Payment systems

The financial world’s nervous system is being rewired

And it is not America that is doing it

TWO WEEKS before Christmas, executives from OneConnect, a Chinese technology firm, boarded a plane to New York. They landed in a chilly atmosphere: American legislators were about to bar Huawei, a telecoms giant suspected of spying for Beijing, from supplying American agencies.

But OneConnect did the job. On December 13th it listed on the New York Stock Exchange, raising $312m, which valued it at $3.7bn. Analysts expect the loss-making firm’s share price to climb by more than 70% in the next 12 months.

OneConnect supplies the artificial brain and nervous system of financial firms that go digital, says Dai Ke, its strategy chief. It serves all China’s top lenders and 99% of the next tier down. It is expanding in Asia and recruits in America, where it runs a research lab, yet few people have ever heard of it.

It belongs to a new breed of Chinese firms that are rewelding the pipes channelling money in the developing world. They are waging a “proxy battle” against American giants, says Huw van Steenis of UBS, a bank.

With America readier than ever to close the liquidity taps on rivals, China is investing time and money in building a private track. It has rolled out its own messaging system to complement SWIFT, which may one day supersede it.

Meanwhile Alibaba and Tencent, two giant tech firms, have already built what Paco Ybarra of Citigroup, an American bank, calls “parallel banking systems”. Their digital wallets have over 1bn users each and account for half of in-store payments and nearly three-quarters of web sales in China.

Plumbing new depths

Payment systems are more about moving information than money. The process usually involves banks at both ends, which exchange messages about such things as the sender’s identity or funds available. Within a single country banks talk the same language, and transfers can be settled by updating the central bank’s ledger.

But cross-border payments cause headaches. Rules and standards differ. And the world lacks a common central bank, so there is no global ledger on which to record the transfer.

For large-value payments, finance’s usual fix is the “correspondent” banking system. Under often reciprocal arrangements, one bank in one country holds deposits owned by another bank in another. When a customer of the second wants to pay someone at the first, that bank instructs its correspondent to use the deposits.

Many banks, however, do not have a direct link. To get to its final destination, the money must make stopovers. That requires an ID for each bank, a messaging system and a common language.

SWIFT provides all of these. Built over decades, its network is hard to replicate. But most of the world has two incentives to give it a go. The first is political. Although the organisation is not American, Uncle Sam leans on it to pressure friends and isolate foes. In 2018, when America threatened action if it did not exclude Iranian banks, SWIFT quickly complied.
The network’s complexity also makes cross-border transfers slow and costly. Many tasks, like checking customers are not known criminals, are duplicated. Banks must keep idle funds in foreign currency (some $10trn globally) to meet forecasted demand. And the system is not fully hack-proof. In 2016, North Korean hackers used stolen SWIFT identifiers to siphon off $81m from an account Bangladesh’s central bank held in New York.

Startups try to alleviate the pain by reducing the number of interactions banks and companies have with SWIFT. Some work with “hub” firms in recipient countries that break up big sums, like payroll, into tiny payments.

Others aggregate transfers to absorb fixed costs. Lucy Liu of Airwallex, a fintech company, says it relocated from Australia to Hong Kong to serve rising demand from Chinese exporters.

Some fintechs fully bypass SWIFT.

Ripple, an American firm, has created a cryptocurrency it uses as an intermediary for payments between countries with different currencies.

Governments are also exploring crypto-money. China is leading a solo effort.

It has already filed more than 120 patent applications for a sovereign digital currency, more than any other country. Hawks fear it may impose its use on BRI countries. “Our values are at stake,” says Tim Morrison, a former adviser to President Trump.

But China seems to favour goals closer to home. With much of its economy now cashless, it sees a digital coin it controls as a crucial fail-safe for its domestic payment systems.

It also wants to pre-empt Libra, a cryptocurrency Facebook intends to launch, from infiltrating people’s pockets.

Others have looked at international applications. Singapore and Canada, as well as Hong Kong and Thailand, have led joint experiments to test if digital coins minted by central banks could be used by commercial banks to transact across borders.

Those proved successful, but engineers who took part doubt the system could ever deal with a large volume of transfers.

Crypto and petro

Pariah states already use digital monies to trade unnoticed. North Korea has hacked crypto-exchanges to fund weapons imports. Russia used bitcoins to pay for the infrastructure that hacked into the servers of America’s Democratic Party in 2016.

But that underground economy is tiny. Jonathan Levin of Chainalysis, a data outfit, says transactions involving the petro, a currency Venezuela created, hit its peak in the last quarter of 2019—at just $8m.

Europe has instead tried to barter. Last year Britain, Germany and France launched Instex, a system meant to match the payments of firms buying oil or foodstuffs from Iran with the receipts of companies selling to the country. In principle, goods could flow with no need of moving money. Yet it took 14 months for Instex to do its first deal. European firms, many of whom do more business with America than Iran, fear being blacklisted.
China has gone furthest. In 2015 it launched CIPS, an interbank messaging system to ease international payments in yuan. It uses the same language as SWIFT, allowing it to talk to other countries’ payment systems. For now just 950 institutions use it—less than 10% of SWIFT’s membership. But “what matters is it’s there,” says Eswar Prasad of Cornell University.

The real revolution is happening in low-value transfers. Like SWIFT, the network of American card schemes is tricky to displace. Member banks and merchants trust each other because they adhere to tested rules. They also like the convenience of the schemes’ settlement platforms, which compute “net” positions between all banks that they square up at the end of the day.

So rival schemes struggle to make a dent.

In 2014, fearing sanctions could block it from using American schemes, Russia created its own, which now accounts for 17% of domestic cards. But its 70m tally is dwarfed by Visa and Mastercard’s 5bn. Size is not a problem for UnionPay, China’s own club. Just 130m of its 7.6bn cards were issued outside the mainland, however, where it is mostly used by Chinese tourists.

A mightier threat comes from a state-led revamp of domestic payment systems. Eager to reassert control over key infrastructure, some 70 countries have rebuilt their local plumbing to enable near-instant bank transfers at the tap of a screen.

Europe is the most advanced, having fused local networks into a bloc of 35 countries and more than 500m people. South-East Asia is also trying to stitch its systems together. On March 5th India and Singapore connected theirs for the first time.

China lags behind its neighbours in beefing up its kit. But that need not matter. As the region’s trade hegemon, it can free ride on others. “Once Malaysia gets its system going, it will figure out a way to work with China,” says Phil Heasley, a former chairman of Visa USA. China is also hedging its bets by building a private track.

Just five years ago, shopping in second-tier cities was tedious. Few shops accepted cards. They did not like the fees and lacked a connection to plug in terminals. Settling anything other than daily supplies in cash required wads of it.

The mass adoption of smartphones, however, meant most customers were starting to carry mini-terminals around. And the invention of QR codes suddenly allowed customers to pay even when the merchant was offline.

The combination of both has swept all before it. Last year Chinese customers paid 347trn yuan ($49trn) in purchases via mobile, 35 times the total in 2013. Two giants eat up 92% of the market. WeChat Pay, owned by Tencent, a tech group, dominates peer-to-peer transfers.

Alipay, which belongs to Ant Financial, the finance arm of Alibaba, an e-commerce group, rules payments to firms. After loading digital “wallets” from their bank account, users can pay for almost anything, from cabs and bills to doctor appointments. Wallets charge no fee to users but tax them when they move money out, so everybody is incentivised to stay in their universe.

Their market now cornered, the “super-apps” are going global. Alipay is accepted by shops in 56 countries and regions, where it targets Chinese travellers. It has also bought minority stakes in wallets in nine Asian jurisdictions, allowing it to influence the industry without applying for local licences.

Douglas Feagin, Ant Financial’s internationalisation chief, says connecting the wallets in which it has invested is not a priority. But others suspect the firm is waiting for local wallets to reach critical mass. “It may not be branded Ant Financial,” says Zennon Kapron of Kapronasia, a consultancy, “but one of their goals is to eventually build an international cross-border wallet platform.” Its expertise is also luring firms from farther away. Six European mobile wallets have adopted Alipay’s QR format.
China’s fintechs will not always succeed. In some markets credit cards, or interbank systems, are too popular. But the battle over payment methods masks a bigger war over the hardware and software that power them all. It is one that China is winning.

Squeezed by low interest rates and the high fixed costs of going digital, banks across Asia are seeking to borrow scale by “moving to the cloud”. They store their data on large servers owned by specialist providers. Dave Bartoletti of Forrester, a research firm, sees the region as the “most important battleground” for cloud in finance (along with Europe). On hardware Alibaba is top dog. The firm provides a fifth of cloud infrastructure in Asia Pacific, more than its next two rivals (Amazon and Microsoft) combined.

China’s tech firms also rule the software bit. The need to execute huge amounts of transactions fast—last year Alibaba netted its first billion dollars in sales for Singles’ Day, China’s annual shopping festival, in 68 seconds—has endowed Ant Financial and Tencent with a knack at automation, machine-learning genius and troves of data. Both have used them to build nimble digital banks. These lead the race to define identification and security standards, crucial as banks and payments move online. Henry Ma of WeBank, Tencent’s offspring, says its facial-recognition tool has an error rate of less than one in a million (the human eye averages 1%).

Both banks are growing fast. MYbank (Ant Financial’s offering) already serves 20m of the country’s 100m SMEs. It also rents its kit to 200 other banks, and hopes to use Hong Kong and Singapore as a testing ground for those skills abroad. Investors think internationalisation has promise: Ant Financial, which is private, was valued at $150bn in its latest funding round. WeBank is taking a different tack. It is making the infrastructure it created available on an open-source basis, so foreign banks can build upon it.
Tencent and Alibaba’s greatest impact, however, may have been to awaken another giant. Ping An, a Chinese insurer with $1trn in assets, decided to become a cloud company after seeing their meteoric rise in finance, says Jonathan Larsen, its innovation chief. The company, which invests 1% of its revenue—worth $164bn last year—in research and development, has spawned 32 stand-alone businesses to help export the tech it hones at home.

The most strategic of its offspring is probably OneConnect, the startup that listed in New York in December. The firm offers cloud-based services that cover everything, from back-office to client-facing tasks. Its first foreign outpost, opened in 2018 in Singapore, has grown to 200 staff. It now serves 47 clients in 16 overseas markets. Those include Thailand, where it is poised to power the credit-card processing of a top-three bank, and Europe.

Covid-19 could help. With staff stuck at home, banks across the world are looking to move data-hungry processes like risk management online. OneConnect has launched a charm offensive to capture the business—this time without boarding a plane.

Companies are dangerously drunk on debt

Sobering up after the crisis will require changes to tax laws, bonuses and pensions

Robert Armstrong

An increasing number of companies are reaching for more debt to stay afloat
An increasing number of companies are reaching for more debt to stay afloat © Ingram Pinn/Financial Times

Homer Simpson once proposed a toast “to alcohol, cause of and solution to all of life’s problems”.

For global companies that have drunk deep of debt, his line captures a nasty irony. The pandemic poses especially big economic hazards to companies with highly leveraged balance sheets, a group that now includes much of the corporate world.

Yet the only viable short-term solution is to borrow more, to survive until the crisis passes. The result: companies will hit the next crisis with even more precarious debt piles. The cycle needs breaking.

In the US, non-financial corporate debt was about $10tn at the start of the crisis. At 47 per cent of gross domestic product, it has never been greater. Under normal conditions this would not be a problem, because record-low interest rates have made debt easier to bear.

Corporate bosses, by levering up, have only followed the incentives presented to them. Debt is cheap and tax deductible so using more of it boosts earnings. But in a crisis, whatever its price, debt turns radioactive. As revenues plummet, interest payments loom large. Debt maturities become mortal threats.

The chance of contagious defaults rises, and the system creaks. This is happening now and, as they always do, companies are reaching for more debt to stay afloat.

US companies sold $32bn in junk-rated debt in April, the biggest month in three years. Junk and near-junk rated companies that added to big debt piles last month include cinema operator AMC, Boeing and Carnival Cruise Line — all of which could see permanently reduced demand after the crisis.

The bond issuance has been dwarfed by credit line drawdowns at US banks, which Autonomous Research estimates at $550bn.The US government has stepped in to make borrowing easier.

The debt market was buoyed by the Federal Reserve’s announcement that it will buy $750bn in corporate debt, and the main street lending programme will make $600bn in loans to midsized companies.

The moral hazard is obvious. When governments help indebted companies avoid bankruptcy, investors conclude that the government will always absorb debt’s tail risks.

The price of debt goes down and its amount rises, yet again.In a better world, bailouts would provide prudent companies with the liquidity they need to see them through crises, while heavily indebted companies’ shareholders would be wiped out and their debt restructured. In both cases, the underlying businesses would keep operating and paying employees.

But in this world, with the US’s cumbersome bankruptcy processes, a big crisis could overwhelm the legal system. The need to get cash to companies fast makes it impracticable for bailout programmes to carefully sort the prudent from the reckless. Bailouts, in the US and elsewhere, were necessary.

The Fed and the US Treasury did put leverage limits on main street loans, saying they would not provide loans that push a company’s total debt past six times its earnings before interest, taxes, depreciation and amortisation. But it quickly became clear that applying this rule rigidly would exclude too many companies.

The government backed off, allowing loose definitions of ebitda that would let more companies participate. The problem of excessive corporate debt needs to be solved not while the crisis rages, but after it passes. It will not be enough for central banks to be more hawkish on rates and unwind asset-buying programmes. The main reason debt is cheap is not central bank policy but low growth.

As the world ages and productivity slows, there are more savings and less demand for investment. Savers can charge less for lending their money.

Containing corporate debt by regulating lenders is also unlikely to work. After the financial crisis, bank capital requirements were made stiffer.

The leverage merely slithered off of bank balance sheets and re-emerged in the shadow banking system. A more promising step would be to end the tax deductibility of interest. Privileging one set of capital providers (lenders) over another (shareholders) never made sense and it encourages debt. The time for reform may finally have come.

The 2017 US tax law limited the deductibility of corporate debt to 30 per cent of income. The deduction should be scrapped altogether with a decrease in corporate tax rates to compensate, so the net effect on bottom lines is zero.

Next, executive bonuses should be tied to pre-leverage return measures, such as return on assets or on total capital, rather than after-leverage measures such as return on equity or earnings per share. Debt can increase EPS, but not the value of a business.

Bosses should not be paid more for borrowing more. These changes may not be enough. As the economist Andrew Smithers points out, if companies are going to deploy more equity, someone has to want to buy it — even as an ageing population pushes portfolios towards debt. Investors’ preferences will have to change; this may mean a rethink of the way public and private pensions are structured.

Changes in debt taxation, bonus rules and pensions will meet resistance from those who make money from the iniquities of the current system.

But at some point, hard as it is, the drinking has to stop and a more sober life must begin.

China Is Still the Next China

By: Phillip Orchard

At the end of last year, the coronavirus slipped through China’s borders.

Now, Washington wants U.S. firms in China to do the same, evidenced by the Trump administration’s recent announcement of a whole-of-government initiative to move U.S. production and supply chain dependency away from China.

This week, lawmakers are expected to introduce White House-backed legislation that would give subsidies to U.S. manufacturers who leave China. The White House, which in the midst of its trade war last year explicitly called for U.S. firms to come home, is also reportedly imposing new tariffs on imports from China and gradually expanding its list of Chinese-made products deemed a national security risk.

Washington is not alone in feeling that Chinese consolidation of supply chains for many essential goods was exposed by the coronavirus as an intolerable threat. In early April, Japan unveiled a $2.2 billion funding package to shift key supply chains away from China, and Germany has called for an EU-wide effort to bolster continental manufacturing of essential health care goods.

Meanwhile, alternative low-cost manufacturing hubs are waiting with open arms. India, for example, is reportedly courting more than 1,000 U.S. firms in China and setting up special economic zones twice the size of Luxembourg to house them.

With the U.S. apparently warming back up to multilateral trade and investment blocs in the form of its proposed “Economic Prosperity Network” – essentially a repackaged and expanded Trans-Pacific Partnership – the prospects of a coordinated effort to construct a more stable global trading system are increasing.

But if the U.S and China are indeed moving toward an economic divorce, it’ll be the sort of “it’s complicated” breakup where neither side really has the stomach for the legal fees or the emotional strength to remain estranged. And the coronavirus pandemic will in some ways make the break up even more difficult. In short, volatility in the global trading system isn’t going away.

Long Time Coming

The U.S.-China economic relationship was rocky even before the outbreak. The seeds were sown nearly half a century ago, when Western firms began rerouting their supply chains through East Asia and thereby igniting a boom in global trade and prosperity.

Following China’s accession to the World Trade Organization in 2001, the center of gravity of global manufacturing shifted firmly to the Middle Kingdom, where a bottomless labor pool allowed foreign firms to unlock unimaginable economies of scale.

China became the world’s largest exporter in 2009. Until about a decade ago, the U.S. heartily supported its efforts. It developed a taste for low-cost imports and fell head over heels for Chinese consumers and investors. It nurtured hopes that China would be disinclined to challenge the global system if it was integrated with that system. At times, the U.S. and China’s commercial relations stabilized their broader bilateral relationship.

The trade-offs of this system crystallized after the 2008 financial crisis, which in the U.S. exposed how the middle class had been gutted by the loss of manufacturing and revealed the structural problems that fueled inequality. Beijing, stung by the brief collapse in Western demand and under immense social pressures of its own, figured it had little choice but to more aggressively move into high-value industries that more advanced economies have dominated for decades – even if it had to renege on its WTO commitments and antagonize countries whose consumers fueled China’s rise.

Many in the U.S. believed they had underestimated China’s ability to make the leap into more advanced manufacturing, and underestimated just how much leverage Chinese consumers and manufacturers would give Beijing – and how willing it was to use its leverage over foreign firms and foreign governments. China’s external vulnerabilities, meanwhile, compelled it to see just how much its newfound economic and military heft could be used to reshape the regional order around its needs.

In other words, the change from competition to confrontation between the U.S. and China has been a long time coming. The launch of the U.S.-China trade and tech wars in 2017 merely announced its arrival. COVID-19 kicked it into overdrive.

The pandemic did this, in part, by exposing just how much China had become a single point of failure in supply chains of essential goods in critical sectors like pharma. For example, China produces around 80-90 percent of the global supply of active ingredients for antibiotics.

Chinese export restrictions and bottlenecks led to shortages of personal protective equipment, test kits and vital medical equipment, including products made by U.S. firms in China. The pandemic also exposed chronic quality control problems in China, with several embattled countries having to discard much-needed shipments of faulty Chinese masks and test kits. (To be fair, the global rush to source pandemic supplies has created a profiteer’s paradise just about everywhere.)

But if the issue were merely about making the system more resilient to unexpected crises – eliminating chokepoints in supplies of essential goods, building in redundancies, and so forth – there wouldn’t be nearly the sense of urgency behind the push to decouple. Most U.S. companies will be wary enough of overdependence on chokepoints in China to want to diversify on their own accord.

The U.S. government and others could just boost stockpiles of essential goods, incentivize domestic production in key sectors, and establish plans in advance to ensure diversity of foreign suppliers and so minimize the risk of disruption at home. Indeed, emergency preparation could be a cornerstone of a U.S.-China relationship defined by cooperation against mutual threats, with the U.S. combining its R&D power with China’s unparalleled production capacity to prevent the next super-spreading virus from doing nearly so much damage.

But, of course, this isn’t just about the pandemic. It’s also about existing fault lines in the international system and immense new political pressures unleashed by COVID-19. Beijing is fronting as a country that’s spearheading global cooperation. Yet, it evidently can’t help but spread disinformation about the pandemic both at home and abroad – and it’s mostly still acting like a government with a crippling fear of mass dissent.

Collaboration is taking a back seat to other needs in Washington, too. Accusations that China somehow intentionally unleashed the virus on the world are nonsensical, as is the notion that China needs to pay a price to address problems that nearly laid waste to its own economy and thus the ruling Communist Party.

Revenge is not a valid strategic motivation, and punitive actions typically backfire – sometimes catastrophically so. Still, this is an election year, so the Trump administration has plenty of reason to keep public anger focused squarely on Beijing’s misdeeds, both real and imagined.

And there are enough legitimate strategic and economic concerns about Chinese supply chain dominance to justify the White House’s move to gain leverage over Beijing by exploiting its need for foreign investment and technology – and to push forward potentially costly and/or politically difficult measures it already wanted to introduce.

Nothing Free

The problem for the U.S., though, is the same one it’s faced for the past three years: It’s really difficult to disentangle its economy from the Chinese without doing more harm than good, and the bulk of U.S. firms in China just don’t want to leave.

To be sure, for companies that were already wary of issues like rising labor and land costs, risks of intellectual property theft, and government coercion, the fact that Beijing’s micromanagerial and censorial tendencies contributed directly to a disruption in their operations might just be the straw that broke the camel’s back.

But for most, when they crunch the numbers, it becomes clear that “the next China” will still be China for years to come. According to an AmCham China survey of U.S. firms in China about the effects of the COVID-19 crisis conducted in March – before China’s success in containing the virus and getting factories up and running was apparent – just four percent said they are actively considering moving some or all of their operations abroad. (Some 55 percent said it’s too soon to tell.)

There are several reasons for their reluctance, but three stand out.

First, in manufacturing sectors considered essential or key to national security, there’s nowhere else with China’s combination of skilled labor, well-oiled infrastructure, ability to move entire towns around to meet the land and logistics needs of major firms, the degree of innovation that comes from industrial clustering and tight-knit supplier networks, and invaluable proximity to other high-value ecosystems in East Asia.

It’s not uncommon for major U.S. manufacturers to demand not only tax incentives from Chinese provincial governments but land and purpose-built infrastructure as well – and for authorities to deliver with astonishing speed. Firms have been moving bits and pieces of operations to South and Southeast Asia, plus assembly hubs in Latin America and Eastern Europe that provide easy access to dominant consumer markets.

But even the most attractive of these locations – Malaysia, Thailand, Vietnam, Mexico, India, Ethiopia – lack the skilled labor pools and/or infrastructure and regulatory environment to compete with China at scale. And each are grappling with chronic problems – natural disasters, organized crime, terrorism, labor unrest, meddlesome governments – sometimes at levels worse than in China. None are immune to epidemics.

Second, China’s consumer base is simply irresistible. Companies will put up with plenty of market barriers and government coercion just to tap into it. It’s an overlooked fact that, in combination with Hong Kong, Chinese imports now nearly match those of the U.S.

The number of automobiles GM sold in China fell 15 percent last year and still surpassed U.S. sales by more than 200,000. U.S. firms like Qualcomm at the center of the U.S.-China tech war rely heavily on the revenues they gain from China to fund R&D and thus, somewhat paradoxically, maintain their innovation edge over their Chinese competitors.

The best way to ensure access to this market is to put up with the headaches of manufacturing in China. This is why most companies actively moving some operations abroad are doing so only partially – just enough to establish a “China plus one” supply chain model with parallel links that builds redundancy and ensures access to both the U.S. and Chinese markets.

Finally, moving is expensive and time-consuming. This is a problem now more than ever, with companies suddenly starved for cash amid the fallout of the pandemic. All told, relocation is generally a three- to five-year process, according to the Economist Intelligence Unit.

Companies will be loath to take on the costs of moving unless it becomes clear exactly how the current surge in U.S.-China trade tensions will shake out – especially considering the possibility that U.S. tariffs might follow them to other destinations.

There’s not a lot the U.S. can do about these issues – and none of its options are cost-free. It can (and may) raise tariffs again on imports from China, but tariffs are a largely ineffective tool of coercion and a tax borne primarily by U.S. businesses and consumers, which is a bad idea at the height of an economic crash.

It can (and will) strengthen restrictions on imports of national security-sensitive goods, but doing so risks crippling U.S. firms and ceding market share to foreign competitors – especially if the definition of security risks is applied too broadly. Both of these, moreover, would almost certainly provoke Chinese retaliation and would thus make things more expensive.

Washington can subsidize the costs of relocating outside of China, but to do this for everyone would cost the U.S. trillions of dollars and do nothing to address the potential loss of competitiveness of U.S. firms that follow suit.

The U.S. has every reason to want to pry itself apart from the Chinese economy – in key sectors such as pharmaceuticals and sensitive emerging technologies, it’s inevitable – but there’s no reason to think Washington can do it quickly, cheaply or efficiently.

It will struggle to strike an optimal balance that preserves national security without undermining its own ability to innovate and compete in global markets.

And it will be impossible to achieve all of its oft-conflicting political, economic, security and strategic goals.

Custom of the country

With oil prices depressed, China presides over a buyer’s market

Oil and gas suppliers are toiling to secure Chinese demand

WHEN OIL supply threatened to overwhelm storage tanks in Cushing, Oklahoma, in April, the pain was felt as far as Chongqing. Retail investors in the Bank of China’s oil bao, or “treasure”, a speculative vehicle linked to crude futures, took a hit as the May contract for West Texas Intermediate settled at an astonishing -$37.63 a barrel on April 20th.

The market’s gyrations have led to consternation in China—regulators have reportedly called for an investigation—and revealed unexpected victims. In general, though, plunging prices have served Chinese buyers rather well.

In 2017 China became the world’s biggest importer of crude, surpassing America, and the second-largest importer of liquefied natural gas (LNG), behind Japan.

Dependence on foreign fuels has long been deemed a strategic vulnerability.

But now oil and gas suppliers are toiling to secure Chinese buyers, not the other way round.

China’s heft was set to grow even before covid-19 kept cars parked and planes grounded. In the long term the growth of China’s population and economy make it a likely source of rising demand, even if climate change clouds prospects for oil and gas elsewhere.

Companies and petrostates have worked to secure their share of China’s market: Russia’s Power of Siberia gas pipeline opened in December; ExxonMobil’s efforts include a 20-year deal to supply LNG to Zhejiang Provincial Energy Group.

As the pandemic obliterates energy demand, China is revelling in a buyer’s market. It has not been shy about squeezing suppliers.

In March Kazakhstan’s energy minister said the country had reduced gas exports to China by 20-25%, at China’s request.

China National Offshore Oil Corp reportedly invoked force majeure to halt LNG shipments from BP, Royal Dutch Shell and Total, three European supermajors.

Chinese buyers have also been opportunistic. Although car, freight and plane travel dropped in the first quarter, crude imports rose by 5%. Neil Beveridge of Bernstein, a research firm, estimates that about 200m barrels of oil went into storage in China in the first three months of the year, as the government, refiners and other buyers stocked up on inexpensive oil.

Refineries lifted run rates in March, benefiting from the gap between cheap imported crude and the state-mandated domestic-price floor of $40 a barrel, which in turn ensured a higher margin for refined products.

Oil suppliers continue to look to China, which has eased its lockdown before other markets.

“China is leading demand at the moment, so everyone is trying to sell into that market,” says Ben Luckock of Trafigura, a trading group. Even as covid-19 depressed global energy demand, seaborne oil exports to China in April reached a record level, according to Kpler, a market-data firm, and were 25% higher than last year’s average.

On May 1st independent refineries, known as “teapots”, were processing more crude oil than in December. In April the Shanghai International Energy Exchange approved new storage capacity for Sinopec and PetroChina, national energy giants.

It is unclear if China will remain a bright spot. Despite analysts’ best efforts—by, say, using satellite images to track outlines on storage tanks—no one knows precisely when China’s oil stocks may near its capacity to store it, says Mr Beveridge.

The International Energy Agency expects Chinese demand to be tepid in the second half of the year, as the global economy remains weak.

“Crude imports are going to have to slow down a bit to run down some of the stocks,” argues Chris Midgley of S&P Platts Analytics, a price-reporting firm.

Meanwhile competition to sell to China continues. Saudi Arabia posted steep discounts for crude heading to Asia in May; rivals are nervously awaiting Saudi prices posted for June.

Complicating the outlook for gas exporters to China, the government is keen to support domestic gas and the cost of Chinese wells has dropped.

The American Petroleum Institute (API), a lobby group, is urging officials to lean on China to import more American oil and gas, as agreed in a recent trade deal.

“China has a growing demand for energy,” says Frank Macchiarola of the API, “and we have a growing need for markets.” Join the club.