world growth

world growth

Thursday, March 25, 2010

China signs $40 billion LNG deal with Australia

Energy-hungry China has signed a landmark $40 billion deal to buy liquefied natural gas (LNG) from Australia for 20 years that Chinese officials say would put the strained relations between Beijing and Canberra back on track.

Under the deal, the China National Offshore Oil Corporation, will buy 3.6 million tonnes of LNG per year from British gas producer BG Group's Curtis LNG facility in Queensland in Australia, official China Daily reported on Thursday.

It is the world's first purchase agreement for supply of LNG from coal seam gas, and marks the first sale of LNG from coal seam gas to China, it quoted CNOOC as saying in a statement.

It is one of Australia's biggest single company-to-company LNG contract.

The deal is worth about $40 billion based on a crude oil price of $70 per barrel, BG chief executive Frank Chapman said after the signing ceremony.

The multi-billion-dollar deal suggests that Sino-Australian commercial ties have been largely unaffected by other tensions such as the Rio Tinto case, said analysts.

The deal was announced even as a Chinese court in Shanghai on Wednesday concluded its three-day trial of four of Australian company's Rio Tinto executives, under trial for bribery and industrial espionage.

The four, including Australian national Stern Hu and his three Chinese colleagues -- Liu Caikui, Ge Minqiang and Wang Yong -- were charged with taking bribes of more than 86 million yuan ($12.6 million) and stealing commercial secrets.

All four pleaded guilty to bribery charges on the first day of the trial although they disputed the specifics of the charges.

The guilty plea came as a surprise to many as Rio Tinto had earlier defended the innocence of its four employees, claiming that they "had done nothing wrong".

The detention of the four, angered Australia and affected its relations during the past few months.

But the two appeared to have warmed up to commercial ties again with Rio Tinto signing a deal last week with China's state-backed metals group CHINALCO to develop a massive iron ore mine in West Africa.

Under the deal CHINALCO will pay $0.85 billion for 47 per cent of the Simandou project in Guinea.

"Energy collaboration will be increasingly important in Sino-Australia commercial ties. The two countries, which have vital roles to play in global energy security, will undoubtedly strengthen cooperation in the area," said Huo Jianguo, researcher at the Trade Research Institute affiliated to the ministry of commerce.

"Resources are the backbone of Australia's trading relationship with China. One-third of Australia's mineral exports go to China, and China is our second-largest trading partner for LNG," the daily quoted Australian resources and energy minister Martin Ferguson. "Australia's trading relationship with China is healthy and mutually beneficial," said Ferguson, adding that his country is committed to strengthening that relationship.

More than $26 billion of Chinese investment was approved in the Australian resources sector in 2008 and 2009, he said.

Under the latest agreement, CNOOC will acquire a 5 per cent equity interest in the reserves and resources of certain BG Group tenements in the Surat Basin in Queensland. CNOOC will become a 10 per cent equity investor in the first of the two liquefaction trains, which will form the first phase of the Curtis project.

BG Group and CNOOC will also build two LNG ships in China.

Use of natural gas fits well with China's efforts to build an environment-friendly economy, said Liu Qi, deputy head of the National Energy Administration.

China will see more natural gas imports as domestic production cannot keep pace with the rapidly rising consumption, Liu said.

Natural gas accounted for around 3 per cent of the country's total energy consumption last year in China and the government plans to raise the proportion to 5 per cent this year.

Tuesday, March 16, 2010

Taiwan needs China trade pact to survive

TAIPEI — Taiwan President Ma Ying-jeou on Tuesday defended a proposed controversial trade agreement with China, saying the self-ruled island faced isolation without it.

Taiwan's China-friendly administration hopes the pact, the Economic Cooperation Framework Agreement, could spur growth and boost employment by easing barriers.

But the opposition Democratic Progressive Party, which favours independence from China, strongly opposes the deal, which it says would demote Taiwan to the status of a local government in future talks with the mainland.

Taiwan and China split in 1949 after a civil war but Beijing still sees the island as part of its territory awaiting reunification, by force if necessary.

"Without the agreement, Taiwan, already politically isolated in the international community, would be isolated economically," Ma said while addressing a gathering of the American Chamber of Commerce in Taipei.

He said Taiwan's industries and businesses would be unable to compete with their competitors overseas which are free of tariffs.

"The agreement is very important to Taiwan's survival," Ma said.

Taiwan and China held their first round of formal talks in late January in Beijing to decide on an agenda for the pact and other procedural issues.

Premier Wu Den-yih said Tuesday he expects the second round of talks to be held in Taipei on March 23.

Monday, March 8, 2010

China invests $1-billion into a copper venture with Canadian company

China is again turning to Canada to satisfy its voracious appetite for raw materials, striking a $1-billion deal with copper producer Quadra Mining Ltd. for its assets in Chile and a stake in the Vancouver-based company.

The joint-venture deal gives China a new copper source amid worries of a shortage in the country, while mid-tier producer Quadra receives the financing it needs to build projects and make future acquisitions.

The deal is the latest in a growing list of state-owned Chinese firms that have bought pieces of Canadian resources companies.

“We bring to the table expertise. They bring to the table money,” Quadra chief executive officer Paul Blythe said in an interview Monday. “It changes what we can and can't do.”

Quadra's deal is a memorandum of understanding with State Grid International Development Ltd., a division of State Grid Corp. of China, the country's largest utility company and one of the world's largest copper customers. The deal is expected to be made official in May and close next fall.

It's the first time State Grid has invested in a copper producer. The metal will be used to help develop power grids, and comes as China's market is expected to see a shortage of copper this year despite a massive restocking in 2009.

“We believe China's massive, import-dependent metals industry needs far more copper than most in the market realize,” UBS said in a recent report.

State Grid will put $900-million (U.S.) into the joint venture as projects are built, and pay about $152-million (Canadian) for 10 per cent of Quadra's shares.

The $900-million total is the value placed on Quadra's two projects in Chile, the Franke Mine and the Sierra Gorda project under development.

Sierra Gorda is estimated to cost more than $2-billion to build, though a feasibility study has yet to be completed. Production is expected by 2013 and has been forecast to be between 250 million and 400 million pounds of copper annually over 25 years.

The deal sees Quadra supervise the day-to-day operations, while State Grid takes the lead on financing, aiming for a 60/40 debt-to-equity ratio, or roughly $1.2-billion in debt and $800-million in equity. Each partner would own half the joint venture and split production proceeds.

The agreement is “a positive and helps resolve funding issues related to the Sierra Project,” according to BMO Nesbitt Burns Inc., which values Franke at $488-million and Sierra Gorda at $244-million.

Mr. Blythe announced the joint-venture deal while in Toronto for the annual Prospectors & Developers Association conference; coincidentally, that is where the two sides starting talking about such a deal a year ago.

Quadra also negotiated with other companies in China, as well as Japan and South Korea, before signing on with State Grid.

As part of the deal, State Grid has agreed not to further increase its stake in Quadra. Quadra's other major shareholder is Swiss-based SIA Funds AG, which also has a stake worth about 10 per cent.

Quadra and State Grid will also look for other copper assets through their joint venture, starting with operations in Chile, which is home to about 35 per cent of the world's copper production.

Quadra's other assets include the Robinson copper and gold mine in Nevada, the Carlota copper mine in Arizona and the Malmbjerg molybdenum development project in Greenland.

Monday, March 1, 2010

China surpasses Japan as the 2nd largest world economy

CHINA surpassed Japan as the second largest economy in the world in the fourth quarter of 2009.

Although Japan’s gross domestic product (GDP) for 2009 at US$5 trillion was higher than that of China at US$4.9 trillion, from the fourth quarter, China produced more goods and services (i.e. enjoyed higher GDP) than did Japan.

It still has some way to go before catching up with the United States, which had a GDP of US$14.5 trillion in 2009.

If China can grow 4% faster than the US annually, it is likely to surpass the US economy in 25-30 years. This could be sooner if the undervalued renminbi is revalued upwards.


On a purchasing power parity (PPP) basis, which assumes similar cost for identical products and services in different countries, China overtook Japan in 2001 (see chart) and could overtake the US by 2020.

As per the International Monetary Fund, China’s GDP per capita in 2009 at only US$3,566 was still significantly lower than that of Japan (US$39,573) and the US (US$46,443).

Growing from a low base was the easy part; the challenge is to sustain growth when China becomes a middle income nation.

China has a few advantages that will help it sustain growth. First, it has a strong pro-growth government that can implement its plans.

In the past, such plans like the Great Leap Forward and the Cultural Revolution were socio-economic disasters but under the collective leadership structure, policies are more measured.

A strong government has enabled China to quickly modernise its infrastructure (unlike India) and enhance its strong position in certain sectors like renewable energy, steel and manufactured exports.

Second, China has a very large domestic market that enables domestic producers to achieve economies of scale and attract foreign direct investments and technology into the country.

Third, China has made good strides in education and research and development. According to Unesco, China’s share of global researchers rose to 20.1% from only 14% in 2002 (see table on the previous page).


China also faces immense challenges. There is, firstly, an over-reliance on investments and exports to boost the economy while private consumption as a percentage of GDP remains low.

In the longer term, China will require a basic social net that will encourage Chinese to save less for future medical and other bills.

China’s strong one-party rule may be suitable for leading a country from a low to middle income nation but to make the leap to a high income nation requires a focus on innovation and a liberal environment that retains and attracts talent (like the US).

Taiwan and South Korea have made the transition from autocratic governments to democratic governments.

The challenge is for China to maintain stability and yet sufficiently relax its grip on its people to allow this transition.

Another challenge lies in how an emerging China interacts with the US and the Western world. Both sides will have to resolve tensions from differing world views and competition for natural resources and markets.

In the longer term, China faces a demographic time bomb due to its one child policy. China’s rapidly aging population is expected to peak at 1.45 billion in 2030 according to a UN study.

By then, China could suffer from what Japan is suffering now, a stagnant economy and a declining population that represents a strain on its healthcare and social welfare system.

China was the world’s richest nation until 1850, a position that was toppled by an inept government in the last days of the Manchu dynasty and unfair treaties imposed after the Opium War in 1842, aimed at reducing British trade deficit with China by selling opium to the Chinese in exchange for Chinese goods.

Barring major military conflicts (unlikely in the nuclear age) and major policy blunders, China is likely to resume its position as the world’s richest nation, a position it held for almost 2,000 years since the days of the Han Dynasty (206 BC–AD 220) which rivalled the Roman Empire.

The nature of the world will change as an emerging China interacts with a declining but still powerful West.

Western liberal democratic traditions focused on individual rights will square off with Eastern collectivist paradigm putting society above the individual.

Inter-Asian trade and relations will strengthen China’s influence in Asia and position the renminbi as the de facto trading currency for the Asian bloc.

Failure of China and the West in accommodating each other could lead to trade war and even a new cold war, an outcome that can be avoided if more moderate voices that value an open diverse world can prevail over xenophobic ultra-nationalistic/religious voices.

In this new global reality, Malaysia will find it increasingly difficult to compete in manufacturing. Malaysia has to fight tooth and nail to retain and attract talent and boost services (like tourism). This means crafting an attractive liberal environment for its citizens and foreign talent.