23 September 2019

Abu Dhabi dispatch: The great Sino-US decoupling

by Frederick Kempe

The most knowing delegates at this year’s World Energy Congress continued to worry about the US-Chinese trade war.

It has slowed growth and placed the biggest drag on oil prices.

At the same time, however, they were shifting focus to the more momentous and generational event of the decoupling of the world’s two weightiest economies.

Abu Dhabi, United Arab Emirates – If one strains hard enough to listen in the humid heat of this oil-rich kingdom, one can hear the rumblings of the most profound event for global energy markets and the world economy, not only for this year but perhaps for this era:

It is the decoupling of the world’s two weightiest economies, that of China and the United States. The process seems as inescapable as its extent and global impact remains incalculable.


This week’s news that President Trump was delaying by two weeks a tariff increase on $250 billion of Chinese goods planned for October 1, the 70th anniversary of the People’s Republic of China, is unlikely to slow this trend, and neither will China’s responding exemption of pork and soybeans from new tariffs. 

The most knowing delegates at this year’s World Energy Congress, who met here this week, continued to worry about the US-Chinese trade war. It has slowed growth and placed the biggest drag on oil prices. At the same time, however, they were shifting more focus to the more momentous and generational event of decoupling.

They saw it in the Liquified Natural Gas contracts that the world’s fastest growing LNG exporter, the United States, wasn’t signing with the world’s fastest growing importer, China. They recognized it in the recent Chinese deal to take an equity stake in Russia’s Arctic LNG 2 project taken by China National Petroleum Corp (CNPC) and China National Offshore Oil Corp (CNOOC).

Delegates also heard decoupling in the only four LNG vessels that have sailed from the United States to China this year, down from 32 in 2018 and 23 in 2017.

LNG has transformed global gas markets dramatically in recent years, driven largely by significant demand in China and the rest of east and southeast Asia. However, in a market where financing is driven by long-term contracts, often even before construction begins, American suppliers are already gauging the potential costs, until recently unanticipated, of lost Chinese buyers.

One can also see decoupling in the oil deliveries not made to China from the United States this year, even though the US has become the world’s largest oil and gas producer and a net exporter. Whereas US shipments of crude oil to China reached half a million barrels a day in summer 2018, they averaged only a third of that in the spring of 2019. 

Though delegates had come here to focus on energy markets, the implications of decoupling have begun to touch almost all economic sectors, from aviation and automobiles, from finance and farmers, and from cell phones to semiconductors.

The tit-for-tat tariffs and accompanying Trump tweets have been driving markets all this year, but what traders haven’t even begun to price in is the longer term, structural impact of this decoupling and its particular danger to individual companies. Wary that US leaders fundamentally want to undermine their country’s rise, Chinese leaders increasingly are dissuading or outright preventing their companies from dealing with American partners. Meanwhile, chastened US companies are rethinking supply chains and relocating Chinese-based manufacturing.

If nothing interrupts this process, it will reverse 40 years of increased trade, financial and economic integration of the two countries. Other nations’ companies won’t follow the American lead but rather look to pick up lost US opportunities among China’s 1.4 billion consumers.

Encouraged by his trade advisor Peter Navarro, President Trump made his own decoupling druthers clear in a late-August tweet: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.” 

President Trump’s trade policies are resulting in an economic slowdown that could endanger his re-election and thus his revived efforts toward a solution. Yet, it remains unlikely that any major deal can reverse this downward trajectory in bilateral relations in any lasting manner, even as China and the United States open the 13th round of trade talks in October (no specific date set yet). 

Beijing remains eager to see the US remove its tariffs. Trump administration negotiators continue to want China to commit to structural changes in how it does its business, ranging from intellectual property protections to state subsidies.

The most profound shift of recent weeks, however, may be Beijing’s move from negotiating the best deal possible to hunkering down for an epochal, systemic contest that Chinese officials fear will long outlive the Trump administration.

Speaking earlier this month to a training session for Communist party cadres, Chinese President Xi Jinping dramatically underscored this change of mood.

The summary of Xi’s speech, published so it would not be missed by the official Xinhua news agency, doesn’t mention the United States but focuses on “all manner of struggles” China will have to undertake to achieve the “Chinese dream” of a “great national rejuvenation” by 2049, the centenary of the People’s Republic of China.

Said Xi, “For those risks or challenges that jeopardize the leadership of the Communist Party and China’s socialist system; for those that endanger China’s sovereignty, security and development interests; for those that undermine China’s core interests and major principles; and for those that deter China’s realization of a great national rejuvenation, we will wage a determined struggle against them as long as they are there. And we must win the struggle.”

The South China Morning Post, in reporting on the speech, said that the Chinese word for “struggle,” douzheng, appeared nearly 60 times in the summary, underscoring the siege mentality that seems to have seeped into Chinese leadership regarding the US.

“It’s a fundamental political statement,” prominent Beijing political commentator Wu Qiang told the newspaper. “China will adopt an antagonist stance, position and approach to handle the deterioration of China-US relations.”

Xi took considerable poetic license, reminiscent of the movie Crouching Tiger, Hidden Dragon in how he instructed Communist cadres to remain watchful of the emerging dangers. He said they should be able “to notice a deer passing by, looking at the grass and leaves, see a tiger jumping out by hearing the wind in the pines, and know the coming of autumn by spotting the changed color of a tree leaf. “

In the less nuanced world of Trump tweets and global markets, it’s time to buckle up for what is likely to be a long and bumpy ride. It also may be the moment to shift one’s focus from President Trump’s “art of the deal” to what one Chinese expert, Li Mingjiang of Nanyang Technological University, calls President Xi’s unfolding “art of the struggle.”

No comments: