Reality check: another look at the Chinese economy
From the oil investor’s perspective, China is often cited as the main reason for the continuing relentless climb in global oil prices. However, a look at the data tells a different story
LNG
In May, the China National Offshore Oil Corporation (CNOOC) opened China’s first LNG terminal project in Shenzhen (Southern China) and received its first shipment of Australian gas. Under the China Liquefied Natural Gas Joint Venture (CLNG), in which CNOOC has a 25 per cent interest, the Shenzhen terminal will receive 3.7 million tons per annum of LNG for 25 years from the Australian Northwest Continental Shelf Project (ANCP), a joint venture between BHP Billiton, BP, ChevronTexaco, Mitsui & Mitsubishi, Shell and Woodside Energy. Under the CLNG Agreement, CNOOC has a 5.3 per cent equity interest in the ANCP, with the ability to increase its stake depending on the quantity of gas supplied to the Shenzhen terminal.
The Chinese Central government has prioritized LNG development as a key platform to increase gas usage to eight per cent from three per cent of total energy consumption by 2010. Currently, there are eight more LNG terminals expected to be built over the next
seven years.
CNOOC has also expanded into the oilsands through its 17 per cent interest in privately held Calgary-based MEG Energy. CNOOC purchased its interest in MEG for $150 million on April 12, 2005. MEG Energy owns a 100 per cent working interest in 32,900 acres in Northeastern Alberta with an estimated 4.8 billion barrels of bitumen in place with 2 billion barrels of recoverable reserves. Recently, CNOOC’s Chairman publicly stated that future projects in Africa and Asia are a priority rather than North America – perhaps a reflection on the company’s chilly political reception regarding its 2005 bid for U.S.-based Unocal.
Environmental Concerns
Although China has environmental protection laws, the main issue has been one of enforcement due to under-funding and understaffing. Having local city or provincial governments responsible for enforcement has also been a disaster. Under the Central government’s recent 5-year plan, pledges have been made to provide clean drinking water to an additional 100 million people by 2010 and to improve urban wastewater management.
Bottom Line
Many U.S. politicians have blasted China on its slow reforms to date in various sectors of its economy, such as banking, capital markets development, price controls and reforms of state-owned enterprises. From the Chinese perspective, however, the Central government’s transition from a socialist to a capitalist system has been deliberately slow in order to avoid the Russian experience of an imploding economy with rapid inflation and significant organized-crime activities.
Many local Chinese agree that their lives today are significantly better than they were five years ago and they expect continued improvement toward Western standards. China is transitioning from a 1980s Japanese-style economy based on copycat manufacturing to more innovative and design-oriented, value-added products and goods. As part of this transition, the Chinese economy may become more cyclical, where the growth rate potentially falls from 10 per cent to 5-7 per cent but still shows rapid growth compared to western economies. The reality today is that the Chinese economy risks overheating.
Anil Tahiliani is Head of Research at McLean & Partners Wealth Management Ltd. in Calgary. Earlier this year, he attended the CLSA Conference in Shanghai, where he met with a cross-section of people including business owners, factory workers, money managers and investment bankers.
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