Dr Nicola Casarini writes: Beijing is rolling out an ambitious plan to create trade routes that stretch to the heart of Europe. This will bring much-needed investment to the countries in its path, but threatens to change the balance of power between rising Asia and the Old Continent

This year, China and the European Union celebrate the 40th anniversary of their diplomatic relations. Once marginal, their partnership has become one of the world’s most important. Trade between Beijing and Brussels now exceeds €1.2 billion a year. Their level of interdependence is such that China’s market meltdown this summer was felt in Europe immediately. 

The two sides are currently discussing ways to link China’s ‘one belt, one road’ (OBOR) initiative with the European Commission president Jean-Paul Juncker’s plan for jobs and growth to boost two-way investment and commerce.

Closer Sino-European relations, however, risk weakening the transatlantic bond which was strained in March by the decision of Britain to join the Asian Infrastructure Investment Bank as a founding member despite United States pressure to stay out. Germany, France and Italy were quick to follow the British lead. 

The state visit by Xi Jinping to Britain in October – the first by a Chinese president in 10 years – will be watched closely by the US and other EU states to see whether London will be able to send a reassuring message to Washington, while reaping the benefits of growing links with Beijing. China Paves Its Way to the EU

Royal Dutch Shell will not do oil exploration off the coast of Alaska.  A triumph for environmentalists.  Whether the company has really found that the oil is in all probability not at that location or the pressure of various forces on political leaders has really worked is not known.  What’s important is that Royal Dutch Shell is out of Alaska.

Andrew Sheng writes: In the wake of a global stock-market sell-off triggered by economic turmoil in China, the US Federal Reserve has just decided to postpone raising interest rates. Indeed, China is facing the huge challenge of dealing with the risk of a global debt-deflation trap.

The debt-deflation cycle begins with an imbalance or displacement, which fuels excessive exuberance, over-borrowing, and speculative trading, and ends in bust, with procyclical liquidation of excess capacity and debt causing price deflation, unemployment, and economic stagnation. The result can be a deep depression.

In 2000, the imbalance was America’s large current-account deficit: the world’s largest economy was borrowing heavily on international capital markets, rather than lending, as one might expect. According to then-Fed Chairman Ben Bernanke, the problem was that countries running large surpluses were buying so many US Treasuries that they were negating the Fed’s monetary-policy efforts.

Rsk-taking and leverage grew, facilitated by inadequate regulation, culminating in the global financial crisis of 2008. To prevent asset bubbles from collapsing and buy time for more sustainable policy fixes, advanced-country central banks implemented massive monetary easing and cut interest rates to zero.

Within China, a second displacement occurred: the government implemented a ¥4 trillion ($680 billion) stimulus package in November 2008 to offset weak demand in its major export markets.

Instead of reducing excess capacity and encouraging a structural shift to higher-productivity activities, the authorities’ investment-led strategy increased manufacturing capacity further.

The stimulus was funded by a debt binge, especially among state-owned enterprises (SOEs) and local governments. The private sector, too, built up debt, with its limited access to equity capital driving firms to the shadow banking sector. The result is a debt overhang of 282% of GDP.

In short, China now faces the same debt-deflation challenge that much of the rest of the world must address. The question, of course, is how. Some argue that the answer is more of the same: continued monetary easing and additional fiscal stimulus. Accumulating more debt (at lower interest rates) can indeed buy time for economic restructuring. But it will merely make matters worse if politicians do not use the time to implement effective reforms.

There is no politically painless way out of the debt trap. Indeed, the first step in that process is to face up to losses, both in accounting and in real terms. In the short run, even efforts to spur technological progress and innovation, which might generate recovery through new profits, are likely to have a negative overall impact on employment, owing to the creative destruction of obsolete industries. Recognizing this, some argue that the way to force reform is to allow interest rates to reflect credit risks.

For China, whose net international investment position at the end of last year was a surplus of $1.8 trillion , or 17% of GDP, it will be possible to implement internal debt restructuring through debt/equity swaps at the project level. Far-reaching governance and structural reforms in the state and private sectors should follow.

In 2013. SOEs and local governments accounted for more than half of the credit issued through the banking system, proper debt restructuring of state-owned assets would strengthen the projects they were funding, by allowing private or professional management teams to improve overall returns.

Escaping the debt-deflation trap will require China to rejuvenate total factor productivity – an effort that the private sector is better equipped to lead.

The advanced countries have fallen into the debt-deflation trap because they were unwilling to accept the political pain of real-sector restructuring, relying instead on financial engineering and loose monetary and fiscal policies. Here, China’s one-party system provides a clear advantage: the country’s leaders can take politically painful decisions without worrying about the next election.