Sunday, January 3, 2010

Fueling China’s Oil Addiction

In the first decade of the new millennium, China has spent an estimated $115 billion on foreign acquisitions. With $2.1 trillion in foreign exchange wealth, China is going on a shopping spree. According to Forbes magazine, China’s investment abroad doubled from $25 to $50 billion last year. To put that figure in perspective, the U.S. invested $318 billion abroad as the largest exporter of capital in the world.

Quenching China’s thirst for oil will be no small feat. China has been busy forging strategic partnerships in Kazakhstan, Iran and Brazil, as well as outbidding formidable competitors Exxon Mobil and Royal Dutch Shell on production licenses. In Nigeria, CNOOC, one of China’s top three state-owned oil companies is trying to obtain licenses on one-sixth of the country’s oil production and meeting plenty of hostility from opponents. Nigerian economic advisers, on the other hand, are thrilled as they will ultimately win from the bidding war.

The real question is if these investments are creating sustainable and responsible economic growth for the Asian lion. Speculators fear that China’s real estate market is already overvalued and that domestic consumption will not be enough to fuel the fire. With huge trade surpluses in dollars, China’s economy is off kilter. As in the U.S., stimulus spending and lending is not a recipe for sustainable long-term growth. Further, supporting China’s enormous aging population will put extra strain on Chinese workers in the coming years. Economists assert that China needs to drive household incomes and private consumption asap. A stronger reminbi will boost purchasing power and make buying foreign assets even cheaper. Although it’s hard to hate on 8% growth in the first half of 2009, perhaps Beijing should focus on supporting small businesses, ensuring equitable opportunities to its less developed Western regions, and fostering innovation in cleaner energies.

Growing in these areas may not seem as strategic as big power plays in Iran, but it will surely create less political opposition to its foreign acquisitions. China learned a tough lesson in 2005 when it tried to buy Unocal, a Los-Angeles based oil company, and received plenty of flack from Washington, D.C. After Beijing’s aluminum company tried to buy 20% of Rio Tinto, Australia’s investment board recommended that no foreign enterprise be allowed to buy more than 15% of natural resource companies. And most recently, Obama’s tire tariff comes across as a slap on the wrist to the Chinese. But the U.S. generally should not close itself off from Chinese investment in American assets. Rather a little international cooperation to define the rules of the game would go a long way.

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