Aug 06, 2018 08:21 PM

Caixin View: China’s Tariffs on U.S. LNG Imports Won’t Stoke Inflation

The trade war rattled energy markets last week — China said it will slap a 25% tariff on imports of liquefied natural gas (LNG) if the U.S. went ahead and imposed its proposed tariffs on $200 billion of Chinese goods. Alongside the super-chilled fuel, China’s latest list included over 5,000 products with a total import value of $60 billion, which would be subject to levies ranging from 5% to 25%. The move followed U.S. President Donald Trump’s instructions to top U.S. trade official Robert Lighthizer last week to look at levying an additional 25% charge on the Chinese goods, up from the 10% proposed on July 10.

A strategy that could potentially raise domestic gas prices might look reckless, as China is increasingly dependent on energy imports — it is the world’s biggest importer of crude oil and natural gas, and the second-largest importer of LNG, after Japan. Gas is increasingly important to the country’s energy mix as it tries to shift away from its dependence on coal as part of its strategy to cut carbon emissions. Shortages of gas last year left millions shivering in northern China. LNG imports jumped 58.2% year-on-year in the first fourth months of 2018, according to the General Administration of Customs.

But in spite of China’s increasing consumption of LNG, we think the impact of tariffs on the domestic market will be limited. This is because China’s LNG imports largely come from Australia (47% in 2017), Qatar (22% in 2017), and Malaysia (9% in 2017), according to official statistics. Imports from the U.S. made up only 3.5% of the total last year. Increased imports from Qatar and Australia — which the government in Canberra estimates could overtake Qatar as the world’s biggest LNG exporter by 2020 — will likely offset any decline in imports from the U.S. Russian gas imports — both via the delayed “Power of Siberia” pipeline, due to come online in 2019, and, in LNG form, along a newly opened Arctic route — are also likely to increase.

The U.S., which is keen to use its shale reserves to ramp up its own energy exports, might not be able to shrug off the effect of tariffs as easily. In 2017, China was the third-largest importer of U.S. LNG exports, behind Mexico and South Korea, accounting for 15% of the total, according to U.S. Energy Information Administration (EIA) statistics. While the U.S. currently has only two LNG export terminals in operation, several more are due to come online over the next few years. China itself is contributing to this ramp-up, with state-owned companies signing two major deals last year to develop natural gas resources in the U.S., including LNG infrastructure. It’s unclear yet how these projects might be affected by trade tensions.

Weekly Roundup

Macro & Finance

The Politburo meeting on Tuesday signaled policymakers will place added emphasis on stability, more-calibrated deleveraging, more-active fiscal policy and more-active infrastructure investment.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI), an indicator that gives a snapshot of operating conditions in the manufacturing sector, slipped to 50.8 in July from 51.0 in June. The reading has not been this low since November 2017.

The manufacturing purchasing managers’ index (PMI) for July, released by the National Bureau of Statistics (NBS), fell to 51.2, its weakest since February. The nonmanufacturing PMI, which includes the construction sector, came in at 54, its lowest reading in 11 months.

China has re-imposed a requirement that financial institutions hold a 20% deposit at the central bank when they purchase foreign exchange forward contracts for their clients. The move is expected to dampen bets that the yuan will continue to fall and help arrest the currency’s recent sharp decline.

The Mastercard Caixin BBD New Economy Index (NEI) rose to 30.6 from 29.2 in June, showing that new-economy industries such as biotechnology and advanced manufacturing accounted for an increasing proportion of total economic inputs used to make goods and services.

China’s State Council, the cabinet, issued new guidance for a pilot program to create a number of state-backed industrial investment vehicles and asset managers. The goal is to push forward reforms in state-owned enterprises that are plagued with low efficiency and overcapacity.

China’s central bank will soon appoint two new deputy governors in an effort to bring in more expertise to tackle systemic financial risks, after a government shake-up in March gave the bank more authority, Caixin has learned.

Southern China’s tech hub of Shenzhen stepped up controls over property transactions, adding to a slew of restrictions and joining dozens of cities trying to rein in soaring housing prices.


A subsidiary of state-owned crude oil giant China National Petroleum Corp. (CNPC) has inked two deals to develop oil storage and pipeline facilities in the Persian Gulf as China’s Belt and Road commitments in the region become more concrete.

HNA Group says it is reverting to its original flight path. A recent spate of asset sales shows how the embattled airline-turned-globe-spanning-conglomerate has refocused its strategy to concentrate on its core aviation-related businesses, which has coincided with a management shake-up.

A Chinese company abandoned plans to buy an advanced German machinery manufacturer in expectation that the government in Berlin would block it due to concerns about the surrender of key technology.

Six U.S. law firms are looking into potential securities claims and may file class-action suits on behalf of people who bought Pinduoduo Inc. shares on the Nasdaq Stock Market, the firms said Thursday. The law firms are making various allegations against the company, including the issuance of misleading information and unlawful business practices.


August 7: The State Administration of Foreign Exchange releases foreign exchange reserves data for July

August 9: The National Bureau of Statistics releases the consumer price index (CPI) and the producer price index (PPI) for July

The People's Bank of China may release money supply and total social financing data for July this week

The Ministry of Commerce may release foreign direct investment (FDI) data for July this week

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