Recently, not-so-optimistic US economic data are triggering fresh doubts about the momentum of the US economy.
The latest summary of commentary on current economic conditions by the Federal Reserve on Jan. 13 showed that, with the exception of cars and aerospace, most segments of manufacturing in the US have seen weakening activity. In 2014, US manufacturing production grew at an annual rate of 4.5 per cent. By November 2015 that had slowed to 0.9 per cent and this year the production is predicted to grow just 1.4 per cent.
According to the US Department of Commerce, sales number is also not good: stripping out car, gasoline and building materials sales unexpectedly fell 0.3 per cent. Total sales were up 2.1 per cent in 2015, the slowest pace of growth since 2009.
The specter of bankruptcy is ever more likely for a significant chunk of the US oil industry, with oil prices plunging to a level which hasn’t been seen since 2003. As many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017 before the crude market reaches equilibrium, according to Wolfe Research. The US oil production companies now have to slash jobs and back off major investments to fight against the difficult times.
The difficult situation of the oil industry has caused trouble in the US banking system, because energy companies have taken on huge debt loads to finance their slice of the US drilling boom. In the third quarter last year, Wells Fargo & Co.’s oil-and-gas loan exposure was 2% of its total loans, roughly $17 billion.
Investors’ enthusiasm for highly valued private tech companies waned substantially in the fourth quarter. Such companies are viewed as the innovation house of the US economy. The decreasing of venture capital funding on them feeds the concerns on the US economy’s losing power. Overall venture capital funding fell 29 percent to $27.3 billion in the fourth quarter from $38.7 billion in the third quarter. The number of financing deals also dipped from 2,008 to 1,743.
There are different opinions and explanations in the US for the not so optimistic situations. Among them, the “China factor” is unfortunately found again.
Some analysts think Chinese polices and the market turmoil should be considered responsible to some extent. The logic is that by allowing the markets to play a greater role in determining the value of China’s currency actually provides an opportunity to depreciate RMB, which puts the US dollar up. On a trade-weighted basis, it has risen almost 22 per cent since July 2014. The strong dollar has harmed US exports by making them lose their price competitiveness.
The source of US financial instability is blamed on China’s market turmoil. The evidence is that China’s CSI 300 stock index plummeted again on Jan. 7, 2016 under the new circuit-breaker rules. After that U.S. stocks tumbled, the S&P 500 falling 2.4 percent.
What’s more, China’s economic slowdown is also treated as an important reason for US domestic oil industry challenges. The logic is that weakening demand in China, the world’s second-largest energy consumer, has helped drive the price down.
Such accusations are far-fetched and lack facts. According to that explanation, it seems that the health of the US economy depends more on China’s situation, not on American consumers and its domestic policies. It’s obviously groundless.
Here are my observations. The US dollar’s appreciation is more set by the US economy’s recovery and the Federal Reserve’s monetary policy normalizing. The US recovery attracts capitals to pour back into the US to pursue more benefits, which raises up the demand on the US dollar and makes the dollar more expensive. The expectation of the Fed increasing the fund rate and its action fuels the US dollar value’s rise.
The reason behind the difficult situation that the US oil industry faces is the glut of oil relative over-supply. In order to compete with the newfound clout of U.S. producers, Saudi Arabia is pumping oil at a fast clip. Members of OPEC refuse to cut back on production for fear of losing their share of the market. A move by the US Congress to lift a 40-year ban on oil exports brings a gush of new supply to global markets. Further, with sanctions on Iran lifted, Iran’s re-exporting of oil feeds market fears and results in oil prices going down further.
The root of the US oil industry’s problem lies in the disorderly development when the oil price is higher than $70. The pressure on the US oil industry will push the restructuring of the oil companies, eliminating some, which is good for long-term development.
Considering the US and China’s economies are facing some difficulties, more cooperation between the two countries will be mutually beneficial.
• Enhance cooperation on oil industry.
China’s oil imports today account for about 60% of its needs. Net crude imports grew a robust 7.9% in the first 10 months of 2015, according to Citi Research, which is projecting at least 5% growth in 2016, to about 7 million barrels a day. The OPEC members are the main exporters to China, about 60% of China’s oil imports comes from them. There is big space for the US exporting to China.
The US government should allow more US companies in the oil industry to sell oilfield technologies to China, encourage the export of oil and gas to China and relax some regulations on China’s investment limits on oil refinery, blending, distillation.
It is reported that China’s state-run oil refiner Sinopec Corp has signed a contract with a US company to import around 600,000 barrels, worth about $20 million. But it is a relatively tiny sum equivalent to about two hours’ worth of China’s overall imports and too small to put a serious dent in a $30 billion a month US trade deficit with China.
• Accepting the RMB’s globalization. To let the RMB play a more important role will be helpful to reducing the demand on the strong US dollar.
• Encourage and help China to reform.
The linkage relation between China’s market, especially the stock market fluctuation with the US stock market, shows us the relationship between the US and China has evolved from bilateral trade level to the higher financial level. Considering the volume of China’s economy, a large-scale financial turmoil will bring huge cost on the US. So the US should encourage China to stick to its reform plan and introduce more of its experience on risk control and crisis management to China. This year China will host the G20 summit. The US could give China some advice on how to communicate with the public and the world.
• Enhance the policy transparency and communications, which will help each other make more preparations for the coming policy changes. It in their shared interest to promote the global economy and a stable international financial system.
• Speed up the BIT negotiation. To make the bilateral trade and investment more easily will make Made in USA products more easily exportable to China. China’s capital can also get access to the US and oil assets acquisitions and take over some bankruptcy companies, alleviating the hurt caused by the incurred unemployment.
