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A new world energy system is taking shape

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On Valentine’s Day 1945, US President Franklin Delano Roosevelt met King Abdulaziz bin Saud of Saudi Arabia aboard the USS Quincy. It was the beginning of one of the most important geopolitical alliances of the past 70 years, as US security in the Middle East was traded for oil pegged to the dollar.

But times are changing, and 2023 can be remembered as the year when this grand bargain began to transform, as a new global energy order between China and the Middle East took shape.

While China has for some time been buying increasing amounts of oil and LNG from Iran, Venezuela, Russia and parts of Africa with its own currency, President Xi Jinping’s meeting with leaders of the Saudi and Gulf Cooperation Council in December marked the “birth of the petroyuan,” an analyst said. Credit Suisse Zoltan Bozar in a note to clients.

According to Pozar, “China wants to rewrite the rules of the global energy market,” as part of a larger effort to de-dollarize the so-called BRIC countries in Brazil, Russia, India, China and many other parts of the world after weaponizing foreign exchange reserves with dollars in the wake of Russia’s invasion of Ukraine.

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I don’t want? For starters, more oil trading will be done in RMB. Xi announced that over the next three to five years, China will not only significantly increase imports from the GCC countries, but also work for “multi-dimensional energy cooperation.” This could include joint exploration and production in places like the South China Sea, as well as investments in refineries, chemicals and plastics. Beijing hopes to be paid for in full in renminbi, on the Shanghai Petroleum and Natural Gas Exchange, as early as 2025.

This would represent a massive shift in the global energy trade. As Bozar points out, Russia, Iran and Venezuela hold 40 percent of the world’s proven oil reserves, and they all sell oil to China at a deep discount. The GCC countries account for another 40 percent of proven reserves. The remaining 20 percent is found in north and west Africa and Indonesia, two regions within the Russian and Chinese orbit.

Those who question the rise of the petroin, and the general waning of the dollar-based financial system, often point out that China does not have the same level of global trust, rule of law, or reserve currency liquidity as the United States, making it unlikely that it would want to Other countries to do business in RMB.

Perhaps, though, the oil market is dominated by countries that have more in common with China (at least in terms of their political economies) than the United States. Moreover, the Chinese provided something of a financial safety net by making the renminbi convertible into gold on the gold exchanges in Shanghai and Hong Kong.

While this does not make the renminbi an alternative to the dollar as a reserve currency, trading in the petroyuan nonetheless comes with important economic and financial implications for policymakers and investors.

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For one thing, the prospect of cheap energy is already attracting Western industrial firms to China. Consider the German company BASF’s recent move to downsize its main plant in Ludwigshafen and shift chemical operations to Zhanjiang. This could be the start of what Bozar calls a “farm-to-table” trend as China tries to get more value-added production domestically, using cheap energy as a lure. (A number of European manufacturers have also added jobs in the United States because of lower energy costs there.)

Petroleum policy comes with financial risks as well as rewards. It should be noted that the recycling of petrodollars in emerging markets by oil-rich countries such as Mexico, Brazil, Argentina, Zaire, Turkey, etc. by US commercial banks from the late 1970s onwards led to many debt crises in emerging markets. Petrodollars also accelerated the creation of a more speculative, debt-based economy in the United States, as cash-flowing banks created all kinds of new financial “innovations,” and the influx of foreign capital allowed the United States to run larger deficits.

This trend may now begin to reverse. Previously, There are fewer foreign buyers of US Treasury bonds. If the petroyuan takes off, it will ignite the fires of de-dollarization. China’s control of more energy reserves and the products from them could be an important new contributor to inflation in the West. It’s a slow-burning issue, but perhaps not as slow as some market participants might think.

What should policy makers and business leaders do? If I were the CEO of a multinational corporation, I would look to regionalize and localize as much production as possible to hedge against a multipolar energy market. I will do more vertical integration to offset the increasing inflation in the supply chains.

If I were a US policymaker, I would consider ways to increase North American shale production in the short to medium term (and offer Europeans a discount on it), while also accelerating the green transition. This is another reason why Europeans should not complain about the Inflation Reduction Act, which supports clean energy production in the United States. The rise of the petroyuan should be an incentive for both the US and Europe to move away from fossil fuels as quickly as possible.

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rana.foroohar@ft.com

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Chinese factories are suffering from the end of the zero covid policy

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Factory activity contracted in China in December, according to a private survey, highlighting the economic costs of the country’s abrupt abandonment of its strict zero Covid regime as it grapples with a nationwide wave of infections.

The Caixin Purchasing Managers’ Index, a special measure of operating conditions in China’s manufacturing sector, showed a reading on Tuesday of 49 for December, its lowest since September and down from 49.4 in November.

Official PMI data in China, released over the weekend, showed a sharp drop in economic activity. The manufacturing and services measures came in at 47 and 41.6 respectively, both falling to their lowest levels since early 2020 at the start of the Covid-19 pandemic. A reading below 50 indicates contraction, while a reading above 50 indicates expansion.

China’s economy, which until recently was severely strained from restrictions designed to keep the virus at bay, is now struggling. The effect of sudden reopening And the outbreak of the disease in major cities.

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as many as possible Hundreds of millions of people may have been infected With COVID by late December, according to internal government estimates, just weeks after authorities began easing President Xi Jinping’s anti-COVID measures.

In Beijing and other major cities, hospitals have been overwhelmed by a wave of elderly and frail patients Supplies of fever medicine and antivirals sold out.

Carlos Casanova, chief economist at UBP in Hong Kong, suggested that while pandemic restrictions were an initial drag on growth in the fourth quarter, the “explosion in Covid cases” was the most important factor in the weak PMI data.

“The main message from the PMI data is that the wave of reopenings has proven very disruptive,” said Julian Evans-Pritchard, chief China economist at Capital Economics. “The market’s euphoria from the shift away from type zero Covid has overlooked how disruptive the shift has been.”

The virus will be officially downgraded on January 8, when international arrivals will no longer be required to quarantine.

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Weak manufacturing activity in December – which marked the fifth consecutive month of declines for the Caixin Manufacturing PMI – followed a prolonged period of economic fragility. Other metrics, including retail sales, an important measure of consumption, also deteriorated at the end of 2022.

China’s CSI 300 index of shares listed in Shanghai and Shenzhen has fallen 1.5 percent over the past month, although it has risen in the past week since announcing the end of Covid zero.

China’s economy It is set to miss its 5.5 percent annual growth target for 2022 — already the lowest in decades — as economists polled by Bloomberg had forecast full-year growth of just 3 percent.

In addition to the wave of Covid infections, policymakers are grappling with a real estate crisis that has weighed on the economy for more than a year. As well as slowing exportsthat supported growth during the early stages of the pandemic.

However, the Caixin survey bore little silver lining to the outlook for the economy, with plant managers reporting increased confidence for the coming year as the rapid spread of cases fueled expectations after the peak of the wave had passed.

“It’s almost certain by February that things will get over the worst and start to pick up,” Evans-Pritchard said.

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The origin of the DNS error | www.investing.com

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If you are a visitor to this site:
Please try again in a few minutes.

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Check your DNS settings. If you are using a CNAME origin record, make sure it is valid and resolvable. Additional troubleshooting information here.

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Chinese banks: Covid will overtake real estate woes in the new year

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Foreign news broadcasts show horrific footage of Chinese hospitals full of coronavirus patients. Nearly half of the passengers on recent flights from China to Milan have tested positive. The Chinese economy is itself sick, correspondingly. As a result, banks will bear a heavy financial burden.

Data suggests that Beijing’s sudden reversal of its restrictive policies regarding the non-spread of the COVID-19 virus caused this to happen. ruin Worse than the widespread lockdowns. Chinese factory activity contracted in December at its sharpest pace in nearly three years. The non-manufacturing index, which measures construction and services sector activity, fell to 41.6 from 46.7 in the previous month. This was well below the 50-point mark that separates contraction from growth.

Chinese health authorities estimate that 250 million people, or about 18 percent of the population, contracted the virus in the first few weeks of December. The real percentage should be closer to the numbers reported by Italian health officials monitoring flights from Beijing.

This points to a severe labor shortage and supply chain disruption. Manufacturing will continue to slow and companies’ financial distress will rise.

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The real estate sector is already in deep trouble. Real estate prices and sales volumes were falling amid slowing consumer demand. The retail and entertainment sectors are also exposed. They would normally expect $110 billion in sales during the Lunar New Year holiday. This year, injuries were the only surge that mattered.

Outside of the real estate business, most major companies have the ability to weather the storm. Small businesses are more at risk. Chinese authorities expect big banks to support troubled companies with soft loans and outright bailouts. Local developers and regional banks are among the previous recipients.

Non-performing loans to Chinese banks had already reached a record high of 3 trillion renminbi ($436 billion) by the middle of last year. Beijing asked major lenders to step in to prop up the housing market with another Rmb1.9 trillion last year. It is increasingly being leveraged in other sectors. China’s debt as a percentage of GDP reached a historic record in the first half.

Shares of the largest banks, including Bank of China, Agricultural Bank of China and China Construction Bank, have fallen in the past six months. China’s largest industrial and commercial bank is down by a tenth and trades at 0.4 times that of tangible books – less than half the price of foreign peers such as HSBC. China’s economic recovery will come at the expense of domestic lenders and their shareholders.

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