ALEX BRUMMER: Xi Jinping loses his lustre

The intriguing question about China before Covid-19 was how long would it take it to overhaul the United States as the world’s largest economy.

With annual growth rates running at between 8 per cent and 10 per cent, the crossover point was expected sometime this decade.

Circumstances have changed dramatically. Donald Trump, for all his faults, saw China as an economic, trade and security threat. 

His hopes of re-shoring production to the US may have been wishful thinking, but the efforts to limit technology transfer, one of the engines of productivity, have proved effective.

President Xi’s crackdown in Hong Kong and threats against Taiwan have also soured economic relations with the West.

Most difficult for China has been its zero tolerance approach to Covid-19. The frequent lockdowns and interruptions to global supply chains have brought output down with a bump. 

As a consequence, China is in the unusual position of fiscal and monetary easing, while much of the rest of the world is heading in the opposite direction as its seeks to counteract surging inflation.

The reduction in China’s key medium-term interest rate is designed to address several problems. These include slowing output, stumbling retail sales and weakening industrial production. Youth unemployment is high at 19.9 per cent. 

There is also over-lending to property firms such as Evergrande and a mortgage market which shares characteristics with a Ponzi scheme to contend with.

Cheap Chinese goods have been one of the factors which have helped to keep prices in the West under control. But strong Chinese demand for oil has been troublesome.

Slower growth in China means lower oil prices, and Brent crude fell sharply on both spot and futures markets. Lower prices at the pumps can already be seen. 

Pity then that the historic relationship between oil and natural gas prices is being distorted by sanctions as a result of the Ukraine conflict.

Mining missteps

The rapidity with which big mining groups have – with varying success – sought to conform to the environmental, social and governance (ESG) agenda may have been premature. 

The Ukraine war changed the dynamics for the immediate term with Germany returning to coal burning and nuclear, and attitudes towards drilling in the North Sea changing.

BHP sold its petroleum business to Woodside as part of its effort to decarbonise. Rio Tinto exited its Aussie coalmines and Anglo American decanted its South African coal into Thungela Resources. 

Only Glencore kept the faith with coal in Colombia with spectacular financial results.

The attempt at decarbonisation, in retrospect, has hurt shareholders. Politically it may not be a good look, but there are spectacular dividend payouts and share buybacks from Glencore, Shell and BP.

Thinking longer term, Rio and BHP have their eyes on nickel, zinc and copper – all important ingredients in electrifying motoring. This, in spite of the questions as to whether, when the climate change chips are down, the fossil fuel production required for motoring grids will ever be green enough.

Many energy analysts think that hydrogen cars, already available in Tokyo, may prove to be a more enduring technology. Winning control of copper and nickel resources is not proving that simple. 

As part of his tidy-up Rio campaign, chief executive Jakob Stausholm is seeking to take full control of the troubled Oyu Tolgoi project in Mongolia with a £2.2biliion offer for the minority interest. 

Full control would not just give it exclusive access to one of the world’s biggest copper deposits, it might also provide an opportunity to burnish its ESG credentials so damaged by its destruction of the sacred Juukan Gorge site in Australia.

BHP’s efforts to take control of competitor Oz Minerals – with access to nickel and copper – for £4.8billion, has also met a roadblock with Oz rejecting the offer. 

Both Rio and BHP doubtless have the financial firepower to overcome the obstacles. Investors won’t thank them if a lack of strategic planning means overpaying for resources that could involve serious ESG hazards.

Pacific heights

Battered by the collapse of flying hours in Covid, it has been a torrid time for the UK’s premier engineer Rolls-Royce.

So there will be relief in Derby that Malaysia Aviation is signalling confidence in the future by ordering 20 Airbus A330neo aircraft to be powered by the Trent 7000 engine. The future for wide-bodied planes is in the Pacific.