China Rising: Have Cash, Buy Oil

While the global financial crisis has left much of the Western world in disarray, China’s position remains strong with a stockpile of cash ready to acquire cheap assets. In many cases, these assets are natural resources, especially hydrocarbons. According to author Dilip Hiro, Beijing’s acquisition strategy seeks to insulate itself from the vagaries of raw material price fluctuation while ensuring a steady growth of the economy and raising its citizens’ living standards. Of note, Beijing has invested in hydrocarbon assets in Latin America and Africa, a continent that is now China’s second largest supplier of oil. Such investments are not a one-way street. In Africa, for example, China also exports cheap goods to the region and helps to build infrastructure such as roads, railways, and power plants. And what is particularly attractive about China’s investment offers is that they usually come without the stipulations for curtailing spending or reducing subsidies normally required by the likes of the World Bank and others. Whether or not the “no strings attached” policy is the cause of China’s popularity in Africa – where 70 percent of the people polled in a Pew survey view the country favorably – is an open question. What is obvious is that Beijing now has a unique opportunity to further its growth as the West licks its wounds. – YaleGlobal

China Rising: Have Cash, Buy Oil

Amid the financial chaos, China goes shopping
Dilip Hiro
Friday, October 9, 2009

LONDON: While the recent international credit crunch has damaged the economies of the Western nations and slashed the profitability of their corporations, it has given an additional boost to China’s earlier policy of cornering large reserves of hydrocarbons and industrial metals. Also, its unprecedented pile of $2 trillion of foreign currency reserves has enabled it to become a leading global supplier of credit and in the process enhancing its standing in the world, especially in Africa and Latin America. 

Beijing’s ongoing strategy is driven by multiple motives: to sustain its impressive economic growth; to insulate its economy against sharp swings in the prices of commodities, petroleum being the most important; and to increase its diplomatic strength by integrating the economies of the supplier countries with its own.  

The latest example of China’s enhanced effort to secure foreign petroleum resources is Nigeria, the foremost oil producer in sub-Sahara Africa, and the fifth largest oil supplier to the United States. 

The state-owned China National Offshore Oil Company (CNOOC) has moved to acquire one-sixth of Nigeria’s proven oil reserves of 36 billion barrels. It has made an initial bid for stakes in 23 prime oil blocks, most of them onshore, which until last year were operated by Western petroleum corporations as the dominant partners with the Nigerian government.

If successful, this will be a crucial breakthrough for China. The agreements that its oil corporations have made elsewhere in Africa cover only 4.7 billion barrels. And, whereas most of the Chinese oil corporations’ earlier contracts with the African states have been on the previously unexplored blocks, in Nigeria’s present instance, they are angling for blocks which are either producing oil or are about to. 

Of course, long before the 2007-2009 financial tsunami, the Chinese government decided to diversify its oil and gas imports away from the volatile Middle East. It turned not only to neighboring Russia and Kazakhstan but also distant Africa, Australia and Latin America.

China’s relentless pursuit of hydrocarbons is an essential part of its commitment to continue raising its citizens’ living standards. Despite its dazzling economic progress over the past three decades, judging by the use of personal transportation, China is still far behind the leading industrialized nations. Whereas there are 777 and 447 vehicles for 1,000 Americans and Japanese, the figure for the People’s Republic of China (PRC) is 17. Over the next decade the number of vehicles in China will treble, and they will almost invariably be powered by gasoline. 

The search for energy brought the People’s Republic of China (PRC) to Africa, a continent with many of the natural resources China needs to feed its fast growing manufacturing and construction industries. For hydrocarbons China focused on Angola, Gabon, Somalia and Sudan.

In 2005, Angola became the second most important oil source for China after Saudi Arabia, overtaking Iran. By then, half of Sudan’s oil exports went to China. The PRC’s copper supplies came from Zambia, iron ore from South Africa, platinum from Zimbabwe, and tropical timber from Congo Brazzaville.

 

But China has not only tapped Africa for hydrocarbons. Latin America has also become a source for investment. In 2006, along with a joint refinery project to handle heavy Venezuelan oil in China, Chinese companies were contracted to build a dozen oil drilling platforms, supply 18 oil tankers, and collaborate with Petroleos de Venezuela S.A. (PdVSA), the state-owned Venezuelan oil company, to explore new oilfields in Venezuela. Worsening relations between oil-rich Venezuela, ruled by Hugo Chavez since 1999, and the Bush administration helped secure such a transaction.

In January 2009, flush with cash, China Development Bank agreed to loan PdVSA $6 billion for the oil to be supplied to the PRC over the next 20 years, and then doubled its development fund to $12 billion in return for Venezuela increasing its oil shipments from the current 380,000 barrels per day (bpd) to 1 million bpd.

Also in 2009, China Development Bank agreed to loan Brazil’s state-owned oil company, Petrobras, $10 billion to lock up supply of 160,000 bpd in the coming years. This amount was only one-tenth less than the total funding by the Inter-American Bank in 2008.

Recently Beijing broke a new ground in the region by giving Buenos Aires access to more than $10 billion in yuan, its currency. Argentina was one of the three major trading partners of China which were given this facility, the others being Indonesia and South Korea. This was a modest effort by Beijing to help diversify the existing international reserve currencies system, dominated by the US dollar, with a view to reducing the risk of a global credit crunch recurring.

Lest one believe the China’s quest for oil is all one-sided, in exchange for Africa’s hydrocarbons and minerals, China sold low-priced goods to its inhabitants. More importantly, it assisted African counties to construct or improve roads, railways, ports, power plants, hydro-electric dams, telecommunications systems, and schools. CNOOC won its $2.7 billion contract in the Niger Delta of Nigeria in 2006 when it was coupled with Beijing’s commitment to invest $4 billion to build economic infrastructure in the region. Since 2001, the PRC has completed 200 infrastructure projects in Africa.

Little wonder that during the first six years of this decade, China-Africa trade quadrupled to $48 billion a year in 2006, with almost 500 Chinese companies active in the continent on their own or in partnership with local firms. Chinese workers and executives became a common sight in the continent.

At the summit of the first China-Africa Forum in Beijing in November 2006, Chinese president Hu Jintao pledged a further $5 billion in assistance to the continent, cumulatively providing $20 billion in infrastructure spending and trade financing during 2007-2010. This was equivalent to the aid the World Bank gave to Africa in fiscal 2008 (July 2007-June 2008), after which, due to the slump in the Western economies which fund the World Bank, this figure declined.

Whereas financial assistance by the World Bank or the International Monetary Fund (IMF) comes almost always with the stipulation of liberalizing the economy – curtailing state spending and subsidies, slashing administrative bureaucracy, privatizing public sector enterprises, reducing tariffs, and so on – Beijing claims to offer its aid without any strings attached.

For better or worse, mutual non-interference in each other's internal affairs has been a cornerstone of the PRC’s foreign policy ever since the rise of Deng Xiaoping as the Supreme Leader in 1978. This policy has gone down well with several African leaders who – like their counterparts in Russia and Central Asia – resent lectures on democracy and unfettered market economy by the United States, the main player at the IMF and the World Bank. 

And such a policy indeed seems to be working. A survey of 47 countries by the Washington-based Pew Global Attitudes Project in 2007 found that in most African countries the proportion of those viewing China favorably to those viewing it unfavorably varied between 70 percent or more to 11 to 17 percent. Also, overall, China’s influence was widely seen as growing faster than America’s, and having a more beneficial impact on African countries than did the US.

Like all expansion of foreign aid and influence, China’s current rising stature is not without its problems like misallocation of resources and corruption. But with the West mired in the economic crisis of its own making, a prospering China has an unprecedented opportunity to build on its already powerful economy and project its influence with little competition.

 

Dilip Hiro is the author of Blood of the Earth: The Battle for the World’s Vanishing Oil Resources, Nation Books, New York. His forthcoming book After the Empire: The Birth of a Multipolar World will be published in January 2010 by Nation Books, New York.
Copyright © 2009 Yale Center for the Study of Globalization

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