Is China about to change the global oil trade?

Beijing’s reaction to America’s assertion of power could reshape markets

Nick Butler

A crude oil tanker at Qingdao Port in China’s Shandong province. The country’s oil imports have risen rapidly over the past decade © Reuters

China is now fully part of the global energy trading system, regularly importing more than 9m barrels a day of oil and a rapidly growing amount of natural gas. But Beijing faces an American assertion of power that threatens to disrupt the current pattern of trade, not least in energy. The Chinese reaction could reshape markets we take for granted.

The first American action is direct: a war of competing tariffs on trade between the US and China that affect everything from washing machines to rice and even baseballs.

The second is indirect: the US sanctions against Iran that prohibit trade between third countries and Iran including trade in oil. Initially exemptions on such trade were granted to a number of countries including India and China, but in May the US began withdrawing those exemptions.

The tariff war is the subject of much bluster with threats and counter threats, but given the interests of both economies in maintaining an open trading relationship, it seems reasonable to expect that a deal will eventually be done.

The sanctions issue is more complicated, not least because of the decades of hostility between the US and Iran going back to the 1953 overthrow of the Iranian prime minister Mohammed Mossadeq and the occupation and hostage taking at the US embassy in Tehran between November 1979 and January 1981.

The issue is made more complex by the absence of any obvious mutually acceptable resolution of the question of Iran’s nuclear activity. Given that US president Donald Trump has rejected the multilateral agreement reached in 2015, it is difficult to see what, short of a full-scale regime change, will satisfy him and his national security adviser John Bolton.

Military action between the US and iran is possible, and even tighter sanctions are more likely. Seen from Beijing, the problem is that the principal loser from a conflict (in addition to the people of Iran) would be China itself.

Chinese oil imports have risen rapidly during the past decade. The country may have 2.5m electric vehicles but it also has more than 300m registered vehicles running on diesel and petrol, along with an expanding internal air travel sector. Oil has become inseparable from economic activity and is essential to satisfying the consumer needs of China’s growing middle class.

Almost half — 44 per cent — of China’s oil imports come from the Middle East. As the US becomes ever more self-reliant in oil and gas thanks to the shale revolution, the natural destination for Middle East oil is Asia rather than America. If Iran’s oil trade is cut off — either by sanctions or by a physical conflict that closes the Strait of Hormuz — China will be among the first to feel the implications. Energy security is now a Chinese issue.

In the short term, China is likely to buy any oil it needs, which would no doubt force up world prices. The country’s imports unexpectedly rose to more than 10m barrels per day in April, presumably to boost stocks ahead of any crisis, and this almost certainly helped strengthen world prices.

Longer term, the reminder of China’s vulnerability to US actions will focus attention on the challenge of its dependence on outside sources for commodities that have become essential for continued economic success. The result is likely to be a more mercantilist policy on energy trade. If an open trading system cannot be replied upon, Beijing will resort to bilateral deals — securing specific supplies of oil, and perhaps gas too, through direct state-to-state barter deals using all the tools it can offer, from cheap loans to political support and the supply of military and other equipment.

Such an approach will go well beyond the limited steps taken so far. A serious bilateral oil-trade plan would include direct investment and ownership of resources and the accelerated development of Chinese companies into multinationals capable of finding and producing energy resources around the world.

For Beijing, this step is logical and would be a completely understandable response to a US assertion of extraterritorial power over the world market. For the rest of us the move will be dangerous. If China ties up 9m or 10m b/d of oil — in April imports reached 10.6m b/d, up 11 per cent on April 2018 — under bilateral deals, the market that remains will be smaller and potentially much more volatile.

The writer is an energy commentator for the FT and chair of The Policy Institute at King’s College London

Top banks push ahead with digital coins for 2020

Move draws on four years of research into uses of crypto technology

Laura Noonan in New York

The ‘utility settlement coin' is expected to soon be used for clearing and settling trades

Thirteen of the world’s biggest banks are preparing to launch digital versions of major global currencies in 2020 after years of research convinced them that the technology underpinning cryptocurrencies could be used to make trading less risky and cheaper.

The UBS-led research on a “utility settlement coin” (USC) has been in the ether since 2015, when banks decided to investigate whether wholesale banking could be made more efficient by deploying distributed ledger technology (DLT).

DLT, which is used in blockchain networks, enables participants to instantly share information on an open-access ledger which can never be altered or erased.

The technology could theoretically replace reams of paperwork and processing, but banks must first confront legal and regulatory hurdles on everything from risk management to privacy before deploying it widely.

“When we started out . . . this project has basically been about R&D, we didn’t know if the characteristics [we wanted to achieve] were possible,” said Rhom Ram, head of Fnality, the new venture into which the banks and exchange Nasdaq have just invested £50m to create a market infrastructure to transfer value digitally.

“The funding signals that it is possible,” he added. “The investors believe it is possible based on the evidence they have seen.”

Hyder Jaffrey, head of strategic investments at UBS’s investment bank, said the research showed the USC would soon be used for clearing and settling trades and could ultimately prove “transformational” for trading.

“We see a way of actually reducing the risk significantly in the post trade world,” he said, referring to the settlement, credit and counterparty risks banks take on between the time that trades are instructed and when the money and assets actually change hands. “All of these things play into costs, operational efficiency and the balance sheet.”

Lee Braine, an executive at Barclays’ chief technology office, said his bank’s confidence in the project’s viability had “meaningfully” increased since it joined the effort a year-and-a-half ago. Other big banks involved in the project include Santander, BNY Mellon, MUFG, Credit Suisse, KBC, ING and Canada’s CIBC.

The USC will begin life with 14 owners and members, and will be denominated in major global currencies including the US dollar, yen, euro and sterling. Every unit of a dollar-denominated USC will be backed by a traditional dollar at the Federal Reserve, and the same model will be used with other currencies, ensuring the value of the coin is stable.

Its initial applications will be in relatively niche areas, such as creating a market infrastructure that allows the coins to be used to meet margin requirements in derivatives trades. Mr Ram said while at present it took at least a day for such requirements to be satisfied, using the USC the process could become almost instantaneous.

Mr Braine said that while the size of the founding banks meant their efforts would have “traction” from launch, the impact would not be a “big bang”. “This ultimately is a market transformation over time,” he said.

Japanese banks are also working on a digital coin — the J Coin — but they are focusing on retail banking, as is social media giant Facebook, which is developing a coin pegged to the dollar which could be used to instantly transfer value between Facebook users.

Has bitcoin joined the ranks of classic haven assets?

Rally coincides with a jump in the yen, Swiss franc and gold and Fed dovishness

Eva Szalay

Bitcoin is back. But it is a bumpy ride.

Since the beginning of June, prices for the cryptocurrency have rushed 50 per cent higher — a resurgence that followed a year of lacklustre trading after the price bubble at the end of 2017 popped.

So far, the rally is still a shadow of that 2017 surge, which took prices to almost $20,000. It is also unstable; prices collapsed 10 per cent in minutes on June 26, with no obvious cause. Still, at just under $12,000 on Friday, this is a hefty recovery from under $8,000 at the start of June.

The renewed gains in bitcoin reflect, in part, the vote of confidence in digital currencies delivered by Facebook’s foray into the space with the launch of Libra. From that point of view, this is simply a numbers game, with greater public participation delivering higher prices.

The rally also coincides with a jump in the price of classic haven assets, including the Japanese yen, the Swiss franc and gold. For the true believers, that is a sign that bitcoin has earned a place among the assets that gain during flights to safety.

“Bitcoin is digital gold — it’s a genuine alternative to traditional safe havens,” said David Mercer, chief executive of London-based LMAX Exchange, which operates a cryptocurrency trading facility.

Crypto fans also argue that there are macroeconomic forces at play, particularly from the shift among major central banks towards cutting interest rates. In the US, the Federal Reserve confirmed at its June meeting that rate cuts are on the cards, while the European Central Bank has also been keen to stress that it will launch another round of easing measures if economic conditions, and inflation, fail to pick up.

In response to that shift from central banks, government bond yields have collapsed, opening another opportunity for cryptocurrencies; with $13tn of government debt around the world trading with a negative yield, some speculators hunting for returns are willing to buy the market equivalent of a lottery ticket.

Blackstone Wants to Benefit From the Amazon Effect

The private-equity giant is buying an industrial real-estate company for $18.7 billion; it’s the least toppy way to buy into tech

By Lauren Silva Laughlin and Dan Gallagher

Blackstone bought warehouse real estate from GLP. Photo: Richard B. Levine/Zuma Press

Blackstone BX 2.77%▲ clearly isn’t concerned about timing the market.

The private-equity firm run by Stephen Schwarzman, known for its 2007 blockbuster property deal that pegged the top of the mortgage market, has spent $18.7 billion to buy warehouse real estate from Singapore’s GLP . 3281 -1.82%▲ is one of the big rental clients for the properties. Industry benchmarks suggest it is paying a generous price but, in typical Blackstone fashion, the deal will most likely work out.

Industrial real-estate assets have been booming because companies such as Amazon and Walmartneed space in proximity to big cities to handle the tricky logistics of short-term shipping. As they compete for warehouse space, rents have been firm. The 10-year compound annual return of industrial real-estate investment trusts, a reflection of the health of the industry, has been 19%, according to the National Association of Real Estate Investment Trusts.

Some industry indicators have been softening recently, though. Building has picked up pace, increasing supply, and occupancy rates of REITs are high but slightly below their peak. Blackstone owned some of these same assets in the past, having sold them to GLP in 2015. Though the portfolio isn’t identical to what was sold, the current deal price on a square-foot basis is some 50% higher than when Blackstone sold.
Industrial space is still harder to find than other types of real estate, though, Nareit data show. There is another ace in the hole that helps: Amazon’s ambition. Much of the tech retail giant’s generous valuation is premised on the company defying gravity typical for such a large enterprise. But growth in North American retail, a business that accounts for about 60% of Amazon’s overall revenue, is slowing down. Wall Street expects growth in that segment to be cut in half to 15% annually over the next three years.

To boost its prospects, Amazon is significantly beefing up its one-day shipping capabilities, and it isn’t wasting any time. The company said Monday that it now has more than 10 million products available for shipping in the one-day window, barely a month after first announcing the move.

Getting more facilities closer to customers is key to that ambition. It also will help Amazon save on shipping costs, which have grown to about 12% of the company’s total revenue from 9% five years ago. Where Amazon goes, though, so does the industry. Other clients, including traditional retailers with e-commerce ambitions, will be competing harder to secure floor space that aids deliveries. That gives Blackstone some negotiating leverage with what could otherwise be a demanding client.

The Populist Paradox

When anti-establishment populists come to power, they implement a range of policies that lead to lower economic growth and fewer good jobs. And yet the angrier people become, the easier it is to persuade them that the media are biased, the experts are always wrong, and the facts are not the facts.

Simon Johnson


WASHINGTON, DC – To defeat populism requires coming to grips with a fundamental reality: bad economic policies no longer necessarily result in a government losing power. In fact, it is now entirely possible that irresponsible populists may actually strengthen their chances of being re-elected by making wilder and more impossible promises – and by causing more economic damage.

How did we get to this point, and what steps can we take to escape it as quickly as possible?

Powerful structural economic factors in recent decades – including automation, trade, and financial crisis – have left many people feeling neglected or ill-treated by those, on the right and the left, who have had control over economic policy. When anti-establishment populists come to power, however, they implement a range of policies that create uncertainty and discourage investment. And less investment means lower economic growth and fewer good jobs.

Ordinarily, this would lead to a feedback mechanism in which the responsible government would be held accountable, ultimately at the ballot box. But populists are effectively circumventing this mechanism by encouraging the belief that the media are biased, the experts are always wrong, and the facts are not the facts. The angrier people become, the easier it is to persuade them to accept this narrative.

Brexit is a good example. If you ignore or disbelieve the economic data (as well as what any credible analyst has to say), then your personal experience in the United Kingdom over the next 12 months may be this: The new Conservative government withdraws from the European Union without an agreement, which disrupts trade and discourages firms from investing in the UK. Either unemployment will go up, or there will be fewer good jobs – or both.

But will the electorate blame the government? Possibly not, as anger levels will increase – a direct result of the spike in economic and financial volatility. The government will therefore find it easier to blame the EU, experts, academics, the press, and immigrants. The politicians most responsible for the Brexit disaster could actually benefit at the polls.

In India, Prime Minister Narendra Modi’s Hindu nationalists actually increased their parliamentary majority in the recent election, despite the government’s failure to fulfill its promises to voters. And in the United States, President Donald Trump’s re-election bid may follow a similar path. Trump seems intent on disrupting the US economy by prosecuting a full-scale trade war with China. Ordinarily, you might expect this to hurt him with voters who care about access to export markets – such as America’s highly productive farmers. Instead, Trump’s support seems to be holding up across rural areas, as well as other parts of his electoral base.

Tariffs are a tax on consumers and also hurt domestic firms that use foreign inputs. For example, the domestic steel industry might benefit from steel tariffs, but there are many more people employed in industries that use steel and thus are hit hard by those same tariffs. Despite this, populists in the US and elsewhere welcome various forms of protectionism. If this slows the economy, as it almost always does, voters will become angry – and easier to distract.

The only way to break this cycle is with policies that go to the heart of the issue – creating more good jobs where they are needed. In the case of the US, Jon Gruber and I, in our book Jump-Starting America, propose boosting public funding of research and development, and creating new innovation hubs around the country. R&D creates new ideas and products, and such innovation consistently supports economic growth.1

Some commentators agree, but argue that any additional science-related push should be concentrated in the existing innovation hubs, such as the San Francisco Bay Area and Boston. But those regional economies are already crowded and expensive, and providing public resources to lift them further is an idea that is unlikely to find many takers at the national political level.

The US has a lot of talented people in many different locations – Gruber and I identify over 100 significant cities that could become innovation hubs. (If you like the general idea but want to assess the details for yourself, our interactive website,, can help you do that.)

Versions of this idea would work in many other relatively rich countries, such as the UK or Western Europe more broadly. A concerted push to strengthen the infrastructure for science can both boost productivity and create the basis for more widely shared prosperity.

Of course, this is not the only constructive measure the government should take. Infrastructure can be updated and strengthened. Distributive outcomes can be tackled directly, including by raising minimum wages and ensuring that rich people actually pay some tax. And better training should be made accessible both for young people and for anyone who needs to shift to another industry as a result of automation and trade.

Overcoming the populist paradox – and preventing the associated downward economic spiral – requires policies designed to create more good jobs everywhere. Crafting such policies is one promise that politicians really can fulfill, and that defenders of liberal democracy can no longer afford not to make.

Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with Jonathan Gruber, of Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream.