Chinese Economics Thread

[tphuang]

This tells me that EU is entirely screwed when it comes to future energy dependence

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if you have to build artificial islands to have large scale green hydrogen production, then the costs are just way too high & simply can't be scaled up.

Green hydrogen as an energy option has become popular in Europe with the ongoing Russia- Ukraine war pushing countries in the region to end reliance on Russian oil and gas.
Under the 2020 EU Hydrogen Strategy, the ambition is to produce 10 million tons and import 10 million tons of renewable hydrogen in the EU by 2030.

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Portuguese Prime Minister António Costa has invited Latin American countries to consider exporting green hydrogen to Europe by taking advantage of the interconnections agreed by Portugal, Spain and France, exemplified by the H2Med pipeline
The president of Colombia, Gustavo Petro, has alluded in the forum to the capacity of Latin America to be a power in the production of green hydrogen and, in turn, Costa has picked up the gauntlet pointing out that such exploitation can serve both for »own consumption» and for export.

Europe needs to add a lot of wind/solar project just to replace natural gas and it is running short on suitable space. It knows ahead of it that it needs to import a lot of hydrogen. Before long, the hydrogen will be used for industrial, transportation and power needs.

Do Europeans really realistically think it can produce 10 million ton of green H2 by itself, let alone import from Latin America?

it's not possible, the only country that will be producing large quantities of green H2 and NH3 is China. China will quickly ramp up its electrolysis production and have large Green H2 bases everywhere around the country. Initially, these plants will just be used for industrial purposes. As H2 infrastructure continues to improve and transportation technology continue to improve, China will be able to export large quantity of green H2 that it produces in these offshore wind/aquaculture/H2 farms that it will be building.

China will make great money several ways:
1) it can sell excessive H2 at like $4 per kg. If it exports 10 million tons of that to Europe, it will be 10 million t x 1000 kg/t x $4 = $40B
2) it can sell wind turbines, solar panels, hydro turbines, electrolysis & hydrogen transportation equipment to all the global south that would love to be produce green H2 and export them to Europe.

Think about it this way. The global oil market is over 100 million bpd. At $80 a barrel for crude, crude sales alone every year is 100m * 365 days * $80/barrel = $2.92 trillion. If we add refined products on top of that, we are probably looking at a $4 to 5 trillion a year. It's the world's largest traded product and commodity. Larger than even the auto industry. A league larger than semiconductors.

The only thing that can replace oil & natural gas in many energy usage is hydrogen.

Let's say we eventually need 800million tons of green H2 a year. At $4000 per ton, that works out to be over $3 trillion market a year. That's less than current oil product/gas market but a lot of energy usage will be replaced by battery powered systems like EVs.

China with its manufacturing and infrastructure prowess is the obvious winner of green hydrogen and ammonia. If China can produce 300 million tons of green H2 a year and export 100 million of that, that would be $400 billion a year of export from just selling energy product. It will be able to transport that around the world in its own ammonia carrying ships and environmentally conscious countries will be all dependent on China.

 

[tphuang]

This tells me that EU is entirely screwed when it comes to future energy dependence

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if you have to build artificial islands to have large scale green hydrogen production, then the costs are just way too high & simply can't be scaled up.

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Europe needs to add a lot of wind/solar project just to replace natural gas and it is running short on suitable space. It knows ahead of it that it needs to import a lot of hydrogen. Before long, the hydrogen will be used for industrial, transportation and power needs.

Do Europeans really realistically think it can produce 10 million ton of green H2 by itself, let alone import from Latin America?

it's not possible, the only country that will be producing large quantities of green H2 and NH3 is China. China will quickly ramp up its electrolysis production and have large Green H2 bases everywhere around the country. Initially, these plants will just be used for industrial purposes. As H2 infrastructure continues to improve and transportation technology continue to improve, China will be able to export large quantity of green H2 that it produces in these offshore wind/aquaculture/H2 farms that it will be building.

China will make great money several ways:
1) it can sell excessive H2 at like $4 per kg. If it exports 10 million tons of that to Europe, it will be 10 million t x 1000 kg/t x $4 = $40B
2) it can sell wind turbines, solar panels, hydro turbines, electrolysis & hydrogen transportation equipment to all the global south that would love to be produce green H2 and export them to Europe.

Think about it this way. The global oil market is over 100 million bpd. At $80 a barrel for crude, crude sales alone every year is 100m * 365 days * $80/barrel = $2.92 trillion. If we add refined products on top of that, we are probably looking at a $4 to 5 trillion a year. It's the world's largest traded product and commodity. Larger than even the auto industry. A league larger than semiconductors.

The only thing that can replace oil & natural gas in many energy usage is hydrogen.

Let's say we eventually need 800million tons of green H2 a year. At $4000 per ton, that works out to be over $3 trillion market a year. That's less than current oil product/gas market but a lot of energy usage will be replaced by battery powered systems like EVs.

China with its manufacturing and infrastructure prowess is the obvious winner of green hydrogen and ammonia. If China can produce 300 million tons of green H2 a year and export 100 million of that, that would be $400 billion a year of export from just selling energy product. It will be able to transport that around the world in its own ammonia carrying ships and environmentally conscious countries will be all dependent on China.

If we just think about it like this. Let's say by 2030 China imports 150 bcm of natural gas by pipe and another 150 bcm by LNG.

From this

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From 2020-2022, the average price of China's LNG imports increases continuously. In 2021, the average price of China's LNG imports is US$559.41 per ton, an increase of 60.53% y-o-y. In January-October 2022, the average price of China's LNG imports is US$808.17 per ton,

Let's say each ton of LNG is $600 based on something closer to 2022 price and pipeline gas is 2/3 of that.
1 bcm = 678k ton -> $61B from LNG and another $40B from pipeline or $100B in total
300 bcm of LNG is about = 203 million t. Now if we consider H2 has 2.5 times the energy density of NG by weight. 203 million t of LNG has as much energy as 80 million t of hydrogen fuel. Note here that if you can get green H2 production domestically to under $1.25/kg, then green H2 is cheaper form of energy than natural gas and it can all be produced in ocean/desert areas that have no real other purpose. With that, China can support domestic industries while also removing a $100B import bill (which could be a lot higher as we saw with the NG prices last summer).

On top of this, let's say China needs 10 million bpd of oil even after transportation sector is fully electric. That would be 3.65 billion barrels a year. At $100 per barrel, it is $365B a year. 3.65 billion barrels -> 489 million t of oil. By weight, H2 is 3x as energy dense as oil (160 million t of H2). Based on the higher octane # of H2, it has higher combustion efficiency, so can possibly be equivalent to 120 million t of H2

Notice how H2 can replace $365B of oil import at $3 per ton.

Regardless, one of China's biggest source of import is its energy needs and it can be turned into an export in the future.

 

[gelgoog]

Green hydrogen is a retarded idea. Transporting it via ship from Latin America even more so. Europe will just go back to burning coal once these idiots sort themselves out. The only way out is coal and nuclear.

 

[henrik]

If we just think about it like this. Let's say by 2030 China imports 150 bcm of natural gas by pipe and another 150 bcm by LNG.

From this

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Let's say each ton of LNG is $600 based on something closer to 2022 price and pipeline gas is 2/3 of that.
1 bcm = 678k ton -> $61B from LNG and another $40B from pipeline or $100B in total
300 bcm of LNG is about = 203 million t. Now if we consider H2 has 2.5 times the energy density of NG by weight. 203 million t of LNG has as much energy as 80 million t of hydrogen fuel. Note here that if you can get green H2 production domestically to under $1.25/kg, then green H2 is cheaper form of energy than natural gas and it can all be produced in ocean/desert areas that have no real other purpose. With that, China can support domestic industries while also removing a $100B import bill (which could be a lot higher as we saw with the NG prices last summer).

On top of this, let's say China needs 10 million bpd of oil even after transportation sector is fully electric. That would be 3.65 billion barrels a year. At $100 per barrel, it is $365B a year. 3.65 billion barrels -> 489 million t of oil. By weight, H2 is 3x as energy dense as oil (160 million t of H2). Based on the higher octane # of H2, it has higher combustion efficiency, so can possibly be equivalent to 120 million t of H2

Notice how H2 can replace $365B of oil import at $3 per ton.

Regardless, one of China's biggest source of import is its energy needs and it can be turned into an export in the future.

Is Russia or Japan going to compete against China in making H2? Japan has lots of related patents, and russia has lots of oil and natural gas.

 

[TK3600]

Japan is the pioneer but is thoroughly outcompeted. Russia do not need it because energy is one thing they do not lack.

 

[Rafi]

China is past that stage of its development now. It cannot be a super power and keep its currency constrained. Otherwise, no one else will use it. The biggest security threat facing China is America using its reserve currency status to employ power and surround China and suppress China. The biggest countermeasure is China's efforts to internationalize its currency. However, you cannot expect countries to form stronger relationship with you unless they can have more easy access to your currency and be able to invest in your economy and bonds/stocks. As such, China needs to have less constrained currency control.

You can have that without reaching the level of "financial sophistication" that Western banking system has reached. Politicians don't have to be bought out by the big banks. You can have a tightly regulated banking system that doesn't take the same level of risks. Things might be less profitable for the banks but you also won't have these major meltdowns. Also, China does not have these debts issues that America has.

I believe the digital Yuan has a key part to play in this.

 

[Ash46]

With that said, someone more knowledge in regards to economy/banks and what it means to have such big values of derivatives compared to total assets?

Derivatives are usually used to make sure there is liquidity in the market and for businesses to hedge against price fluctuations.
Let's say I agree to buy porn from you for 100 a week from now. Next week pork price remains 100. In that case the inherent value of derivative contract is going to be 0 because well I can buy pork from any other vendor in the market for the same price so essentially our contract isn't worth anything, just a formality. Now if the price becomes 105 so the value of contract for me become 5 as I will buy that from you for 100 because we agreed according to the derivative contract . Now while the inherent value of the value itself if quite less, while doing calculation the total value calculated will be 100 regardless. This notional value also does not take into account overall positions across the market .Lets say I agree to buy pork from you for 105( 100 is price today) and you do a similar deal to buy the pork from someone for 102 (100 is price today) the notional value which is used in the calculation in the graph is going to make it 207 rather than 5(inherent value). Play it across the market and you have this insane number of 167 trillion dollar.
Also, regarding the leverage part. You are required to deposit a certain amount of money decided by a clearing house which decides it on the basis of reasonable price fluctuations expected in the meantime. Let's say you want to buy 100 million of contracts in euro, you have to deposit 5 million ( if a clearing house thinks 5% is the reasonable price change that might happen today). Now if it exceeds 5%, there's a margin call and then you are expected to deposit more. Now there is a risk in the sense that clearing house may ask you to deposit lower % to attract business ( choosing a clearing house that asks for 2% rather than 5%) but then dealing with nuances would make the post too long.
So the inherent value of derivatives is lot less than what is shown in the graph. Also there are lots of regulations and stopgaps have been put in places to prevent a meltdown( it may always happen but the system is a bit more robust than many doomsday people would like you to beleive).
And your point about why is the derivatives number so large for us banks? Well USD is the major reserve currency and majority of the business and trade deals still happen in USD (think petrodollar) and us exchanges play a big role setting the prices of contracts and all. US banks are very essential for clearing such deals.( Think why usd sanctions on iran devastated a significant% of it's trade despite it being blacklisted by only American banks not European ones).
China's global reserve currency share is less than 3% compared to the 59% of usa. Let the international trade deals and commodities be priced in yuan and you will see Chinese banks portfolio of derivatives would increase too.

 

[Michaelsinodef]

Derivatives are usually used to make sure there is liquidity in the market and for businesses to hedge against price fluctuations.
Let's say I agree to buy porn from you for 100 a week from now. Next week pork price remains 100. In that case the inherent value of derivative contract is going to be 0 because well I can buy pork from any other vendor in the market for the same price so essentially our contract isn't worth anything, just a formality. Now if the price becomes 105 so the value of contract for me become 5 as I will buy that from you for 100 because we agreed according to the derivative contract . Now while the inherent value of the value itself if quite less, while doing calculation the total value calculated will be 100 regardless. This notional value also does not take into account overall positions across the market .Lets say I agree to buy pork from you for 105( 100 is price today) and you do a similar deal to buy the pork from someone for 102 (100 is price today) the notional value which is used in the calculation in the graph is going to make it 207 rather than 5(inherent value). Play it across the market and you have this insane number of 167 trillion dollar.
Also, regarding the leverage part. You are required to deposit a certain amount of money decided by a clearing house which decides it on the basis of reasonable price fluctuations expected in the meantime. Let's say you want to buy 100 million of contracts in euro, you have to deposit 5 million ( if a clearing house thinks 5% is the reasonable price change that might happen today). Now if it exceeds 5%, there's a margin call and then you are expected to deposit more. Now there is a risk in the sense that clearing house may ask you to deposit lower % to attract business ( choosing a clearing house that asks for 2% rather than 5%) but then dealing with nuances would make the post too long.
So the inherent value of derivatives is lot less than what is shown in the graph. Also there are lots of regulations and stopgaps have been put in places to prevent a meltdown( it may always happen but the system is a bit more robust than many doomsday people would like you to beleive).
And your point about why is the derivatives number so large for us banks? Well USD is the major reserve currency and majority of the business and trade deals still happen in USD (think petrodollar) and us exchanges play a big role setting the prices of contracts and all. US banks are very essential for clearing such deals.( Think why usd sanctions on iran devastated a significant% of it's trade despite it being blacklisted by only American banks not European ones).
China's global reserve currency share is less than 3% compared to the 59% of usa. Let the international trade deals and commodities be priced in yuan and you will see Chinese banks portfolio of derivatives would increase too.

Thanks for the explanation, while the number still feels incredibly big, it does make sense why it might be so high and it makes it less 'alarming' I suppose.

 

[tphuang]

Is Russia or Japan going to compete against China in making H2? Japan has lots of related patents, and russia has lots of oil and natural gas.

Japan really hasn't gone anywhere with this. Japan itself does have a lot of coast line, but then it would still need Chinese offshore wind turbines & electrolyzers to get that going. It also doesn't have much expertise with offshore drilling and things like that will be needed for floating wind farms. Japan itself is crowded & there aren't that much space for large wind farms.

Russia simply has fallen back to just reliant on fossil fuel since Ukraine war kicked off. As I said before, we might have a situation where China builds wind farms in Russia and export electricity back to China, but I'm not sure that's needed. China has vast amount of empty unused land in desert regions which are perfect for green H2 production since they are otherwise wasted. And these places have so much wind power that battery story and high voltage transmission is just going to waste a lot of energy.

Europe has the will for green H2 transition but it doesn't have the empty space nor the funding needed for these projects. You have to remember that large wind/solar farms w/ electrolyzer cost a lot of money. After the startup cost, it generates a lot of cheap electricity, but there just hasn't been that many large scale projects in Europe right now. China right now in terms of actual green H2 project is way ahead of everyone else.

Not only will it be able to sell green H2, but it can sell a lot of green ammonia which it can convert to green fertilizer. Remember all the Dutch farmers protesting about lack of fertilizer. Now, if they can get green fertilizers, that will be a treasured asset.

I believe the digital Yuan has a key part to play in this.

not related. CBDC is probably going to work out to be more of a B2B kind of service. Your average customers prefer Alipay & Wechat Pay

 

[Michaelsinodef]

Japan really hasn't gone anywhere with this. Japan itself does have a lot of coast line, but then it would still need Chinese offshore wind turbines & electrolyzers to get that going. It also doesn't have much expertise with offshore drilling and things like that will be needed for floating wind farms. Japan itself is crowded & there aren't that much space for large wind farms.

Russia simply has fallen back to just reliant on fossil fuel since Ukraine war kicked off. As I said before, we might have a situation where China builds wind farms in Russia and export electricity back to China, but I'm not sure that's needed. China has vast amount of empty unused land in desert regions which are perfect for green H2 production since they are otherwise wasted. And these places have so much wind power that battery story and high voltage transmission is just going to waste a lot of energy.

Europe has the will for green H2 transition but it doesn't have the empty space nor the funding needed for these projects. You have to remember that large wind/solar farms w/ electrolyzer cost a lot of money. After the startup cost, it generates a lot of cheap electricity, but there just hasn't been that many large scale projects in Europe right now. China right now in terms of actual green H2 project is way ahead of everyone else.

Not only will it be able to sell green H2, but it can sell a lot of green ammonia which it can convert to green fertilizer. Remember all the Dutch farmers protesting about lack of fertilizer. Now, if they can get green fertilizers, that will be a treasured asset.

not related. CBDC is probably going to work out to be more of a B2B kind of service. Your average customers prefer Alipay & Wechat Pay

Won't green H2 production in desert regions of China be a bit of a problem, since it would be in desert regions and therefor not have access to a lot of water.