINA TRADE

China’s main trading strengths are with countries bordering it such as Japan, South Korea, Central Asia, ASEAN, and Pacific Island Countries. Its total trade with Pacific Island Countries was $754 million in 2006, compared to $404 million by the United States, $3.7 billion by Australia, $918 million by Japan, and $832 million by the EU-25 countries (CRS, 36).

“[I]n 2007, China’s total trade with ASEAN was 17% larger than total U.S. trade ($200.6 billion versus $171.7 billion). China’s exports to ASEAN in 2007 were 55.6%” greater than United States’ exports to the region, while U.S. imports from ASEAN were 2.6% greater than China’s imports (CRS, 91).

“Based on the fact that China’s imports from ASEAN in 2007 grew by 21.1% (over the previous year), versus 12.4% for the United States, it is likely that China’s imports from ASEAN will be larger than U.S. imports [from the region] in 2008. China ran a $14.1 billion trade deficit with ASEAN, while the U.S. trade deficit totaled $50.6 billion” (CRS, 91).

China’s trade with Japan was $210.7 billion in 2006; Japan’s amount of trade with the US was $213.5. The trend in trade indicates China is probably now Japan’s number one trading partner (CRS, 43). Japan receives 9.5% of China’s exports.

China’s trade was greater that US trade with South Korea in 2006. China-SK had $118.1 billion in bilateral commerce, compared to America’s $76.9 billion in bilateral commerce with the peninsular state (CRS, 44). China’s trade with the country is rapidly accelerating and currently accounts for 4.6% of China’s exports (CRS, 45).

China’s trade with Central Asia was $12 billion in 2006 (CRS, 71), accounting for 1.34% of Chinese export trade (CRS, 72). In 2003, US trade with Central Asia amounted to $1 billion. In 2006, the United States imported $1.3 billion from the 5 Central Asian states and exported around $927 million to them (Data from HERE, HERE, HERE), HERE, and HERE). for a total of around $2.3 billion; dwarfed by China’s trade with the region.

WHERE THE UNITED STATES’ TRADE INFLUENCE REMAINS STRONG

In contrast, the United States still trades more with Latin America and Africa, two regions often identified as places where China might eventually challenge the United States’ trade dominance.

“China’s overall trade with LAC [Latin American Countries] grew to about $70 billion in 2006, representing just 4% of its overall trade. In comparison, U.S. trade with Latin America and the Caribbean amounted to almost $555 billion in 2006” (CRS, 26).

“From 2001–2006, the absolute value of U.S. goods trade with Africa, at $71 billion, was greater than that of Sino-African trade, but Chinese-African trade grew at a much faster rate than U.S.-African trade.” Then again, it had a longer way to rise. “China’s total trade with sub-Saharan Africa rose from $8.92 billion to $45.35 billion in that period, an increase of 409%, as compared to a 152% rise in total U.S.-African trade” (CRS, 119).

WHAT EFFECT DOES CHINA’S RISING TRADE HAVE?

China’s growing influence in trade with its Asian neighbors could lead to future trade embargoes and conflicts such as the 2001 mushroom/automobile trade war between China and Japan. This began when Japan placed a tariff on Chinese leeks and mushrooms. In return, the Chinese imposed oppressively high tariffs on Japanese cars, mobile phones, and air conditioners. The Japanese eventually backed off. It is important to note, however, that the mushroom trade war happened before full Chinese ascension to the WTO. Now that China is part of the WTO (since November 2001) and greater integrated into the world financial system, such trade wars might be less likely to occur.

US-CHINA TRADE & THE TRADE DEFICIT

The United States received, in 2006, 21% of China’s exports (CRS, 45). “In 2007 the United States incurred a merchandise trade deficit of $256 billion with China, $83 billion with Japan, and $13 billion with South Korea (43% of the total U.S. trade deficit of $816 billion) (CRS, 60).

CHINA FDI

As earlier noted; estimates of China’s FDI investments in foreign countries might be incorrect due to non-inclusion of Hong Kong FDI numbers into the CRS report.

From existing data, it appears China’s FDI sent abroad is relatively low.

“From 2002–2006, U.S. FDI flows to ASEAN were $13.7 billion (or 8.0% of total), making the United States ASEAN’s 4th largest source for FDI. Over this period, China’s FDI totaled $2.3 billion or 1.3% of total, making China the 10th overall source of ASEAN’s FDI” (CRS, 95). “The United States remains ASEAN’s 2nd largest trading partner (China ranks 5th) and its 4th largest source of foreign direct investment (China ranks 10th)” (CRS, 102).

“While China’s reported cumulative stock of FDI in [Latin America] amounted to $11.5 billion in 2005, the cumulative stock of U.S. FDI in the region amounted to $366 billion in 2005, and grew to $403 billion by 2006” (CRS, 26).

Considering the difficulties of analysis; rather than getting into a deeper blow-by-blow analysis of China’s FDI around the world, I’ll point out an interesting point.

According to the UN; US and Japan’s year 2005 FDI into China accounted for $95 billion, which is $22 billion more than China’s total 2006 FDI invested everywhere in the world (CRS, 47). Using those numbers, it still appears that foreigners are developing and affecting China more than China is developing and affecting the world.

At least that’s how it is for now, anyway.

CONCLUSION

There’s a lot more to read in the US Government report, from a discussion on Sino-Japanese-Korean relations, to analyses of how the Taiwan issue affects international relations and of China’s energy diplomacy and the SCO (Shanghai Cooperation Organization), to in-depth discussion of international loans and trading and nuanced explanations of where China’s FDI is heading and why.

Despite its flaws, the report is still well worth checking out.

* Also of Interest: UNCTAD’s World Investment Report: 2006

17 June, 2008 Posted by | Book Review, China Diplomacy, China Economy, China Future | , , , , , , , , , , , | Leave a comment