By Tim Daiss
Much has been written about how a Trump instigated trade war has hurt China, and with good reason. Numbers coming out of the country show that U.S. tariffs are taking a toll on Chinese economic growth and that dismal projection is likely to be exacerbated going forward.
China’s manufacturing sector in October expanded at its weakest pace in more than two years, hurt by both slowing domestic and external demand, in what Reuters called this morning a sign of deepening cracks in the economy from an intensifying trade war with the US.
China’s official Purchasing Managers’ Index (PMI) dropped to 50.3 in October, the lowest mark since July 2016 and also down from 50.8 in September. The PMI gives global investors a look at business conditions in China at the beginning of the last quarter of the year. A mark of 50 or below indicates economic contraction instead of growth.
China’s approaching long economic winter
Yet, the recent PMI figure could just be the beginning of a long spiral downward for the middle kingdom’s economic fortunes.
Data analyst Leland Miller told CNBC on Monday that China’s economy could be facing a tough winter as economic growth slows and the effects of a trade war with the U.S. begin to take hold. “The tariff situation has created a very bad potential problem for [the] China fourth quarter of this year, potentially in a big way first quarter” next year as well, Miller said. Even if the U.S.-China trade dispute were resolved Jan. 1, “the Chinese economy will be hurting very badly” despite some other “growth engines not doing as poorly,” he added.
Miller’s comments come just a few days after China reported stagnant growth of 6.5 percent for Q3, marking the slowest growth rate since the financial crisis. The 6.5 mark missed expectations and was lower than the 6.7 percent expansion in GDP in the previous quarter.
Stroke of brilliance
China is undeniably taking the brunt of the ongoing trade war between Washington and Beijing squarely on the chin. However, its retaliatory tariffs against U.S. LNG imports could arguably be called a tactical stroke of brilliance. China’s gas demand growth is already revolutionizing global LNG markets as it pivots to natural gas in place of dirtier burning coal. The country bypassed South Korea last year to become the world’s second largest LNG importer.
China’s August gas imports (both LNG and pipeline gas) spiked some 37 percent year-on-year, while gas imports in August were up 5.4 over the previous month. In the first eight months of 2018, China has imported 57.18 million mt of gas, up 34.8 percent compared with the same period of 2017.
However, August’s figures are merely a flash in the pan compared to the International Energy Agency’s (IEA) projections. In December, the Paris-based agency said that China’s demand for natural gas will continue to soar toward 2040, outstripping domestic output by around 43 percent.
“China’s annual gas production will more than double to 340 billion cubic meters in 2040, with shale gas a major contributor, but consumption is foreseen to grow even faster, reaching 600 billion cubic meters,” said the China Special Report of the World Energy Outlook 2017.
And, it’s this seemingly insatiable gas demand that gives Beijing leverage with the U.S. As the so-called second wave of U.S. LNG development unfolds, numerous projects will likely not reach the all-important final investment decision (FID) needed to go forward unless they can secure either Chinese funding, Chinese long-term off-take agreements or both. In fact, it’s already starting to happen. On Monday, Australia’s LNG Ltd delayed until next year a planned decision on whether to build its Louisiana-based Magnolia LNG plant due to problems lining up Chinese customers.
“Chinese LNG demand growth is the largest piece of demand growth out there, and Chinese buyers have got to feel reluctant to commit to U.S. capacity when the U.S. government sees trade as a means of exerting political leverage,” said Bob Ineson, managing director of North American natural gas at IHS Markit.
Moreover, China has indicated that it will not sign any more LNG deals until ongoing trade tensions are over. Going forward, newer LNG project developers without the experience or deep pockets of an ExxonMobil, Shell or Cheniere Energy, will be caught holding the bag. Not only could their projects be canceled, but the projection that the US could vie for top LNG exporter status in terms of liquefaction capacity with LNG heavyweights Qatar and Australia may at the end of the day be just a pipe dream.