db140weekender:Insights in 140words

China - The official pageantry was rolled out for President Trump this week butgiven $250bn worth of deals were discussed with President Xi, infrastructureseemed surprisingly neglected. Strange perhaps given its economic growthpotential. Indeed, China has accounted for one-third of global growth since 2014,of which one-fifth was attributable to infrastructure spending, says the IMF. Thisinfrastructure bonanza stemmed from a 4tn yuan stimulus package that meantits contribution to investment growth rose from one-third in 2009 to over halfnow. The funding techniques, though, highlight hidden problems. Much of thespending was via local government financing vehicles, which have doubled totwo-fifths of economic output in just a decade, while interest coverage ratioshave fallen one-third since 2010. That might be fine if profitability was good. Yet,investing all that money has halved the return on assets to one per cent.

    Oil - Saudi Arabia’s corruption crackdown helped add five per cent to brent crudeprices this week, yet WTI oil rose only about half that amount. Indeed, brent isnow over $6 per barrel more expensive than WTI, the highest premium in over twoyears and above the level that makes exporting profitable despite the additionaltransport costs. Domestic issues in the US have also helped suppress WTI. Stocksof American crude and petroleum are a full standard deviation above the ten-yearaverage even though production dropped 15 per cent during the recent hurricaneseason. Hence, export markets look appealing and America’s net imports of crudehave plummeted one-third over the last three months. Refiners will be pleased.

    Their current 90 per cent capacity rate is right at the top of the ten-year range.

    And demand only increases into the year end.