7 September 2016

The U.S. Energy War With Green China

by Nomi Prins

"For, in the final analysis, our most basic common link is that we all inhabit this small planet. We all breathe the same air." 

I've been in China meeting with members of the International Monetary Fund (IMF) and the New Development Bank (NDB, launched by the BRICS). Here's what I found out: Green is the new black.

Nomi Prins and Dr. Raphael Lam, resident representative of China for the IMF. July 2016

As Jim Rickards has explained, the shift away from the dollar as the world's reserve currency creates an opening for a new global superpower. Other countries are making their moves to fill that spot, and none is moving more quickly than China.

China has two big moves lined up, and the first one is happening at the G20 meeting on Sept. 4. Jim Rickards says that this will be the day the dollar dies. This will also be the day China shows that it is an equal to the U.S. and any other country vying for world supremacy.

A massive part of world dominance is control over energy. Before, that meant oil. Now, it means green energy. The U.S. and China are racing to control green energy. For China, that's how they can clinch the title of new world superpower. For the U.S., it's a last-ditch effort to hold their ground.
Why Green Energy Matters

At one point, having a significant oil stock reserve was a national security priority for White House administrations. Now, sustainable energy is. Why? Because if other nations open avenues of renewable energy sources to run their economies, global reliance on oil and fossil fuels will face competition as a sector.

Countries that were once deemed energy resource deficient see a light at the end of the tunnel. This is their chance to break away from the dependency curse that has riddled so many into a debtors' prison. Nations with more control over oil flow or supply (like the U.S.) will face diminishing political power as the forms of energy used shift toward sustainability (like in China).

It's not just currency wars, but energy wars now, too.

The effect of the changing power dynamic isn't just confined to your opinion on climate change, but to how the money and power behind going green relates to your investment portfolio or your next career.

The ramifications of this new power are global. The IMF reports that:

"Even sectors that are resource intensive can maintain employment when energy and raw material costs increase." It notes "executive power and investment banking will continue to seek the greatest areas to expand influence, regardless of negative or positive influences."

The downside here is that the elite are gunning for clean energy control. The upshot is more job creation and (eventually) lower energy costs for people (and a healthier planet.)

Regardless of political elections and candidates' beliefs about climate change, these pioneering facilities create green jobs. They also aren't as affected by extraneous factors like economic crises or wars. The wind will always blow. The sun will always shine.

Millions of jobs have been lost in the fossil fuel industry, particularly in coal. In contrast, over the last year, the solar industry added jobs 12 times faster than the rest of the economy - more than the jobs created by the oil and gas extraction and pipeline sectors combined.

Nations with less access to their own oil are either buying access or investing in alternative forms of energy. China sees huge opportunity in gaining dominance from new power. China doesn't have the "Old Power" of the petrodollar and doesn't have its own oil.

The NDB, headquartered in Shanghai, has shaped its mission statement to support sustainable energy infrastructure projects, giving Chinese (and China's emerging markets partners) companies the funding they need to stay ahead in the race. To fuel its growth, China needs control over as much energy as possible. The sun and wind offer a way.

Meanwhile, the New Power Elite from Silicon Valley have mega operations, are involved in multiple government national security contracts, and have increased presence in Washington. The power supply they use to energize their businesses is the power they can access more cleanly, ultimately more cheaply, and in which they can lead the way innovatively.

Wall Street is going where the money goes, so we'll find some of the usual crowd mixed in as we explore the key players on the U.S. side of the energy wars.

First, here's a look at where power is now and a short overview of how it arrived there:
The Rise of Old Power and What it Means for the New Elite

At the turn of the 20th century, old money and old power expanded from billionaire industrialists, like the Carnegies and Rockefellers, to include billionaire bankers, the Stillmans and Morgans of the world. Their control over the country's political and economic affairs was built on control of financial and energy resources (More of this in my most recent book).

Take the Rockefeller fortune, for example. It was built largely on the success of the Standard Oil Co. in the late 1800s. The Morgan family's wealth relied on the global reach and domestic influence of the Morgan Bank and the spread of financial capitalism. In the late 1800s, the Morgans funded governments during financial panics. In the 1900s, they helped finance two world wars. The Rockefellers retained their power by achieving industrial, financial and political influence.

As the Morgans and Rockefellers grew their profits, they, like other elites, looked to expand their power. They pursued making money from money, rather than from supplying energy to industrial pursuits and physical innovations.

Bankers grew more powerful as they expanded their existing empires. This happened in tandem with the United States becoming a major superpower, a role solidified after World Wars I and II. To maintain its superpower status, the U.S. increasingly relied on its control over the dollar as the dominant currency and oil as the dominant energy source.

The notion of the petrodollar in the 1970s, or linking petroleum and the U.S. dollar, was politically and financially motivated. Winthrop Aldrich, Chase chairman since 1933, was fixated on the Middle East. His sister had married a Rockefeller, and he believed true power would come from combining oil-related banking and finance activities. The petrodollar was based, in part, on the Rockefeller family aligning Chase with U.S. ambition to become a global superpower.

From Aldrich to his successor, John McCloy (lawyer and major establishment operator of the Rockefeller and Seven Sister oil companies), to David Rockefeller (who ran Chase in the 1970s and 1980s), global growth was fueled by oil. The power of these families and banks was enhanced by the petrodollar as a tool of America's global power.
Nothing Happens Without Wall Street

The reason this history matters to us now is because, as Shakespeare wrote:

"What's past is prologue."

The Old Power Elite preserved their fortunes in relation to their involvement in oil as the prevalent source of energy.

Now, the New Power Elite are taking the stage. Wall Street smells real money after years of profiting from a high market share in trading commodities. During the era of Old Power, the winning combination of power was finance and oil.

We're watching the transition to finance and sustainable energy as the next power couple right now. That's why in November 2015, Goldman Sachs announced it would finance and invest $150 billion in clean technology and renewable energy projects over the next decade, quadrupling its prior goal.

As far back as early 2014, the banking community began sticking their fingers into the sustainable energy pie. That was when a consortium of the usual players banded together to kick-start the green bond market. A "green bond" is a tax-exempt bond issued by federally qualified organizations or by municipalities for clean energy development. Bank of America Merrill Lynch, Citi, JPMorgan Chase, BNP Paribas, Deutsche Bank, Goldman Sachs, and HSBC are all part of the effort.

Last fall, Wells Fargo, the fourth-biggest U.S. bank, said it would cut back lending to coal-mining companies. In June 2016, it announced increasing support for building efficiency startups through the next round of its $10 million philanthropic Innovation Incubator program, administered by the U.S. Department of Energy's (DOE) National Renewable Energy Laboratory.

Morgan Stanley also pledged to reduce its exposure to coal-mining. Citigroup announced it would earmark $100 billion over 10 years for "lending, investing and facilitating" activities focused on mitigating climate change and other sustainability solutions.

The money is in green energy. The companies who will benefit from Wall Street's support aren't necessarily the usual suspects.

Most of the New Power Elite in the U.S. hails from Silicon Valley. The first person to talk about is the omnipresent Elon Musk. He is Rockefeller, Morgan and Ford all in one - he has melded together currency, transportation and energy in a 21st-century way.

Musk made his first fortune as a cofounder of PayPal, which processes the exchange of money. He chairs and co-founded Tesla, which is innovatively the Ford Model T. He is also the chairman of SolarCity, the publicly traded solar panel designer and installer run by his cousin, Lyndon Rive. His pending merger announcement of Tesla and SolarCity will join clean transportation and energy.

Not coincidentally, SolarCity's Executive Vice President of Global Capital Markets, J. Radford Small, was at Goldman Sachs for 17 years. And the underwriters Elon Musk is using on the Tesla/SolarCity deal? Goldman Sachs and Morgan Stanley. Musk is the modern version of the original robber barons. Expansion of his power is a fresh take on an old play.

There's also the "Breakthrough Energy Coalition," which includes Microsoft co-founder Bill Gates, Facebook co-founder and chief executive Mark Zuckerberg, and Jeff Bezos, founder of Amazon. During the UN economic conference in Paris last winter, this group announced they would mainly invest in early-stage sustainable energy companies. The New Power Elite need energy to run their businesses.

If they can harness new forms of energy, they don't have to compete with the fossil fuel crowd or their legacies.

And like their past counterparts, the New Power Elite can influence governments and policy without holding public office. They don't need to be in the inner beltway to call the shots - they create the systems that monitor and share the information behind the scenes. They are investing in sustainability not only because it's profitable, but because it's a path to greater influence in general.

China's Next Two Moves Against the U.S.

China is challenging the U.S. for world influence right now. First, China is leading the way in wind, solar and associated investments, domestically and abroad. While being environmentally conscious and providing sustainable energy is good for PR and air quality, there is more to it than that.

Geopolitics is strategically important and always at work - now more than ever. The competition between China and the U.S. can break depending on who has power over "dirty" energy and who can find alternatives to diffuse that power.

It is all a power play, and that's how you should be reading U.S. and China economic and energy headlines.

China has a long-term view of the global dominance offered by the shifting power paradigm. Central banking is the second key to this shift. China is undermining U.S. dominance by making the yuan a viable option to replace the dollar as the world currency.

The 2008 financial crisis destabilized global finance and accelerated China's moves toward power and autonomy in the world. They want to get away from the fragile U.S. and European banking system and its central bank enablers. China was able to use the fallout to further jockey for its position as a global super power with respect to currency and energy.

From my recent travels, I know that China has two target dates for certain global displays of their new power: the fast approaching G20 meetings and the 2022 Olympics.
G20 Game Changer

The G20 is the most urgent. China is hosting the G20 leaders on Sept. 4 and 5, 2016 in Hangzhou, Zhejiang. This will be the first official G20 summit hosted in China. According to one of my sources, China is spending around 100 billion yuan to make Hangzhou look and feel amazing for the G20 meetings. They want the G20 leaders (and the rest of the world) to see China at its best.

One main topic on the docket for the G20 meetings in September will be the fallout of Brexit and ensuring stability in the currency and financial markets. Hand in hand will be the inclusion of the yuan in the IMF's Special Drawing Right (SDR) basket. This is a huge move for China to gain power over the dollar.

In addition to the yuan joining the SDR, the second focus, at China's insistence, will be sustainable energy. Chinese Minister of Foreign Affairs, Wang Yi, recently said at a press conference,

"China will promote the G20 to take the lead in pursuing cooperation for sustainable development throughout the world in a bid to bridge the development gap." He wants to "accelerate the process of consolidation and the ratifying procedures of the Paris Agreement on climate change."

In an ironic twist, given its former bad rap on clean air, China's superpower aspirations are paving the way for them to insert sustainable development into the G20 agenda by bringing the UN's 2030 Agenda to the table. While playing host to the G20, China will spearhead discussion on green bonds.

Before the Hangzhou event regarding green bonds, China will hold a meeting with the NDB, based in Shanghai. Eastern countries picture Shanghai as an emerging financial hub and it appears to be quickly over-taking Hong Kong in terms of international attention and national growth - and buzz.

I met with Mr. Paulo Nogueira Batista, Vice-President of the NDB, at its headquarters. Mr. Batista was the executive director at the IMF, representing Brazil and 10 other countries for eight years. He was also a key architect of the NDB after the financial crisis of 2008.

The NDB was created to "support public or private projects through loans, guarantees, equity participation and other financial instruments." We met opposite the Shanghai Tower, the second-tallest building in the word, and one that promotes itself as the greenest. There, we discussed China's dedication to leading the way in sustainable energy.

Regarding sustainable projects and investments, Mr. Batista told me:

We will try to be as green as we can. Traditionally, multi-lateral banks have wanted to do such projects but have complained that sustainability gets in the way. We, on the other hand, see sustainability as a goal in itself for the lending side. We are issuing our first green bond next week - proceeds will be fully allocated for green projects. We will set up an independent third party to ensure adherence to green standards.

Paulo Nogueira Batista, VP of the New Development Bank, previously the executive director of the IMF together with Nomi Prins

The NDB isn't just financing green projects for its members. It's also the first major development bank putting its money where its mouth is - which spells demand for green bonds.

"Our own assets," he said, "will be invested in green bonds - two-thirds of our proceeds will be in sustainable infrastructure."

On July 18 2016, the NDB issued its first green bond, as Mr. Batista noted - a $449 million yuan-denominated green bond - into China's interbank market. It is the first green bond from a development agency with a lead underwriter that is not a U.S. or European bank, but instead, the Bank of China.

China currently leads the world in the sale of green debt and has helped push global green issuance in the first part of 2016 to equal the full-year total of 2015, according to my sources at the Asian Development Bank.

On July 6 2016, the Bank of China sold $3.03 billion in new green bonds, the largest international issuance of its kind. The issuance was the first to be made in three currencies - a $2.25 billion tranche, a €500 million tranche and one issued in New York totaling 1.5 billion in offshore renminbi.

It was also the first green bond offering from Asia to be made in Europe. Green bonds have benefits beyond their greenness - they have tax advantages and take advantage of longer term investment strategies, in a similar way to gold.
Beijing's Olympic Makeover

Having walked around Beijing, I can tell you that pollution is troubling. Combatting it is something the Chinese government has aspired to since the 2008 Beijing Olympics.

Nomi Prins in Tiananmen Square in July 2016

In my talks with city locals, I learned that the government planted trees and grass around the city with a vengeance before those Games.

Beijing will host the 2022 Winter Olympics. If trees and air quality were of concern before, the Chinese government is even more focused on the future Games. It will be the first city to host both the Summer and Winter Olympics. It will be the largest city ever to host the Winter Olympics.

After the Paris climate change conference in 2015, China has stated its goal to reduce emissions of major pollutants in the power sector by 60% by 2020. Sustainability, clean energy and green bonds are matters of national pride and power. With these factors, the Olympics will provide a vantage point for the world to revisit how China has progressed on sustainable energy.

China, in its renaissance as a new global power, will increasingly rely on renewable and sustainable energy to drive its economy and those of its key allies and trading partners.

According to the Global Wind Energy Council:

Currently China is "the world leader in wind power, accounting for about one in every three turbines currently installed."

Solar power generation capacity was up 74% in China last year compared with 2014 levels.

There are major implications in all of these changes, and opportunities to understand the energy wars

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