Posts Tagged ‘International Monetary Fund’

G20 in China this weekend expected to be long on talk, small on solutions and substance

August 31, 2016


© AFP/File / by Benjamin Carlson | Workers make shirts at a spinnery in Nantong, east China’s Jiangsu province

BEIJING (AFP) – G20 leaders will meet in China this weekend in a climate of economic uncertainty and sluggish global growth — but the absence of an urgent crisis means the forum will be short on breakthroughs, analysts say.Eight years after the first G20 summit in Washington, when countries coordinated a response to the financial meltdown, Beijing has set a modest agenda for the Hangzhou gathering — focusing on making the world economy innovative, invigorated, interconnected, and inclusive?.

But as countries? economic needs diverge — the US is mulling a rate hike, Japan is toying with fresh easing, Germany is sceptical of fiscal stimulus, Chinese overcapacity remains huge, and Britain has voted to quit the EU — the prospects for major unified action are dim.

A man rides an electronic bike past a billboard for the upcoming G20 summit in Hangzhou, Zhejiang province, China, July 29, 2016. Picture taken July 29, 2016. REUTERS/Aly Song

“At the moment there’s simply not a lot of common overlapping interests between the major economies,” Christopher Balding, professor of economics at Peking University HSBC Business School, told AFP.

The G20 is made up of the world’s leading industrialised and emerging economies, which together account for 85 percent of the world’s gross domestic product and two-thirds of its population.

But its failure to deliver on past pledges has raised questions about the credibility of future promises.

Compliance with vows made in 2015 has fallen to a low of 63 percent, according to analysis by the University of Toronto.

– Disappointing growth –

“Ongoing economic malaise has been accompanied by the unwillingness of G20 members to sustain their commitment to the structural reforms needed to meet the growth pledge,” said Tristram Sainsbury and Hannah Wurf of the G20 Studies Centre at Australia’s Lowy Institute in a report.

Despite repeated promises to achieve the G20’s mission of strong, sustainable, balanced growth, members are “not achieving any of those three terms”, Sainsbury told AFP.

Every year since 2011 the IMF has revised downwards its economic forecasts made at the beginning of the year as hopes for recovery have disappointed.

This summer it again cut its forecast for global growth in 2016 to 3.1 percent.

It is a far cry from the sunny pledges of the Brisbane Action Plan two years ago, when G20 leaders set a goal of lifting collective GDP an extra 2.1 percent beyond baseline IMF predictions by 2018.

Leaders said at the time that doing so would add $2 trillion and millions of jobs to the world economy.

“The best way to think of the forum is a dinner party that happens to include leaders of 85 percent of the world economy around the table making pledges,” said Sainsbury.

“People can go and make statements, but then they go home, and there’s no guaranteed way of enforcing a commitment.”

But there is no doubt the G20 was useful, he added, as it provides a platform for leaders to coordinate financial policies, bolster market confidence, and reach agreements on matters such as tax havens.

“What we often say is, if the G20 didn’t exist, someone would have to invent it.”

– Introspection –

Beijing’s G20 presidency this year has seen some areas of agreement, with a finance ministers’ meeting in February helping bring a measure of stability to volatile markets that were hit by concerns about China?s growth and the depreciation of its yuan currency.

While global growth remains underwhelming, experts say Beijing will probably seek longer-term agreements on lower-key matters at the G20 that support its domestic goals.

Among them are financing eco-friendly projects and pressing its campaign for wider use of the International Monetary Fund’s Special Drawing Rights (SDR) basket, which includes the yuan.

There could also be a push for more coordinated fiscal stimulus and infrastructure spending, analysts with HSBC said in a note, as Beijing hopes to win support for President Xi Jinping’s signature One Belt One Road policy of expanding trade and building ports and highways in foreign countries, often using Chinese construction firms.

But one area where agreement could be difficult is trade.

Since 2008 the grouping has promised to halt and roll back protectionist measures, but a WTO study found that earlier this year G20 members were adding more than 20 restrictive policies per month.

“Around the world you see an obvious global movement towards introspection, a country-first mentality, call it xenophobia if you will,” said Andrew Polk, China economist for Medley Global Advisors. “It makes it harder for these international forums, especially on trade.”

by Benjamin Carlson (Related articles below photo)
The elephant in the room at the G20 may well be the host nation, China. Japan is ramping up military spending in large part due to what it calls Chinese aggression in the South China Sea and East China Sea. Several nations also have doubt about China’s economy but those issues likely will not be addressed.

US Army chief to China: Sorry (not sorry) America’s top missile defense system is going to South Korea

China’s Finance Minister Lou Jiwei is one of the key Chinese officials charged with rebalancing the Chinese economy away from export-led manufacturing and toward domestic services. AFP/Getty Images

Chinese Banks Step Up Bad-Loan Writeoffs

August 30, 2016

Lenders seek to improve future profitability despite country’s economic slowdown

China Construction Bank Corp. signage sits on a wall in Hong Kong.
China Construction Bank Corp. signage sits on a wall in Hong Kong. PHOTO: BLOOMBERG NEWS

Aug. 30, 2016 8:25 a.m. ET

BEIJING—China’s largest banks are writing off huge volumes of soured lending in an effort to clean up their balance sheets, as they look to improve their future profitability despite the country’s economic slowdown.

The country’s top four banks collectively wrote off 130.3 billion yuan ($19.5 billion) of bad loans in the first half of 2016, 44% more than in the same period a year earlier.

The clear-out has helped banks in one sense: Overall, their nonperforming loans as a proportion of their lending book were unchanged at the close of the second quarter from the end of March, the first quarter since mid-2013 that the key metric hasn’t increased.

But the write-offs have come as a number of other challenges beset Chinese banks. New loans are shriveling—nearly all in July went to mortgages. A series of interest-rate cuts by the central bank since 2012 have meanwhile squeezed banks’ earnings.

The International Monetary Fund estimates China’s nonperforming-loan ratio at 15% compared with the official 1.75% reported by the government, because of differences in the way bad loans are recognized.
And a plan by Beijing to let companies allot their equity to banks in exchange for loan forgiveness is likely to saddle lenders with more dubious assets in coming months, bankers and analysts say.

On Tuesday, Industrial & Commercial Bank of China Ltd., the world’s biggest bank by assets, reported first-half results, saying its net profit edged up 0.8% from a year earlier to 150.2 billion yuan ($22.5 billion). Across the banking sector, second-quarter profit was up 3.2%, half the pace of the first quarter.

“Companies of better quality aren’t borrowing, and are mainly issuing bonds or equity-financing,” said Zhou Mubing, chairman of Agricultural Bank of China Ltd. Agricultural Bank posted the most bad loans and, alongside ICBC, the slowest profit growth in the first half among the Big Four, which also includes Bank of China Ltd. and China Construction Bank Corp.

The heavy write-offs are a step toward solving a major headache for the banks. The more bad loans have piled up in recent years, the more resources the banks have had to set aside in provisions, leaving little spare capital to invest elsewhere.

Three years ago, when signs of China’s economic slowdown were just starting to show, lenders on average had enough provisions to cover 290% of their bad loans, well above the minimum 150% level Chinese regulators require. At the urging of regulators keen to head off an anticipated wave of souring credit, the Big Four wrote off 22 billion yuan in bad loans in the first half of that year.

But the tsunami of bad debt has since grown large enough to breach regulatory buffers. In the January-June period, ICBC said its provisions covered 143% of its bad loans, up slightly from 141% at end-March. The bank and the China Banking Regulatory Commission didn’t respond to questions about the breach.

Increasing pressure on banks’ earnings, regulators have prodded lenders to get out of high-yield investments that were often recorded off their balance sheets. That has left banks more reliant on low-risk mortgages that generate relatively small profits. Six cuts to benchmark interest rates by the central bank since 2012 have triggered declines across the Big Four in net interest margin, a major source of revenue for Chinese banks.

If debt-for-equity swaps become widespread, bankers and analysts say, lenders stand to lose further. Banks are required to hold higher capital buffers for stocks sitting on their balance sheets, and equity in unlisted companies can be hard to value. In part due to the lack of relative depth in China’s financial markets, banks and insurers already own about two-thirds of the country’s corporate bonds. In one case of bond default, Dongbei Special Steel Group Co., banks and other bondholders remain in gridlock over a proposed debt-for-equity swap.

Ambiguity in China’s financial regulation means the scale of the bad-loan problem could be greater than it appears on paper. Chinese regulators allow banks to deem a loan nonperforming only if the lender thinks it might incur a loss.

At China Construction Bank, the growth of bad loans slowed in the second quarter. But the number of its so-called special-mention loans—those that the bank deems problematic but which it says are still performing—grew 12.5% in the first half, outpacing the 9.6% rise in recognized bad loans.

That and other types of overdue loans “suggest a potential rebound in nonperforming-loan formation in the coming months,” said Wei Hou of Bernstein Research.

The IMF urged Beijing recently to recognize all loans overdue by more than 90 days as nonperforming, in line with the global norm. The fund said the China Banking Regulatory Commission pushed back against that call for change. The CBRC didn’t respond to a request for comment.

—Grace Zhu contributed to this article

Write to Chuin-Wei Yap at


Chinese rebalancing, reforms are key to China’s economy and global growth

August 30, 2016


Hard landing in China would push world economy into recession

Chinese economy accounts for fully 18% of world output

China’s Finance Minister Lou Jiwei is one of the key Chinese officials charged with rebalancing the Chinese economy away from export-led manufacturing and toward domestic services. AFP/Getty Images

By Stephen Roach

NEW HAVEN, Conn. (Project Syndicate) — Despite all the hand-wringing over the vaunted China slowdown, the Chinese economy remains the single largest contributor to world economic growth. For a global economy limping along at stall speed — and most likely unable to withstand a significant shock without toppling into renewed recession — that contribution is all the more important.

A few numbers bear this out. If Chinese gross domestic product growth reaches 6.7% in 2016 — in line with the government’s official target and only slightly above the International Monetary Fund’s latest prediction (6.6%) — China would account for 1.2 percentage points of world GDP growth. With the IMF currently expecting only 3.1% global growth this year, China would contribute nearly 39% of the total.

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Chinese Olympians Welcomed in Hong Kong(1:55)
Despite recent political tensions, Chinese Olympians got a warm reception in Hong Kong over the weekend, where some of the Rio medalists showed off their sporting skills in front of local fans. Photo: Reuters

That share dwarfs the contribution of other major economies. For example, while the United States is widely praised for a solid recovery, its GDP is expected to grow by just 2.2% in 2016 — enough to contribute just 0.3 percentage points to overall world GDP growth, or only about one-fourth of the contribution made by China.
A sclerotic European economy is expected to add a mere 0.2 percentage points to world growth, and Japan not even 0.1 percentage point. China’s contribution to global growth is, in fact, 50% larger than the combined 0.8-percentage-point contribution likely to be made by all of the so-called advanced economies.

Moreover, no developing economy comes close to China’s contribution to global growth. India’s GDP is expected to grow by 7.4% this year, or 0.8 percentage points faster than China. But the Chinese economy accounts for fully 18% of world output (measured on a purchasing-power-parity basis) — more than double India’s 7.6% share. That means India’s contribution to global GDP growth is likely to be just 0.6 percentage points this year — only half the 1.2-percentage-point boost expected from China.

More broadly, China is expected to account for fully 73% of total growth of the so-called BRICS grouping of large developing economies. The gains in India (7.4%) and South Africa (0.1%) are offset by ongoing recessions in Russia (-1.2%) and Brazil (-3.3%). Excluding China, BRICS GDP growth is expected to be an anemic 3.2% in 2016.

So, no matter how you slice it, China remains the world’s major growth engine. Yes, the Chinese economy has slowed significantly from the 10% average annual growth recorded during the 1980-2011 period. But even after transitioning from the “old normal” to what the Chinese leadership has dubbed the “new normal,” global economic growth remains heavily dependent on China.

There are three key implications of a persistent China-centric global growth dynamic.

First, and most obvious, continued deceleration of Chinese growth would have a much greater impact on an otherwise weak global economy than would be the case if the world were growing at something closer to its longer-term trend of 3.6%. Excluding China, world GDP growth would be about 1.9% in 2016 — well below the 2.5% threshold commonly associated with global recessions.

The second implication, related to the first, is that the widely feared economic “hard landing” for China would have a devastating global impact. Every one-percentage-point decline in Chinese GDP growth knocks close to 0.2 percentage points directly off world GDP; including the spillover effects of foreign trade, the total global growth impact would be around 0.3 percentage points.

Defining a Chinese hard landing as a halving of the current 6.7% growth rate, the combined direct and indirect effects of such an outcome would consequently knock about one percentage point off overall global growth. In such a scenario, there is no way the world could avoid another full-blown recession.

Finally (and more likely in my view), there are the global impacts of a successful rebalancing of the Chinese economy. The world stands to benefit greatly if the components of China’s GDP continue to shift from manufacturing-led exports and investment to services and household consumption.

Under those circumstances, Chinese domestic demand has the potential to become an increasingly important source of export-led growth for China’s major trading partners — provided, of course, that other countries are granted free and open access to rapidly expanding Chinese markets.

A successful Chinese rebalancing scenario has the potential to jump-start global demand with a new and important source of aggregate demand — a powerful antidote to an otherwise sluggish world. That possibility should not be ignored, as political pressures bear down on the global trade debate.

All in all, despite all the focus on the U.S., Europe, or Japan, China continues to hold the trump card in today’s weakened global economy. While a Chinese hard landing would be disastrous, a successful rebalancing would be an unqualified boon. That could well make the prognosis for China the decisive factor for the global economic outlook.

While the latest monthly indicators show China’s economy stabilizing at around the 6.7% growth rate recorded in the first half of 2016, there can be no mistaking the headwinds looming in the second half of the year. In particular, the possibility of a further downshift in private-sector fixed-asset investment could exacerbate ongoing pressures associated with deleveraging, persistently weak external demand, and a faltering property cycle.

But, unlike the major economies of the advanced world, where policy space is severely constrained, Chinese authorities have ample scope for accommodative moves that could shore up economic activity. And, unlike the major economies of the developed world, which constantly struggle with a tradeoff between short-term cyclical pressures and longer-term structural reforms, China is perfectly capable of addressing both sets of challenges simultaneously.

To the extent that the Chinese leadership is able to maintain such a multi-dimensional policy and reform focus, a weak and still vulnerable global economy can only benefit. The world needs a successful China more than ever.

This article has been published with the permission of Project Syndicate — Global Growth – Still Made in China.


US Army chief to China: Sorry (not sorry) America’s top missile defense system is going to South Korea

China takes aggressive steps to fend off growing risks in its financial and banking system — China’s debt was $26.56 trillion, or 255 percent of gross domestic product at the end of 2015

August 25, 2016


Thu Aug 25, 2016 5:45am EDT

A branch office of Ezubao, once China’s biggest P2P lending platform is seen in Nantong, Jiangsu province, China, December 9, 2015. REUTERS/Stringer

China took aggressive steps on Wednesday to head off signs of growing risks in its financial and banking system, unveiling detailed rules to curb an unruly peer-to-peer (P2P) lending sector and intervening in its money markets.

In the past year, Chinese policymakers have been moving levers to try to keep credit growing at a reasonable pace to underpin the economy, while addressing vulnerable aspects of the financial and banking system.

But sharply increasing debt levels have raised alarm bells, most lately from the International Monetary Fund, about the health of the financial system. The country’s stock market crash last year is still fresh in investors’ minds.

This year, officials have expressed concern about the unraveling of Chinese peer-to-peer (P2P) online lending platforms that they had once hoped would provide a new channel of funding to spur the economy’s growth.

On Wednesday, the banking regulator and other government entities issued measures to curb a sector that has produced a raft of scandals. Almost half of the 4,000-odd lending platforms are “problematic”, the China Banking Regulatory Commission warned.

The measures will probably leave about 200-300 P2P platforms by this time next year, said James Zheng, chief financial officer of Lufax, the top lending platform in China.

“That’s okay because they’re cracking down on all the bad guys,” he said at a conference in Hong Kong. “What doesn’t kill will make you stronger. That’s the case for us.”

The $93 billion P2P lending sector has been a source of funds for individuals and small businesses overlooked by the country’s traditional financial services that prefer big borrowers with better credit history and collateral and links to the government.

But Beijing’s hands-off approach to promote the sector as a form of financial innovation led to a rash of high-profile P2P scandals and frauds.

Ezubao, once China’s biggest P2P lending platform, folded earlier this year after it turned out to be a Ponzi scheme that solicited 50 billion yuan in less than two years from more than 900,000 retail investors through savvy marketing. Retail investors have been unable to get their money back.

Under the new rules, P2P firms cannot sell wealth management products or issue asset-backed securities. They must use third-party banks as custodians of investor funds and will not be permitted to take deposits.

The banking regulator also set a ceiling for borrowers on P2P platforms.

Outstanding loans issued on P2P platforms had reached 621.3 billion yuan ($93.6 billion), data from the regulator showed.


China’s overall debt has risen rapidly since the global financial crisis. Outstanding debt was $26.56 trillion, or 255 percent of gross domestic product at the end of 2015, according to the Bank for International Settlements.

While debt has played a key role in stimulating and shoring up economic growth, policymakers in China are not unaware of the risks.

The central bank is holding off on cutting bank reserve requirements or interest rates for fear such moves could fuel more cheaper credit, put downward pressure on the yuan and fuel outflows from its mountain of more than $3 trillion in foreign reserves.

That view was solidified in financial markets this week, prompting a sharp selloff in bond futures following a summer rally.

In turn, that appears to have worried the central bank that too many small banks had jumped on the bond rally using short-term borrowing to fund purchases, traders said.

So on Wednesday, it injected cash into money markets through 14-day reverse repurchases agreements for the first time in six months to show its concern about the rising leverage.

For most of 2016, the People’s Bank of China (PBOC), the central bank, had used the lower interest seven-day rate, with cash injections nearly every day.

“The PBOC appears to be signalling to banks to move away from a reliance on short-term liquidity and head towards more longer-term liquidity,” Jonas Short, head of NSBO Policy Research in Beijing, said in a note.

He said if short-term interest rates continue to tighten, it could hurt China’s small banks.

“There may be potential for a liquidity squeeze for small banks on the horizon,” he said.

The central bank’s injection of money into the financial system using 14-day reverse repos was also taken as a signal by financial markets that further cuts to bank required reserve ratios were unlikely.

Chinese five- and 10-year treasury futures CTFc1 CFTc1 fell on Wednesday. The yuan CNY=CFXSand the benchmark CSI300 equities index .CSI300 both edged lower.

(Reporting by Nathaniel Taplin, Winni Zhou and the Shanghai Newsroom; Shu Zhang in BEIJING and the Beijing Newsroom; Additional reporting by Elzio Barreto in HONG KONG; Writing by Ryan Woo; Editing by Neil Fullick)

A New Measure for China’s Economy: The ‘Repression Index’ — “Warning signs are flashing” — Private investment collapsing

August 23, 2016

Arrests, censorship, military imagery point to political insecurity at the top as economic reforms stall

Chinese legal rights activist Hu Shigen at his trial in Tianjin earlier this year. He was sentenced to 7½ years in prison on subversion charges. More than 300 legal professionals and activists were briefly detained or interrogated last year, and several dozen were formally held.
Chinese legal rights activist Hu Shigen at his trial in Tianjin earlier this year. He was sentenced to 7½ years in prison on subversion charges. More than 300 legal professionals and activists were briefly detained or interrogated last year, and several dozen were formally held. PHOTO: ASSOCIATED PRESS

Updated Aug. 23, 2016 3:46 a.m. ET

SHANGHAI—As the Chinese economy slows, the regime is ramping up an assault on dissidents and others it brands as troublemakers.

Call it the repression index. One of the best indicators of the country’s economic direction is now a political one.

The crackdown is telling us that the leadership, despite outward displays of confidence, is growing increasingly insecure as it grapples with faltering growth, the mainstay of the Communist Party’s legitimacy. That translates into crippling indecision; leaders seem unable to summon the resolve to implement tough yet necessary economic overhauls.

Meanwhile, evidence of policy disarray is growing with President Xi Jinping and his premier, Li Keqiang, apparently disagreeing on how aggressively to add stimulus. A People’s Daily article in May by an “authoritative person,” most likely a proxy for the president, read like a rebuke of Mr. Li for going off on a credit binge this year.


China Sentences Human-Rights Lawyer, Activists

China recently began a series of trials of human-rights lawyers and activists, as President Xi Jinping continued to clamp down on potential sources of dissent.

These are perilous times for the party. It knows that an accelerated economic transition from a wasteful investment-led model to one driven by services, consumption and innovation will deliver a hit to growth and likely generate social unrest—with no guarantees of ultimate success.

Switching gears was always going to be more of a political challenge than an economic one. It will entail redistributing the benefits of growth from large state-owned corporations toward households.

This isn’t the revolution that party stalwarts signed up for; it implies a transfer not just of wealth, which has helped fill the bank accounts of families of the governing elite, but power.

And the process threatens to destabilize the system. State enterprises bankroll the regime, provide social services and keep workers in line.

Moreover, they are huge employers, in particular the loss-makers that operate old-fashioned steel furnaces and cement plants and keep exhausted coal mines alive.

In purely economic terms, closing down these industrial relics is a no-brainer. They add to rampant overcapacity, as well as choking pollution. They’re the zombies at the heart of the country’s growth dilemma: More and more credit is producing less and less output. Mounting corporate debt threatens to crash the financial system. “Warning signs are flashing,” writes David Lipton, the first deputy managing director at the International Monetary Fund.

Yet apparently that prospect isn’t as troubling to the regime as the specter of unemployed workers flooding the streets.

Hence, the slow pace of factory closures, along with the desire to continue chasing an unrealistically rapid growth target.

By contrast, the political crackdown is imbued with urgency. A repression index would prominently feature data on the plight of rights lawyers. More than 300 legal professionals and activists were briefly detained or interrogated last year, and several dozen formally held. Show trials are now under way.

An index would also track new restrictions on civil society groups, capture the intensity of censorship and count references in state media to “hostile foreign forces” trying to subvert the government, a phrase that since Mao’s day has been a reliable gauge of paranoia among the ruling elite.

A sub index might measure television hours devoted to images of missiles, military jets and warships. Rising nationalism is the other corollary of political insecurity.

‘Warning signs are flashing.’
—David Lipton, first deputy managing director at the International Monetary Fund

The political chill recalls the immediate aftermath of the bloody army crackdown that ended the Tiananmen Square protests in 1989. Not coincidentally, the economy was in trouble then too.

Tank Man at Tienanmen by Jeff Widener of the Associated Press.

Public-interest lawyers are in the crosshairs because of their ability to coordinate and channel scattered public grievances at a time of growing economic distress. They offer the means, in other words, to empower a citizenry increasingly aware of its rights. That runs against the control instincts of a top-down Leninist party.

And there’s the rub. Can an economic transformation be successful without a loosening of the reins? Censorship is at odds with a knowledge economy. Ideological dogma suppresses free inquiry essential to creativity.

The political signals are unsettling the private sector, which creates almost all the new jobs and drives innovation in products and services. Private investment is collapsing, despite the government’s instruction to local officials to “chant bright songs” about the economy.

The reluctance to invest can only partially be explained by factors such as falling returns amid global economic weakness, on top of worries about currency depreciation. It also reflects what analysts at the Chinese investment bank CICC call an “uncertainty trap”—doubts about the “timetable, road map and implementation” of reform.

According to one school of thought, the repression is setting the stage for bold and politically risky economic overhauls. In effect, the government is battening down the hatches in preparation for hard times.

Entrepreneurs aren’t so sure: the key group that will make or break reforms—and can’t be easily coerced—is making a free choice to sit it out.

Write to Andrew Browne at


President Xi Jinping of China, center, was applauded when he visited the newsroom of People’s Daily in Beijing. Credit Lan Hongguang/Xinhua, via Associated Press


Britain’s Queen Elizabeth speaks to Commander Lucy D’Orsi during a garden party at Buckingham Palace in London on May 10, 2016. PHOTO by REUTERS

China’s state run media seems to be attacking other nations with renewed energy lately….


Bookseller Lam Wing-kee (C) takes part in a protest march with pro-democracy lawmakers and supporters in Hong Kong, China June 18, 2016.

China blocks VPN services that let users get round its ‘Great Firewall’ during big political gatherings in Beijing

 (Contains many  links to articles on the Chinese human rights lawyers)

How the West Texas Oil Cowboys Changed the Global Energy markets Forever– Even the Saudis proved unable to break the back of the US shale industry

August 1, 2016


Orion Drilling Co’s Perseus rig in Webb County, Texas. Bloomberg News photo

By Ambrose Evans-Pritchard
The Telegraph

Opec’s worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has still failed to break the back of the US shale industry.

The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is a bitter victory at best.

North America’s hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits.

US shale oil output has risen exponentially, and the latest dip is just a temporary setback CREDIT: EIA

Scott Sheffield, the outgoing chief of Pioneer Natural Resources, threw down the gauntlet last week – with some poetic licence – claiming that his pre-tax production costs in the Permian Basin of West Texas have fallen to $2.25 a barrel.

“Definitely we can compete with anything that Saudi Arabia has. We have the best rock,” he said. Revolutionary improvements in drilling technology and data analytics that have changed the cost calculus faster than almost anybody thought possible.

The ‘decline rate’ of production over the first four months of each well was 90pc a decade ago for US frackers. This dropped to 31pc in 2012. It is now 18pc. Drillers have learned how to extract more.

Mr Sheffield said the Permian is as bountiful as the giant Ghawar field in Saudi Arabia and can expand from 2m to 5m barrels a day even if the price of oil never rises above $55.

His company has cut production costs by 26pc over the last year alone. Pioneer is now so efficient that it is already adding five new rigs despite today’s depressed prices in the low $40s. It is not alone.

The Baker Hughes count of North America oil rigs has risen for seven out of the last eight weeks to 374, and this understates the effect. Multi-pad drilling means that three wells are now routinely drilled from the same rig, and sometimes six or more. Average well productivity has risen fivefold in the Permian since early 2012.

Workers at a Statoil USA site in the Eagle Ford formation, Texas

Workers at a Statoil USA site in the Eagle Ford formation prepare to tie in a pipeline extension CREDIT: DAVID GAFFEN/REUTERS

Consultants Wood Mackenzie estimated in a recent report  that full-cycle break-even costs have fallen to $37 at Wolfcamp and Bone Spring in the Permian, and to $35 in the  South Central Oklahoma Oil Province. The majority of US shale fields are now viable at $60.

This is a cold douche for Opec. It has been an article of faith among Gulf exporters that hedging contracts had kept US shale companies on life-support and that there would be a brutal cull as these expired in the first half of this year.

No such Gotterdamerung has occurred. A few over-leveraged players have gone bankrupt, but Blackstone, Carlyle and other private equity groups are waiting on the sidelines to buy distressed assets and take over the infrastructure.

The real growth area for shale oil is in West Texas. CREDIT EIA

The crucial mid-tier drillers have weathered the downturn. Many are still able to raise funds at low cost. Total output in the US has fallen by 1.2m barrels a day to 8.5m since the peak in April 2015 but production has been bottoming out. Today’s frackers can just about cope with oil prices in the $40 to $50 range.

Opec may now have to brace for a longer war of attrition than they ever imagined. Global inventories of crude oil remain near all-time highs, record volumes are being stored on tankers off-shore.

Forest fires in Canada, rebel attacks in Nigeria, and other global upsets took 4m barrels a day off the global market at one stage over the May-June period, masking the continued world glut. These disruptions are subsiding. Lost output has dropped to nearer 2m barrels a day. That is a key reason why US crude prices have fallen 20pc to $41 over the last six weeks.

Morgan Stanley says the long-awaited rebalancing of the global markets has been delayed for yet another year until mid-2017.

Worse yet for Opec, consultants Rystad Energy say that 90pc of the 3,900 drilled but uncompleted wells – so-called ‘DUCs’ – are profitable at $50. This implies an overhang of easy supply waiting to hit the market. Citigroup expects an extra 1m barrels a day in late 2016.

The rig count may have plunged in West Texas but output per rig has soared. Production is steady CREDIT: EIA

Once that is cleared, shale drillers will have to build new rigs. Mr Sheffield said Pioneer can do this is 135 days flat, a dramatic contrast to deep-water mega-projects that can take seven to 10 years.

This agility has changed the nature of the oil cycle. It means that Opec faces an unprecedented headwind from mid-cost producers. Stalwarts Anadarko and Hess say they will wait for $60 before investing heavily, but they are already preparing the ground.

The losers are high-cost projects elsewhere: off the coast of Nigeria and Angola, in the Arctic, or the oil sands of Canada and Venezuela’s Orinoco basin.  Roughly 4m to 5m barrels a day of future supply has been shelved around the world.

This sets the stage for an oil shortage and a price spike later this decade. Whether Opec can survive that long is an open question. Most of the cartel need prices of $100 to fund their regimes.

Wellhead costs for US shale have plummeted as technology improves CREDIT: RYSTAD

Venezuela is already in the grip of hyperinflation and food riots. Nigeria’s currency peg was smashed last month, and the naira has fallen 60pc. Angola has turned to the International Monetary Fund, Azerbaijan to the World Bank.

Saudi Arabia has deeper pockets but its net foreign reserves have fallen from $737bn to $562bn, even though it is borrowing money abroad to slow the loss. It burned through another $11bn last month.

Riyadh is trying to curb the country’s culture of subsidy and entitlement, but was forced to sack a minister and backtrack after a 500pc rise in water prices set off an outcry. It is the famous social contract from cradle-to-grave that keeps the House of Saud in power.

The IMF says the budget deficit will be 13pc of GDP this year, but nobody really knows since true military spending is secret and subsidies for Egypt and a nexus of clients in the Saudi sphere are opaque. Riyadh probably has a safe reserve buffer for another eighteen months at current oil prices before perceptions change and capital flight turns serious.

If West Texas really can boost output by another 3m barrels a day at anywhere near $55 a barrel – as Mr Sheffield claims – the Saudis may have to dig in for a very long and painful siege.

Rig supervisor David Crow is shown at work on the oil rig he manages for Elevation Resources at the Permian Basin drilling site in Andrews County, Texas, U.S. in this photo taken May 16, 2016.

Is China Starting The Trade War Everyone Fears? Beijing Slaps EU, Japan, S. Korea with Steel Duties — Owns South China Sea Despite International Court Ruling

July 24, 2016


© AFP/File | A Chinese worker polishes steel at an offshore oil engineering platform in Qingdao, east China’s Shandong province on June 1, 2016

BEIJING (AFP) – China said Sunday it has started imposing anti-dumping tariffs on certain steel imports from the European Union, Japan and South Korea, as Beijing itself comes under fire for similar trade practices.

Duties on the materials, used in power transformers and electric motors, will range from around 37 to as high as 46.3 percent, the commerce ministry said on its website.

The measures are intended to prevent the sale of the product at below cost, a practice known as dumping, it added.

A Chinese worker labors at a steel mill in a village of Jiangyin city, Jiangsu Province, China. (AP Photo/Eugene Hoshiko, File)

The world’s second largest economy, which makes more than half the world’s steel, finds itself under attack by EU countries for allegedly flooding world markets with steel and aluminium in violation of international trade agreements.

On Friday Premier Li Keqiang told a group of visiting leaders from the World Bank, International Monetary Fund and other organisations that China “will not engage in a trade war or currency war”.

Nevertheless, the EU sees itself under attack. Earlier this month in Beijing, EU Commission head Jean-Claude Juncker pledged to defend the group’s steel industry against China using “all the means at our disposal”.


He also said there was a “clear link” between the steel issue and the EU’s decision on whether to grant China “market economy status” — a prize eagerly sought by Beijing.

China has been pressing the EU to grant it the status — which would make it harder for the bloc to levy anti-dumping tariffs — before the year’s end, citing World Trade Organisation rules.

China’s announcement is the latest in a tit-for-tat fight with other countries over the special metal known as oriented electrical steel.

In May last year the EU imposed similar duties on imports of Chinese oriented electric steel as well as products from other countries, in a move which Bloomberg News said was intended to curb competition for EU producers.

Chinese Premier Li Keqiang and International Monetary Fund Director Christine Lagarde arrived at a roundtable discussion in Beijing on Friday. Mr. Li said his nation is a ‘stability anchor’ for the global economy.
Chinese Premier Li Keqiang and International Monetary Fund Director Christine Lagarde arrived at a roundtable discussion in Beijing on Friday. Mr. Li said his nation is a ‘stability anchor’ for the global economy. PHOTO:MARK SCHIEFELBEIN/EUROPEAN PRESSPHOTO AGENCY

The decision prompted China to launch an investigation into imports from the European manufacturers.

China has imposed such duties before. In 2012 the World Trade Organisation ruled that Chinese duties on high-tech steel from the US violated trade rules. In 2015 the organisation censured Beijing for continuing the practice despite the judgement against it.


G-20’s Focus Shifts From China to Europe

July 24, 2016

Geopolitical concerns allow Beijing to return to role it prefers — showcasing its growing clout

Chinese Premier Li Keqiang and International Monetary Fund Director Christine Lagarde arrived at a roundtable discussion in Beijing on Friday. Mr. Li said his nation is a ‘stability anchor’ for the global economy.
Chinese Premier Li Keqiang and International Monetary Fund Director Christine Lagarde arrived at a roundtable discussion in Beijing on Friday. Mr. Li said his nation is a ‘stability anchor’ for the global economy. PHOTO: MARK SCHIEFELBEIN/EUROPEAN PRESSPHOTO AGENCY


Updated July 24, 2016 12:42 a.m. ET

CHENGDU, China—A few short months ago, China’s economic problems were fueling global panic in markets and drawing unwanted attention and rebuke by the world’s largest economies.

Now, China’s economic challenges have taken a back seat to more pressing geopolitical concerns among finance ministers and central bankers from the Group of 20 largest economies, allowing Beijing to return to the role it prefers: showcasing its growing clout on the world stage.

Britain’s surprise vote to leave the European Union, Turkey’s recent coup attempt, a series of horrific terror attacks, souring global growth prospects and threats of an Italian banking crisis are drawing the scrutiny of the world’s finance chiefs. July’s meeting in Chengdu stands in contrast to the last G-20 finance leaders’ meeting, held in February in Shanghai.

China — Premier Li Keqiang chats with IMF director Christine Lagarde

Then, fears of a China-induced currency war and an economic meltdown in the world’s second-largest economy left the host nation on the defensive. The Chengdu meeting, which ends Sunday, is the last major G-20 event before the financial group’s September summit in Hangzhou.

“The Chinese economy is a ‘stability anchor’ for the global economy,” Premier Li Keqiangsaid Friday ahead of the meeting of the G-20, which acts as the world’s economic executive board. “Prophecy of China’s economy heading for a hard landing is rarely heard now.”

China continues to face questions about its currency policy and its steel exports, amid concern that overcapacity could become a global flashpoint in much the way that currency policy has been over the past decade. Another worry: China’s rising metal exports could worsen the weak inflation problem that central banks are grappling with around the world.

Foreign industries and their governments accuse the country of undercutting their markets unfairly by selling goods at prices below the cost of production. But those worries currently pale against much hotter fires elsewhere in the world.

“Brexit, the Turkish coup, and the U.S. elections have certainly helped redirect attention away from China,” said Standard Life Investments Ltd. economist Alexander Wolf, adding that markets often have a “limited attention span.”

The U.K. vote to leave the EU has cast a pall over the global economy, prompting the International Monetary Fund to downgrade its outlook and warn that growth could slip dangerously lower if U.K. and EU leaders don’t quickly address investor concerns about their future together. The coup against Ankara’s leadership revived political-risk worries in many emerging markets. And Republican presidential candidate Donald Trump’s talk of hiking tariffs is spurring worries the U.S. could pull the world into a global trade war.

China is undergoing an important structural transformation. Any transition has bumps here and there, but the overall direction of the change has been positive

—Italian Finance Minister Pier Carlo Padoan

Meanwhile, G-20 officials say Chinese management of the economy has risen to the challenge. Beijing has recalibrated its communication on exchange-rate policy and monetary and fiscal policies after global markets shuddered under what many said last year were management missteps.

“China is undergoing an important structural transformation,” said Italian Finance Minister Pier Carlo Padoan. Unlike earlier this year and last, no officials at the Chengdu G-20 mentioned China’s economy as a fundamental vulnerability to the global economy, Mr. Padoan said.

“Any transition has bumps here and there, but the overall direction of the change has been positive,” he said.

Beijing has taken active steps to restore confidence, repeatedly pledging since February not to depreciate the currency for competitive advantage. That helped allay fears of an imminent currency war.

The Asian powerhouse has also benefited from the Federal Reserve’s decision to delay an interest-rate increase, allowing authorities here to gradually depreciate the yuan, also known as the renminbi or RMB, without alarming investors.

“China has committed to moving in an orderly way toward a more market-oriented exchange rate,” a senior U.S. Treasury official said. “I’ve observed over the last months…a willingness to actually intervene to support the RMB to keep the RMB from depreciating more.”

China in recent months addressed fears of a financial crisis sparked by a flood of capital leaving its shores by tightening bank supervision, cracking down on unauthorized foreign-exchange traders and making it more difficult for customers to exchange funds. Foreign-exchange reserves have declined by $30 billion to $40 billion a month recently, compared with a $514 billion decline in 2015 and nearly $100 billion in January.

Also fueling the world’s more sanguine view of China, economists say: policy makers’ view that more fiscal spending, greater stability of capital outflows and other moves to curtail volatility are important as global growth slows, issues that play to China’s strength.

Beijing answered global concerns that its economy was slowing faster than it acknowledged by injecting a flood of money into the financial system, frontloading infrastructure spending and easing restrictions on its massive property sector. That saw second-quarter growth match the 6.7% rate in the first quarter, which was the economy’s slowest pace since the global financial crisis.

China on Friday reported 6.7% economic growth for the second quarter, slightly better than expected. Here’s how various sectors performed, by the numbers. Photo: Menglin Huang/The Wall Street Journal

The stimulus keeps China’s economy humming along, allowing Beijing to claim economic stability and put growth on track to hit the government’s annual target of 6.5% to 7%.

But, many economists caution, China may be buying growth now at the expense of output later.

The return to credit-fueled growth pushes up already-high corporate debt levels, fuels the problem of industrial overcapacity, blunts reform efforts and sets back efforts to shift the economy from state-directed growth.

“There is already a big problem of impaired loans which are on banks’ books which have not really been dealt with,” said IMF chief economist Maurice Obstfeld. “There needs to be a re-intensification of efforts in that area.”

Economists warn medium-term risks in China are rising. Standard & Poor’s Financial Services says corporate-credit quality is deteriorating faster than at any time since 2009. Corporate debt levels are estimated at 145% of gross domestic product, up from less than 100% of GDP in 2007.

Those levels, the IMF says, “are high by any measure.”

Write to Mark Magnier at and Ian Talley at



IMF chief Lagarde to stand trial in French arbitration deal

July 22, 2016

July 22, 2016 at 5:21 am Updated July 22, 2016 at 6:00 am

International Monetary Fund (IMF) Managing Director Christine Lagarde speaks during a press conference for the 1+6 Roundtable on promoting economic growth at the Diaoyutai State Guesthouse in Beijing, Friday, July 22, 2016. (IMF) Managing Director Christine Lagarde speaks during a press conference for the 1+6 Roundtable on promoting economic growth at the Diaoyutai State Guesthouse in Beijing, Friday, July 22, 2016. The IMF called Friday to end uncertainty over Britain’s vote to leave the European Union she says is dampening global economic growth. (AP Photo/Mark Schiefelbein)

The Associated Press

PARIS (AP) — France’s top court has ruled that International Monetary Fund chief Christine Lagarde must stand trial in France over a 2008 arbitration ruling that handed 400 million euros to a politically-connected business magnate.

Lagarde, who was French finance minister at the time of the deal in favor of tycoon Bernard Tapie, is accused of negligence in the case. She has denied wrongdoing.
A special court ruled in December that Lagarde should stand trial, but she appealed. France’s Court of Cassation on Friday rejected the appeal.

Lagarde’s lawyers did not immediately respond to the decision. Lagarde, who was in China on Friday at a Group of 20 summit, has said she had acted “in the best interest of the French state and in full compliance with the law.”

The unusually generous 2008 arbitration deal, paid from public funds, prompted years of legal disputes that remain unresolved.

The investigation began in 2011, soon before Lagarde was named to head the IMF in the wake of sexual assault allegations against her predecessor, French economist Dominique Strauss-Kahn. The executive board of the IMF has expressed confidence in Lagarde despite the investigation.

The decision last year to send her to trial had come as a surprise because a prosecutor had earlier argued that the case against her should be dropped.

“Negligence” by a person invested with public authority carries a risk of up to a year in prison and a 15,000 euro ($16,500) fine.

She will be tried at the Court of Justice of the Republic, a special body that tries government ministers for alleged wrongdoing while in office. A date has not been set for the trial.

The case is part of a larger legal saga centering on Tapie, a flamboyant magnate and TV star who had sued French bank Credit Lyonnais for its handling of the sale of his majority stake in sportswear company Adidas in the mid-1990s. With Lagarde’s approval, a private arbitration panel ruled that he should get 400 million euros in compensation, including interest.

The deal was seen by critics as a sign of a too-close relationship between magnates and the French political elite. Tapie was close to then-President Nicolas Sarkozy, Lagarde’s boss.

IMF Calls for ‘Urgent’ G-20 Action to Shore Up Vulnerable Global Economy — But U.S. Treasury Secretary Jacob Lew Says Not Yet, China Also Backs Off

July 22, 2016

Treasury Secretary Jacob Lew says coordinated crisis response isn’t necessary given the current outlook

Christine Lagarde, managing director of the International Monetary Fund, spoke in New York on Monday.
Christine Lagarde, managing director of the International Monetary Fund, spoke in New York on Monday. PHOTO: GETTY IMAGES

Updated July 21, 2016 5:25 p.m. ET

MUSCAT, Oman—Painting a dark outlook for the global economy, the International Monetary Fund on Thursday issued an “urgent” call for the world’s largest economies to roll out more growth-boosting policies.

The IMF said central banks need to maintain their easy-money policies and the Group of 20 largest economies must prepare contingency plans should a stagnating outlook turn into a downturn.

“Policy makers should stand ready to act more aggressively should the impact of financial market turbulence and higher uncertainty threaten to materially weaken the global outlook,” the IMF said in a briefing written for the G-20 ahead of a group meeting of finance officials later this week in China.


“A coordinated use of fiscal space would be beneficial should the global outlook weaken materially,” the IMF said.

U.S. Treasury Secretary Jacob Lew, jetting to the meeting late Thursday, said such a crisis response isn’t necessary given the current outlook.

“I don’t think this is a moment that calls for the kind of coordinated action that occurred during the ‘great recession’ in 2008 and 2009,” Mr. Lew said. “It really is a moment where we each need to do what we can to ensure that where growth is soft it gets stronger, and that prospects for the medium- and long-term are improved.”

Some countries already have begun leveraging budgets to boost growth. Canada has become a poster child for the G-20, and the U.K.’s new government has signaled it may use state coffers to goose a shaky economy. China juiced its economy with fresh credit, but fund economists warn those efforts delay needed economic overhauls and come at a cost given the country’s high debt levels and overcapacity.

Earlier this week, the IMF downgraded its forecast for global growth and warned that the U.K.’s decision to leave the European Union and problems elsewhere around the world risked pushing the economy into a deeper rut.

The U.K. and Europe are likely to face pressure from other G-20 members to resolve their divorce expeditiously and in a way that averts further market turmoil. Mr. Lew last week pressed his counterparts in a whirlwind trip across Europe to negotiate a relationship that preserved as much of the key trade and financial terms the U.K. and EU currently share.

“The best outcome is one that maximizes the integration of the U.K. and Europe,” he said Thursday. Washington is urging leaders to ensure discussions are “characterized by amicable, pragmatic engagement where the focus is on maximizing integration and cooperation,” Mr. Lew said.

The IMF warned that an “unnecessarily long period of political and economic uncertainty” surrounding Brexit and the deterioration of financial conditions in some European countries “could have severe macroeconomic repercussions.” Advanced economies would likely get hit hardest, “including through the intensification of bank distress in vulnerable economies.”

The fund said heightened uncertainty also exposes the world to unforeseen negative shocks translating into “global disruptions.”

Those risks are why the IMF is pushing the G-20 to ramp up efforts on all fronts.

Besides urging the G-20 to deliver on long-promised but half-delivered economic overhauls meant to boost productivity and using budgets to revive growth prospects, the fund said anemic growth means central banks should keep their feet on the cheap-cash accelerator.

“Central banks should continue to use all available instruments to raise inflation, including negative interest rates,” the fund said.

And even though the U.S. economy appears on the verge of taking off, the fund says the U.S. Federal Reserve should push back rate increases. “There is a clear case for the Fed to proceed along a very gradual upward path for the fed-funds rate, conscious of global disinflationary trends,” the IMF said.

Write to Ian Talley at

Corrections & Amplifications:
The IMF warned that an “unnecessarily long period of political and economic uncertainty” surrounding Brexit and the deterioration of financial conditions in some European countries “could have severe macroeconomic repercussions.” An earlier version of this article incorrectly stated the IMF warned about a “necessarily long period of political and economic uncertainty.” (July 21)



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