For Texas, promise and pitfalls in China Texas companies are betting big on China. But will the nation’s slowing growth bring a payoff?

For Texas, promise and pitfalls in China Texas companies are betting big on China. But will the nation’s slowing growth bring a payoff?

Published Feb. 6, 2020

First of three parts

Read more about why we went to China.

BINHAI, China — A hundred miles south of Beijing, rows of identical, gleaming white apartment buildings stretch to the horizon, with construction cranes signaling many more to come. A 100-story glass and steel office tower looms over a downtown filled with Western-branded hotels and restaurants. A modernist library designed by a Dutch architect sprawls along a city block.

The only thing missing: people. The population of Binhai, one of hundreds of former farming communities built into cities over the past decade, numbers more than 4 million, according to official Chinese statistics. Yet sidewalks are devoid of pedestrians at all times of day. Storefronts sit empty, their concrete foundations still exposed.

“We have to serve not just today,” says Liu Xiufeng, curator of Binhai’s library. “We have to look to the future.”

He is showing off mostly empty bookshelves that reach 60 feet high. They are painted to appear as if they are holding books.

It is a potentially telling moment. Texas companies are placing big bets that China’s economy, long the fastest-growing in the world, will continue to expand. Texans want to sell oil, soybeans and other products to the fast-growing middle class moving into new cities such as Binhai. But growth is slowing in the face of rising wages, competition from lower-cost southeast Asian nations and a protracted trade war with the United States. Analysts and experts are starting to question the once-certain promise of investment in China.

So, the question: Is the lure of a bustling middle class, and big payoffs that come with it, just a mirage, like the books in Liu’s library? Could China be a sucker’s bet?

“We export a lot of agriculture and some energy, which we’re hoping to increase,” said Steven Lewis, China fellow at Rice University’s Baker Institute. “These are things the Chinese need. But there’s a lot of businesspeople in China who say the outlook is bad.”

The risks of a Chinese downturn were made stark by the plunge in global stock and commodity markets over growing unease about China’s ability to contain the coronavirus outbreak. U.S. oil prices are down about 20 percent from last month on fears the virus will slow Asian economies and energy consumption.

Few regions of the United States have more at stake than Houston. China is already the region’s second-largest trading partner after Mexico. And China’s continued expansion means it would need more oil, liquefied natural gas and chemicals, products Texas produces and exports in abundance.

In anticipation, the energy companies that drive the Texas economy have rushed to expand their footprint in China. Exxon Mobil recently expanded its massive research and testing complex in Shanghai, as it moves to grow its energy business with state-owned Chinese firms. Houston chemical maker LyondellBasell announced in December it was entering into a deal with China’s Sinopec to build a petrochemical facility along the coast of eastern China.

Meanwhile, back on the Gulf Coast, multibillion-dollar LNG facilities and petrochemical plants are going up, at least in part under the expectation that the world’s second-largest economy will maintain its juggernaut pace and hunger for Houston’s energy products. They accounted for three-fourths of the region’s $7.2 billion in exports to China in 2018.

The trade war has slowed deal-making. But in a sign of things to come, Houston company Cheniere Energy last year signed an $18 billion deal to supply LNG to China for 20 years.

‘Rorschach test’

Among the residents of Beijing and Binhai, there is no end to optimism about their future. Wages and quality of life are on the rise, bringing newfound wealth displayed in designer clothes and trips abroad — luxuries unimaginable for many of their parents’ generation.

On the outskirts of Binhai, an animation studio, computer-technology firms and a sprawling apartment complex sit beside what was little more than a mass of struggling farms and a heavily contaminated sewage reservoir — rendered relatively clean by a government cleanup project.

“This used to all be salt marsh,” said Lv Kai, deputy director of the complex. “You couldn’t grow anything.”

But China is in the middle of a ticklish transition as it attempts to transform itself from an emerging economy based on low-cost manufacturing and exports to a developed nation driven by high-value products and services and domestic consumer spending. Economic growth has declined steadily for close to a decade now to about 6.6 percent, according to China’s official numbers.

The Texas-China connection These Texas companies have placed huge bets on doing business in China:

Enterprise Product Enterprise is hoping the growing Chinese economy would provide a big market for the huge volumes of American crude the company moves through its terminal on the Houston Ship Channel.

Exxon Mobil The company’s history with China dates to the selling of kerosene there in the 1890s. The Texas oil major recently completed the expansion of a sprawling research and development facility in Shanghai.

LyondellBasell In December, the Houston chemical giant announced it had a deal with state-owned Sinopec to build a plant outside Shanghai to produce the chemicals used to make plastic.

Cheniere Energy The pioneering liquefied natural gas firm made headlines last year when it struck a tentative $18 billion deal to supply natural gas to state-owned Sinopec for the next two decades.

BP Though BP’s efforts to drill shale fields in China haven’t worked out, the company has plenty of other energy ventures, including get fuel and gasoline stations, there.



Though that might be the envy of most any nation in the world — the U.S. economy grows at about 2 percent a year — the prospect of a continuing decline is stoking fears about China’s ability to repay the trillions of dollars of debt it took on during the 2008 financial crisis to keep its industries growing despite slumping global demand.

Figuring out the health of China’s economy is more art than science, considering the limited data the government releases and the general lack of transparency, said Scott Kennedy, an adviser at the Center for Strategic and International Studies in Washington, D.C., who has studied and visited China for 30 years.

“There is no consensus on China’s economy,” Kennedy said. “It’s a Rorschach test.”

China’s government is working at what economists describe as a modest spending increase to keep economic growth steady, a vastly scaled-down version of the stimulus a decade ago. But that’s just a Band-Aid. Longer term, the government in Beijing is betting on demographics.

Along the train tracks between the sprawling modernity of Shanghai and Beijing — where high-speed trains move at speeds of more than 200 mph — lies an alternate world of subsistence farming and small villages composed of a few dozen stone homes and centered around the smokestack of a small coal-fired power plant.

China’s strategy is to move those people into well-paying jobs in China’s cities and grow the middle class, increasing consumption while expanding the country’s formidable industrial and manufacturing sectors. President Xi Jinping has ordered regional officials to move about 1 million people out of the countryside each year, not to already overcrowded cities such as Shanghai (population 24 million) but rather to newly designated urban zones such as Binhai.

Almost 60 percent of China’s 1.4 billion people live in cities, compared to 40 percent two decades ago, as the population has shifted from the countryside. That has resulted in megacities such as Beijing, where skyscrapers stretch to the horizon, streets are so wide pedestrians use underground tunnels to cross them and one of the city’s train stations is so vast it has two subway stops.

“Urbanization is the core agenda for Chinese development, given the current demographics in terms of age and income,” said Zou Ji, president of the China Energy Foundation, a Beijing nonprofit advocating for clean energy. “We are trying to pursue prosperity, to raise incomes for poor people.”

To this end, the Chinese government has created more than 200 so-called economic-technological development areas such as Binhai, to expand the country’s manufacturing and industry beyond their traditional hubs — with a focus on high-technology and other lucrative sectors such as energy, aviation, artificial intelligence and biotechnology.

Belt and Road

At the same time, China’s Belt and Road initiative, through which the government commits billions to finance ports, pipelines, roads and other infrastructure projects in developing nations across Asia, Africa and South America, provides plenty of work for Chinese contractors and a cash infusion for the domestic economy as Chinese companies send profits back home.

“China still has a lot of inefficiencies in their economy, but it’s still growing,” Kennedy said. “They still have good fundamentals, a smart, highly motivated flexible workforce and fantastic infrastructure.”

Not everyone is so confident about China’s future. A survey last year by AmCham China, which represents U.S. companies operating on the mainland, reported that only 22 percent of its members were optimistic about the business outlook in China during the next two years.

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Ratings agency S&P Global also reported that local authorities in China had amassed up to $6 trillion in “hidden” debt off their balance sheets, accumulated as they went on spending sprees to build roads, bridges and other infrastructure to keep economic activity in their regions in line with mandates from Beijing. “That’s a debt iceberg with titanic credit risks,” the report said.

A debt crisis, should one materialize, would inevitably slow China’s economy and leave many Texas oil and gas companies in the lurch. Texas firms are not only relying on a booming Chinese economy to absorb vast amounts of crude and natural gas produced in American shale plays, but also have come to rely on billions in Chinese financing from companies such as Shandong Xinchao, a Beijing energy and real estate firm, to fund the development of new fields in West Texas.

At least for now, Chinese officials assure American firms there is nothing to worry about.

In an interview, He Zhenwei, secretary general of the China Overseas Development Corporation, an affiliate of China’s economic planning commission, said China’s projected economic growth, increasing energy demand and plans to reduce its reliance on coal should create a huge market for American LNG, an industry concentrated along the Gulf Coast.

“The consumption of this market is incredible,” he said. “We are amazed ourselves (with) how much energy we consume.”

Ready to grow

In Binhai, they are more than ready for growth.

On a tour organized by local government officials, they described a train line under development that would connect Binhai to the more established city of Tianjin. They showed off new apartment blocks complete with solar panels. Wind turbines have gone up alongside what was once a cesspool for sewage runoff.

At a new maritime museum on the city’s waterfront, not far from the site of a petrochemical explosion that killed more than 170 people in 2015, workers were dusting off fossils and stuffed whales ahead of the official opening.

Many of the exhibit signs were in English — a language not commonly spoken in China outside major cities and cultural sites.

“Maybe later,” a tour guide explained, “we will have more foreigners.”

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Part 2: China’s challenge to the world’s energy capital

Part 3: Differing policies in U.S.-China trade negotiations spell trouble for Texas

James Osborne has been the Washington energy correspondent for the Houston Chronicle since 2016. Reach him by email at james.osborne@chron.com and follow him @osborneja.

Designed by Stephanie Lamm and Jasmine Goldband.

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