Moon of Alabama Brecht quote
April 25, 2009

China's Resource Strategy

As Bernanke is doing his best to actively create inflation, the Chinese look for ways out of the immense amount of dollars they hold and to minimize their losses.

It took a while but their strategy is now clear. The will buy as much natural resources as they can get for the currently depressed prices.

Iron ore:

Although iron ore demand in other countries is slumping, in China demand is apparently increasing. In the first quarter of this year, China imported 131 million tons, up 18.8%, year on year. In March alone China imported 52.08 million tons, 46.2% over the same month last year and a record high.

Oil:

China has said it will build the second phase of a strategic crude oil reserve with a capacity of 26.8 million cubic metres, or nearly 170 million barrels, after filling its first four reserve bases with total capacity of 100 million barrels.

Copper:

China, which accounts for about 30 percent of global copper demand, imported a record 296,843 tonnes of refined copper in March, up 137.6 percent from a year ago.

Gold:

China has boosted its gold reserves to 1,054 metric tons, according to a Friday report by Xinhua News Agency, which cited Hu Xiaolian, head of the State Administration of Foreign Exchange.

The increase makes China the world's fifth-largest holder of gold, just ahead of Switzerland, and among the six nations plus the International Monetary Fund that have reserves of more than 1,000 metric tons.

Other stuff:

China Inc. is drawing increased attention as Chinese companies snap up mining and energy assets around the world. China announced foreign acquisitions totaling $52 billion last year, two-thirds in natural resources, according to Dealogic. This year, there have already been 65 deals totaling $23.2 billion, nearly all in natural resources, Dealogic says.

Where China can not buy directly, it invests via loans:

Beijing - China and Russia on Tuesday signed an oil cooperation deal involving the supply of Russia oil in return for record loan of 25 billion dollars from China. Chinese Vice Prime Minister Wang Qishan and his Russian counterpart, Igor Sechin, signed government agreements in Beijing to finalize the deal.

Further loan for oil deals were made with Kazakhstan, Brazil and Venezuela.

I think this is a very smart strategy. With demand in the rest of the world in decline due to the Second World Depression, resource prices are still falling. That is a good time to buy in bulk and to hoard for times of higher demand and prices. Paying for these resources in dollars will give China more value than the declining treasuries in now holds.

This will not solve China's treasury headache though. As long as it pegs the yuan to the dollar it will have to keep buying treasuries and there may not be enough resources readily available for China to buy right now to again get rid of these. Eventually the dollar peg will have to fall. But up to then China will do its best to convert its treasury holdings into tangible assets.

When the world economy eventually rebounds China will have the big advantage of having cheaply bought raw materials in stock while others will then have to buy them for increasing prices.

Posted by b on April 25, 2009 at 11:01 AM | Permalink

Comments

Yes. This is one of the reasons i've been saying that the current depression is perfect for advancing China's interests.

Beyond that, though, i'd draw attention to another tine on the fork that's picking apart the old world order: China's intent to subvert ASEAN with cheap loans that directly challenge the IMF and World Bank. This, carried out over the long term, would have effectively shifting all of Asia onto an RMB currency standard at precisely the time when the U.S. and Europe are grasping around for ways to prop up the underpinnings of their post-colonial, credit-based economic systems.

The Euro, however, is -- and correct me if i'm wrong on this, b -- based on blue-chip European stocks, right? Whereas the Dollar is based upon, basically, "trust" as defined by the post-WWII environment -- which translates to oil and a big military -- and not much else.

ASEAN idenitifies with a few basic princiles: "non-interference, informality, minimal institutionalization, consultation and consensus, non-use of force and non-confrontation" (from Wikipedia, so take it as you wish). These are, if i may be permitted a bit of stereotyping, very Asian principles, very Chinese, and very much not U.S.-American.

So on one side, the Chinese are buying up cheap resources, putting their glut of dollars to the best use right now, while the getting is still good -- and on the other side, they're willing to convert those dollars into loans to other nations, using the dollar's current value to pry open more local, Asian economies and tie them closer with their own.

If the U.S. dollar fails, those loans aren't going to disappear; they're going to form a solid source of income for the Chinese economy, while at the self-same time undermining the ability of the U.S. to cushion itself against international currency devaluations. For the ASEAN economies, they'll be getting the best of both worlds: neither China nor the U.S. will be interested in invading them, so long as they are a reliable creditor, while any effects upon one or the other currency will be much mitigated by having much of their infrastructure and wealth underpinned by the other.

What just fascinates me is that ASEAN was created specifically as a means of opposing the CCCP. That China can so overtly make these overtures towards those nations, here only 40 years later, makes me shake my head in wonder. It remains to be seen how they will react towards the gestures, but i suspect that Indonesia, Malaysia, and Singapore will be extremely friendly towards the idea (the first two because they are Muslim states, and the last because of its powerful and practical ethnic Chinese elite). That will leave the Philippines, Japan, South Korea and Taiwan on the outside, but while each is opposing the Chinese cultural advance in their own way, they also each have open weaknesses to it in others.

Posted by: china_hand2 | Apr 25, 2009 11:39:45 AM | 1

Oh: and of course, Thailand -- but Thailand's a basket case that tumbles with the wind.

I should learn how to use the "preview" button.

Posted by: china_hand2 | Apr 25, 2009 11:42:55 AM | 2

I should learn how to use the "preview" button.

Yeah, but with typepad, you have a 50% chance it will fuck it up too. Why b keeps this shit I'll not guess at but, I will say, it seems to be meant to slow down dissemination of information.

Posted by: Uncle $cam | Apr 25, 2009 12:17:17 PM | 3

The Euro, however, is -- and correct me if i'm wrong on this, b -- based on blue-chip European stocks, right?

No - the Euro is just a fiat currency like all others.

Posted by: b | Apr 25, 2009 12:29:34 PM | 4

the euro is based on a typical consumer shopping cart to measure inflation, which the ECB is supposed to keep under 2 percent

Posted by: outsider | Apr 25, 2009 1:28:06 PM | 5


the other winner is Germany because pretty soon the West may have no choice but to free Germany to compete against China for shelf-space in Walmarts. At which time the Germans will promptly peg the deutchmark against the yuan for maximum export muscle. Ironically, the West continues to be far more afraid of Germany than it is of China.

Posted by: jony_b_cool | Apr 25, 2009 1:57:10 PM | 6

I think you're overthinking it. With the exception of their new strategic oil reserve and the drawdown that created, China waited until all strategic metals hit below their cost of production when warehouse and mine stocks had peaked and flattened as mines began to shut down. Then they ordered enough replacement stock for their next orders and for their own strategic construction planning, since they are a martial economy. With the exception of palladium which spiked on the false cold fusion rumor, metals prices are heading back down again and stocks are increasing. At some point, when the price is below the cost of production and mines are shutting down, you would have to be brain dead NOT to stockpile strategic metals, whether you're Joe 6 Pack or Wen Ho Lee, because currencies have been inflated by all the industrial countries, and the cost of producing strategic metals cannot become less, especially uranium yellowcake. A crawlspace stuffed with silver is better than a bank account overflowing with pixels.

Posted by: Peter Piper | Apr 25, 2009 9:16:54 PM | 7

Peter Piper:

You neglect the part where the Chinese have been buying up mining companies, as well. Several, all over Australia and South America.

That's a lot more than just stockpiling.

Another thing you neglect is the astronomical pace at which the Chinese economy has been expanding.

Just "covering their [next] orders" would mean little more than a few months-worth of metals stock, if that. However, the most recent 15 year plan -- which began only a few years back -- calls for precisely the sorts of acquisitions that b is describing: mines, mining companies, massive oil reserves, guaranteed access to oil in sufficient quantities to sustain a huge expansion of their auto industry, consolidation of all major industrial resources and industries along the auto-industry vertical, and a push for the development of high-end, luxury goods to Europe, Japan and the U.S.

They don't intend to be primary exporters of those goods in such a short time, but they do want to have a luxury automobile or two on the market by the end of that time.

It all begins with consolidation of resources and industry, which is precisely what we're seeing now.

Posted by: china_hand2 | Apr 25, 2009 10:50:55 PM | 8

Thanks to both b and outsider; i'd be much obliged, outsider, if you could point me in the right direction to read up on the mechanisms you're describing in #5. I'd like to understand it more, but i don't know where to begin.

Posted by: china_hand2 | Apr 25, 2009 10:57:42 PM | 9

@ china_hand2

wrt ASEAN. You seem to neglect the internal political changes that may take place in some of the countries with the waning of the US (imperialists) influence. "traditional" ruling elites and arrangements may fall under pressure from increasingly empowered and assertive masses. This may further skew things in the region away from the current "world order". Thailand seems to be a ripe example of this among other cases.

Posted by: a | Apr 26, 2009 3:04:15 AM | 10

Wait until China gets its hands on Methanosarcina barkeri biotechnology and buys out GE's methane gas turbine line, and becomes the first country to achieve clean coal and clean cellulosic, then sells that technology back to the US under the Onus of Global Cap & Trade, transferring a GCC $B bleed to a Beijing $B bleed just like that.
http://www.csievents.org/Cleantech2009/abs.html?i=10048

Posted by: Golly Geewillikers | Apr 26, 2009 3:38:29 AM | 11

At which time the Germans will promptly peg the deutchmark against the yuan for maximum export muscle.

I have something to tell you about the Deutsche Mark... ;-)

Posted by: Qlipoth | Apr 26, 2009 4:48:09 AM | 12

@a:

Neglect?

I thought i implied that?

Posted by: china_hand2 | Apr 26, 2009 4:58:59 AM | 13

b -Thanks for overview and analysis.

@Uncle #3 re balky typepad -

The easiest workaround I have found for typepad, when it gives you one of those "cannot post" messages after editing: 1) open MoA in a new screen, 2) cut and paste my edited post from the nonfunctioning screen to the new screen, 3) hit "post" button in the new screen.

This has worked every time so far.

Posted by: small coke | Apr 26, 2009 10:49:13 AM | 14

wrt ASEAN. You seem to neglect the internal political changes that may take place in some of the countries with the waning of the US (imperialists) influence. "traditional" ruling elites and arrangements may fall under pressure from increasingly empowered and assertive masses. This may further skew things in the region away from the current "world order". Thailand seems to be a ripe example of this among other cases.

I hope you see the irony here: cheering the replacement of American "imperialism" (though I'll be damned if I can find it) with Chinese mercantilism and political hegemony, as though this were supposed to be an improvement. If directing state-owned firms to buy up the means of production in foreign countries does not constitute economic imperialism, I don't know what does. Likewise, subsidized loans from Chinese state-owned banks does nothing but foster dependency in the recipient countries. There are already political strings attached (mostly along the lines of 'ignore Taiwan'), and we're only in the beginning stages.

It remains to be seen how China will actually behave when all these processes have run their course - but considering that the PRC is an authoritarian, state-capitalist dictatorship, I suspect that 'empowerment of the masses' is very much not in the cards.

Posted by: Matt | Apr 26, 2009 6:43:11 PM | 15

right on, matt

Posted by: slothrop | Apr 26, 2009 7:20:02 PM | 16


@15/@16
no nation or foreign leader should have to choose between being an American stooge or a Chinese stooge. Nor be compelled.

Posted by: jony_b_cool | Apr 26, 2009 7:52:49 PM | 17

Having a superpower that is:

A) loathe to build up its military beyond defense of its own borders, and
B) capable of marshaling enough soft-power to make up the difference, so that it rivals the U.S. and Europe internationally

is a good thing. It would have the effect of expanding the world from a single axis of propaganda into a space where dialogue can take place, while at the same time casting a stark contrast to the European-American colonialist model of international relations that has ruled the world for the last three hundred years.

So to slothrop and matt, i say: at best, you're wishing for a pipe-dream utopia that ain't gonna happen, not in our lifetimes. You want someone who can fight the U.S. and will bring the second nirvana of Jesus Mohammad down to create heaven on earth? Fat chance. The best we can hope for is for China to rise and be able to fend off the U.S. imperialism using soft-power while deflecting Euro-american advances from open combat.

And i find it funny when matt says:

"....the PRC is an authoritarian, state-capitalist dictatorship...."

State-capitalist? Is that something like when the government steps in and props up economic foundations with massive influxes of capital that are distributed solely among the managing elite, while the rest of the country falls into massive unemployment and economic stagnation? Wouldn't that also be when the State directs and manages production and scientific development through government-sponsored contracts that are disseminated primarily through its military and state-managed bureaucracies? Or would that be when the State decides which manufacturers survive and which are sent off to bankruptcy and restructuring?

"Authoritarian" would be something along the lines of a nation that doesn't recognize Habeas Corpus, uses torture as a means of establishing, validating and disseminating propaganda narratives, and has a massive police state that imprisons large numbers of its own population for political and ideological offenses, rather than violent ones, wouldn't it?

Now, "dictatorship" might be harder to pin on the U.S., but saying that the CCCP is run as a "dictatorship" isn't any more accurate. The highest levels of leadership in the CCCP are power-sharing arrangements, not a dictatorship. It's really more of an oligarchy, and has been enforced as such ever since the Gang of Four incident. Hu may be president, and nominally the one with the final say, but he shares much of his power with Wen and there are many areas where he can only advise, not directly intervene. Lumping the CCCP in with regimes like that of Baby Doc Duvalier, the Saudi King, Manuel Noriega, or Idi Amin is shallow and disingenuous.

I'm not saying i prefer the Chinese ways to the U.S. ways; but i am saying that, in light of how the two systems have been recently developing, i honestly can't see a whole lot of difference.

Now, China's excuse for its government excesses is that it's a once-proud empire that was ravaged by more than a century and a half of vicious colonialist aggression, now at long last picking up the pieces of its palaces and re-assembling them. Make an omelet, eggs get broken.

The U.S., however, has been at the top of the world's social order for some 20 or 30 years now, at least (i'd push that back to 50 or 60, even). In that time, it's been promoting war and intensifying social stratification and police repression among whatever peoples it involves itself (don't believe me? Compare 1980's Hungary to 1980's El Salvador, and then let's talk). Most recently, its elite took it upon themselves to run armageddon across two defenseless countries, solely for the sake of grabbing up more oil. Its economy is today founded on a "military-industrial complex", as one of its Presidents so famously stated, that is now back-biting into its own domestic culture with massive prison institutions that far outnumber, per capita, anything Chinese peasants have to face down.

So what's its excuse for all that? Really, you two are just playing the old American Exceptionalist card: "The devil you know must be better than the devil you don't." You pretend as if the Chinese system represents some horrifying de-volution from the current world order, and further pretend as if the current order represents some sort of enlightened achievement of high humanity.

But where are all these advantages y'all're advertising, here? Slothrop, you're a free marketeer; China is now at long last maneuvering itself into a position where it can compete with the U.S. on even ground, without fears of the U.S. breaking the rules by starting a war. It's entering "the marketplace of ideas", yeah? Are you suddenly now going all ideological on us, and retreating into "it's only a fair market if its managed by white people"? Have you lost all sense of reason? So much for a rational market, then, yah?

By definition, the Chinese system is going to have things in it that Americans aren't going to like. But whinging around about how really, we all know the US/UK is better for people, better at heart, better in practice, blah blah blah doesn't add a tiny jot of anything productive to the process or discussions about where its headed. It's just one more instance of Americans hearing how weak their standing truly is and then sticking their fingers in their ears and screaming "Lalalalala! We're white! We're right! And if you don't believe us, we'll fight!"

And pardon me for pointing out: haven't we had enough of that, these last 30 years? It was the same under Reagan, the same under Bush I, the same under Clinton, the same under Shrub, and now here we are at Obama, watching the economy fall apart and witnessing the greatest government giveaway to the rich ever (or at least, since the railroad land-grab...) --

and you two are whining about how things are still better here than they are in China?

Well, i got news for ya:

Considering where the race was begun, back fifty years ago, that's a pathetic standard indeed.

Posted by: china_hand2 | Apr 26, 2009 10:35:16 PM | 18

On the other hand, what China is not stockpiling so much anymore is US trash. Cardboard and other recyclable materials are piling up in the US as China and other dumping grounds refuse it. Good for them, let it fill up all those suburban back yards.

Posted by: biklett | Apr 26, 2009 11:04:01 PM | 19

I think China will hang on to some amount of USD as a hedge against the US deciding that their international resource purchases and supply agreements are contrary to national interest (of the US) and seeks to unwind them by hook or crook. Having a hand on the button that will turn the dollar into toilet paper will be helpful going forward. Call it insurance.

Posted by: peedee | Apr 27, 2009 12:29:12 AM | 20


and China makes the choice not to be the "White Mans Burden". We should at least do the best we can to pretend its really cool.

Posted by: jony_b_cool | Apr 27, 2009 8:33:37 PM | 21

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