REVEALED: Debt, China and an oil price at $50 a barrel

chinaoil

EMERGING NATIONS PAYING OFF DEBT WITH OIL, CHINA STOCKPILING TO SUPPORT THEM

mesnipThis isn’t a scoop: far from it – I was sent a Reuters story about it last night, and since then have contacted those who should know in Asia. The story seems to explain to me why we’re back at $50 oil, why China is buying so much of it, and the geopolitics involved in Beijing’s continuing support for Emerging Market countries. What it also makes clear is that $50 oil is NOT based on real demand-driven global recovery.

We got trouble, right here in Beijing City, with a capital T and that rhymes with D and that stands for Debt.

Debt is one of the strongest weapons the West in general and the US in particular have for reining in those they see as enemies. They messed up Putin with oil manipulation. And they forced Hollande to about-turn towards austerity with an attack on French sovereign bonds. The Chinese élite has long suspected the US of attacking their currency (both buying and selling, sometimes through Japan), and of course this was the initial tactic used to get Iran onside.

China’s longer-term strategy – as evidenced by the already successful AIIB – is to create a credible transmission and investment currency to rival the Dollar hegemony….especially the petrodollar.

To this end, Beijing has both invested and lent money to EM oil producers like Angola, Nigeria, Iraq, Venezuela and Kurdistan – who together owe some $40 billion to China. To one extent or another, however, the collapsing demand for oil and consequent glut has left these countries in difficulties when it comes to paying cash.

So China has taken a smart decision: to stockpile oil while the price is low….and to buy it from nations in debt to it. This both protects the money they lend, and supports Beijing’s spheres of influence.

Specifially, the producers are paying off Chinese debt in oil. China has, for example, become Venezuela’s top financier via an oil-for-loans programme which, during the last decade, has funneled $50 billion into Venezuelan coffers in exchange for repayment in crude and fuel, including a $5 billion deal last September.

Keen to hype the oil price as “evidence” of a global recovery, Wall Street and Texas have been happy to show the increased volume – and pump the price of crude up on the basis of it. Ironically, this is also a geopolitical own-goal, because it means EMs can repay debt more quickly from now on, and China doesn’t wind up saddled with bad debt. China has already stockpiled oil in the cheaper $30-35 range as part of a fixed-price deal….which I understand is soon to come to an end.

But as Reuters points out, every wheeze has its consequences. People tend to look at current production volumes, but committing your entire production to China means (a) little room for negotiation and (b) ALL the income being used to pay off debt….rather than investment in new plant and markets. This is precisely the export dependence on China that will smack Australia in the teeth before too long.

Intriguing. And as always, debt, oil and energy geopolitics are behind what’s really going on. Global recovery? Of course not: look at the transportation, trade and real salary numbers throughout the West.

Connected at The Slog: A forming global duopoly

30 thoughts on “REVEALED: Debt, China and an oil price at $50 a barrel

  1. So China has taken a smart decision: to stockpile oil while the price is low….and to buy it from nations in debt to it. This both protects the money they lend, and supports Beijing’s spheres of influence.

    This is rather nicer than having the IMF kick your door down, and then tell you that you still have to pay 50% of your debt to the hedge-fund-vultures that bought the debts at 3 cents in the dollar.

    Being locked into that kind of deal is only going to make your economy worse… just look at Greece! Mind you, when people invested in Greece, what happened? Does anybody remember the joke about the Spanish bridge that was only one lane wide instead of the two agreed with the EU – and the mayor of the village had a new home… and the Greek bridge that didn’t have any lanes at all…

    It is one thing to lend money, it is quite another to expect it to be used wisely.

    Liked by 1 person

  2. Yes, the Baltic Dry Index is slowly but surely heading south again.
    Won’t the Chinese offer more to the EM to invest into their infrastructure for new plants and markets?
    I wouldn’t have thought this would sit well with Washington.

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  3. Yesterday Stephen Crabb pointed allegations.
    Today the price of oil in china.
    Tomorrow ? More potshots from the ivory towers followed by another botello of 2015 chateau oblivion.
    LOL WTF? LOL

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  4. The Chinese certainly won’t have any trouble drumming up enough steel to contain all that slippery stuff – two birds, one stone? No doubt the US would like to give them both barrels..

    Liked by 2 people

  5. Gold, oil even nuclear reactors in foreign nations just so they do not end up holding the $ in a NIRP world and a bastardisation of currency.

    As the USA keep manipulating commodities like suppressing gold China buys, suppressing oil China buys.

    Value in assets not US treasuries.

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  6. Washington has used debt as a weapon, to loot and subdue recalcitrant states for many years. The IMF and World Bank are their preferred attack dogs.
    The mode accompli is a well worn tactic. The IMF advances a loan to a vulnerable country under the guise of development funds. When the loans cannot be repaid, they insist on privatisation of state assets to service the loan. We have seen this in Greece and it is ongoing.
    In the case of Russia,we have hybrid war, military threats on their border, incessant propaganda, and financial warfare.The financial warfare consists of attacks on the Ruble currency trade sanctions , the deliberate driving down of the oil price by forcing the Washington poodle Saudi Arabia to overproduce and manipulation on the oil exchanges.
    The low oil price has caused destabilisation of vulnerable countries, especially evident in the Latin American countries of Brazil and Venezuela, which is also in Washingtons interest.
    This manipulation of the oil price has devastated the US fracking industry and of course the recycling of petrodollars has been greatly reduced. This affects the already parlous state of the US economy.
    This high end ‘game of chicken’ will last until either the US Empire collapses on itself, or Russia succumbs to its authority.
    Interesting times, with the threat of a European conflagration hanging over all.

    Liked by 3 people

  7. PT@ it seems you have nothing to actually add yourself! only mock others views! that’s al right ,Mr Crabb certainly hasn’t been open to parliament about declaring his interest! China is obviously stockpiling cheap oil! the reasons for both maybe interpreted differently but the facts can’t! i have no idea about company house,so haven’t commented on that!but the trouble with fiat money is it makes everything valueless (although i doubt you actually understand what i mean by that) so Bitcoin,oil and local coinage like near Bristol are and can be used,since Britains wealth was really all about weights and measures and standards(regulating) its currency! which destroyed such measures as bitcoin etc of there day! ever being able to compete.
    hence why its not surprising that other forms of exchange are being adopted! yet you can’t see it! that says more about your blindness to the world you live in,but does explain your lack of comment

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  8. @PT@

    I maintain that Louiz CK Neilsen and Jonathan E Macy seem extremely dubious names. I have found no mention of either on the web in any other context than Crabb’s landlords. I do believe this merits investigation. BTW, LOL, WTF? Really? ADBB :-)

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  9. @SL; ‘or Russia succumbs to its authority.’
    Can’t see that happening myself. Methinks WWIII before Russia would become another vassal state, although there are said to be some on the inside at the Kremlin who would favour the vassal state status…My gut tells me we are on the verge of something very very nasty indeed.

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  10. A clued up move by China, as you would expect. In the same vein it contiues to accumulate gold at a rate that is equal to half global production every year.

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  11. @Gemma

    I first heard the bridge joke over thirty years ago. It was told about the Argentines under Galtieri and the Philippines under Marcos. It was close to the truth. President Aquino’s Minister of Finance told me the first day he had been Minister of Roads and Highways he was shown maps of the Philippines with some roads in bold lines and some in dotted lines. He asked about the dotted lines and was told they were ‘ghost roads’ that had been paid for under World Bank and other funding but never built.

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  12. great explanation of the 50$ iol…. everyone is storing it… but why would anyone pay over the odds?? unless they pay with printed paper fiat. Then the price will continue to rise as the paper is deemed to be more and more worthless… same as what happened in the 70s with the 3 day week etc.. Money is gold and oil… printed paper is just that….

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  13. OAH

    Now reverse all you said and look at who gained from your stories.

    It didn’t help the country, it didn’t help the workers, it didn’t help the economy… and in Greece’s case, they are still suffering because of that corruption.

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  14. Oil supplies to China from Nigeria would go some way towards explaining why the CIA, aka – the Niger Delta Avengers have just targeted and shutdown a Chevron facility in Nigeria. @NDAvengers

    http://www.zerohedge.com/news/2016-05-26/chevron-facility-goes-offline-nigeria-following-tweeted-attack-mysterious-militant-g#comments

    I recommend people to read their tweeted announcement of the attack (huh, removed), paying particular attention to the way the words “Listen”, “PipeLine” and “Electricity” are spelt. Only tech savvy bods use variations of “L vs l” like that.

    Proxy war, worldwide, painting countries into corners.

    Liked by 1 person

  15. I think the explanation for Chinese buying of oil is simpler. A few years ago, the US Treasury Secretary (I think it was Geithner) addressed an audience of students in China and brought the house down by suggesting that the US Government would be able to repay the investors who had bought US Treasuries. That is what the Chinese fear – being robbed by a US default or by the US letting inflation rip. Remember that interest rates in China are nowhere near zero and that consequently their view of the risks of ZIRP and NIRP is very different from that in Europe or the US.

    The Chinese are in a similar predicament to the Germans. Neither country wants to stop running a massive current account surplus. The main difference is that the German people won’t increase consumption and the Chinese people aren’t allowed to by their government. (Who needs capitalists when you have communists with such little regard for the standard of living of their people?) Both Germany and China have come to realize that there is a limit to how much debt their customers can take on in order to continue buying German and Chinese goods. Beyond that limit, default is inevitable and the Germans and Chinese will have to accept that they didn’t sell all those exports, they actually gave much of them away.

    So the Chinese Government is stuck in a situation where raising the standard of living of their own people is unacceptable and where the financial investments, in which they can invest the dollars they receive for continuing to run a massive current account surplus, will probably lead to a capital loss in real terms if not in nominal terms. How can the Chinese invest their dollars so that they are protected from capital losses and from inflation? Oil is the best bet. Buying oil at under $40 is not a one-way bet. However, the potential for capital gains is far greater than that for capital losses. And even if the oil price did crash, China would benefit from the boost that would give to their economy. And of course oil would offer much better protection against inflation that most other investments. The misfortune for us as individuals is that we cannot stockpile oil in the way that the Chinese Government can.

    Building relationships with oil producers is by no means unimportant. It is however secondary.

    Liked by 1 person

  16. @Gemma Perhaps you haven’t been following …

    It was the IMF who were arguing that Greece should get proper debt relief, i.e. part of the debt is written off. It was the EU and ECB who want to protect their banks. (I can’t believe that I’m defending the IMF).

    @kfc

    While the Russian thugs are focused on the US, they are in danger of becoming a vassal state to China.

    As for all the self-appointed military experts on here, I doubt that either you or I know anything about the outcome of a military confrontation between the US and Russia. If Russia retakes the Baltic states without war, it will not be because the US was incapable of responding, it was because the US decided not to start WW3. I can remember the doubters who predicted military disaster for the US before the first Iraq War.

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  17. @ Losvanvan 99.
    Why would Russia have any interest in invading the Baltic States. The break-up of the Soviet Union and the stand down of the Warsaw Pact forces,gave them back their Sovereignty, which they rapidly gave away by entering the EU and NATO.
    Stop swallowing the Yanqui B–s.

    Liked by 1 person

  18. One wonders when any pronouncement from a government or a bank would again be considered information. We have long expected to be lied to. Why then do we cling to the hope that one day they will again speak truth? Look at the 2 populist candiates for emperor in the US; both citing the people against their governments actions and finding the populace responds favorably. One says it because of the way it affects him and his operation, the other demonstrates some empathy toward those it affects most. One is middle class, the other two alleged to be in the 1%. And now, Sanders and Trump have agreed to a first of its kind debate during primary season. The third can’t come because questions would be asked that don’t have an answer fit for the public. In Fraudo Veritas
    Public lies, once started can never stop. re; the ponzi scheme. Orwell solved this enigma and governments have embraced it.
    things are getting more interesting because both of these debaters have eschewed war with our world neighbors and that just can’t be allowed.

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  19. @ SL on your previous post you might have added ” then finally they decide some regime change is required”.

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  20. Losvanvan

    “It was the IMF who were arguing that Greece should get proper debt relief”

    – – – and how many years were they pumping Greece to pay up? The IMF change their minds as the winds in Washington change…

    … and the Hedge funds don’t care how much of a haircut they get. They bought their bonds at such a tiny fraction, Greece could be let off 90% of their debt and the Hedgies would still profit on the deal.

    PS The EU and ECB have strings held by Washington. They don’t move an eyebrow without permission from the Führer.

    Liked by 1 person

  21. @Gemma; ‘They don’t move an eyebrow without permission from the Führer.’
    And that’s not the Führer in Germany eh? That would be the one in Washington?

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  22. the fuhrer in this case being the deep state of the us of a. 95% of the bailout money for greece went directly to the banks. The greek public will pick up the tab…. this is the EU in action..

    Liked by 1 person

  23. KFC

    Yes, the American one. After all, it’s how they won WW2…

    … and yes, 95% of the money went to the banks. No few American ones amongst them. Just another way to drain Germany’s economy. The last little jig by the Americans – to show the thinking world just how desperate they are – was to defraud VW of a year’s profits. Nice little earner for a country verging on destitution.

    This from the Sueddeutsche Zeitung, the Guardian carried something similar. It speaks of the fact that most car companies cheat on emissions… but the Americans chose only VW to pick on.

    http://www.sueddeutsche.de/auto/abgase-von-dieselautos-viele-autokonzerne-tricksen-nicht-nur-vw-1.2956473

    Liked by 2 people

  24. @Gemma

    If the IMF, ECB and EU are all just puppets of the US and take their orders from the same ‘Fuhrer’, how come they have been arguing over Greece for more than a year?

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  25. @ Salford Lad

    The motives for Russia to invade the Baltic states are the same as the motives to invade Ukraine: defend the interests of ethnic Russians, create a buffer between Russia and NATO, shore up domestic political support.

    The probability of the Russians invading is small. However, most of the citizens of these states see invasion as possible and they know from experience how unpleasant life is under Russian oppression. That’s why they joined NATO.

    Time to contact Moscow and get a new soundbite.

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  26. ChrisB

    They are all puppets of the Führer – but what you forget is that this is an American dictatorship, not a German one. I’m sure you have heard of the term ‘little Hitler’? Well, each of those institutions will have its own, who is nominally subservient to the big boss, but would as happily stab him in the back as any decent, upstanding American citizen will his neighbour.*

    One clear example of this was when the New Syrian Army started fighting ISIS. Nothing unusual in that, save that the New Syrian Army is US government funded – and ISIS is funded by the CIA. I think you get the idea?

    Whilst nominally puppets, IMF, ECB and EU all have their own daggers to grind.

    (*Just look at how many mass shootings there are in the US if you don’t believe me!)

    The motives for Russia to invade the Baltic states are the same as the motives to invade Ukraine Please, stop believing what’s in the mainstream media! They aren’t there to inform you…

    Liked by 2 people

  27. @ Gemma

    ‘One clear example of this was when the New Syrian Army started fighting ISIS. Nothing unusual in that, save that the New Syrian Army is US government funded – and ISIS is funded by the CIA.’ Why don’t you start listening to yourself, I mean, listening to what you are saying rather than just admiring the sound of your own voice?

    There is no ‘Fuhrer’, neither German or American. Even within the US state, there are competing organisations with opposing aims and strategies. This has been the case going back to Vietnam and probably further back than that. I would guess that even within one of these organisations there are competing factions.

    Likewise when it comes to analysing the Troika, consider each in its own terms and ask who funds the organisation and who makes the senior appointments. Their differing views will reflect the differing interests of those who influence or control each organisation. Regrading Greece, the difference in views between the IMF and the ECB is easy to explain. The IMF is not as preoccupied with the solvency of European banks as the ECB. The Troika are not ‘nominally puppets’. The EU, for instance, is nominally the political representation of the citizens of the EU. Unfortunately, it is no such thing.

    As for lecturing me on not believing what I read in the media, that is rich coming from someone who predicted that the Russian armed forces would defeat the US forces on the basis of an article you read in the media.

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