China Starts Investing Globally

Hawkish Chinese buying spree, watch out! I guess as long as you keep those middle-to-upper class in check, there is no worry of an all out revolution to topple this authoritarian government.

February 21, 2009
China Starts Investing Globally
By DAVID BARBOZA

SHANGHAI — China is taking advantage of the economic downturn to go on a major shopping spree, investing in energy and other natural resources that could give it an economic advantage it has never had before.

Some economic analysts say they believe that China’s investments pose a threat to competitors like the United States. In the last move, Beijing said on Friday that one of its big state-owned banks, the China Development Bank, would lend the Brazilian oil giant Petrobras $10 billion in exchange for a long-term commitment to send oil to China.

China signed similar deals this week with Russia and Venezuela, bringing Beijing’s total oil investments this month to $41 billion. They represent an important investment. Supplies of commodities like oil are likely to tighten again once global growth picks up, and China will have a toehold it lacked during the recent boom, when it grew phenomenally even with limited access to resources.

But some analysts say China’s recent investments are welcome because they will help finance much-needed development, increasing the global supply of oil and natural resources at a time when many of the world’s biggest banks are reluctant to lend.

“It’s a good thing because a lot of projects have been postponed,” said Prof. Philip Andrews-Speed, director of the energy policy center at the University of Dundee in Scotland. “Oil companies may now have the money to produce oil.”

It is not just oil. This month, China’s biggest aluminum producer also agreed to invest $19.5 billion in Rio Tinto, an Australian mining company that is one of the world’s biggest. On Monday, China Minmetals bid $1.7 billion to acquire OZ Minerals, also of Australia, a huge zinc mining company.

China is flush with cash — thanks to trillions of dollars from decades of selling goods to the West — at a time when credit markets are tight and collapsing commodity prices have left energy and natural resource companies desperate for cash. For many of these companies, China has gone from pariah to lender of first resort.

“This is heavy energy diplomacy,” Professor Andrews-Speed said. “If you need money, you go to where the money is, and today, China’s the place.”

President Hu Jintao of China traveled this week on his “Friendship and Cooperation Tour” in Africa, where China has huge interests in resources and mining. The vice president, Xi Jinping, visited South America, met with the leaders of Brazil and Venezuela and signed cooperation agreements on oil and minerals.

Venezuela borrowed $6 billion from China and agreed to increase its oil exports to China, bringing China’s total investment in the country to $12 billion. In Brazil, China signed a $10 billion “loan-for-oil” deal that guarantees the country up to 160,000 barrels a day at market prices.

And in Beijing this week, Prime Minister Wen Jiabao met his Russian counterpart after China agreed to lend Russia’s struggling oil giant Rosneft and Russia’s oil pipeline company, Transneft, $25 billion in exchange for 15 million tons of crude oil a year for 20 years.

The investments are China’s biggest moves since 2005, when a Chinese state-owned oil company made an unsuccessful bid for Unocal, the American oil company, prompting worries about whether fast-growing China was seeking to tie up global resources.

But the world has changed drastically since then. Commodity prices have fallen sharply in recent months, after a long bull market that was partly fueled by China’s voracious demand for energy and resources. And China has built up nearly $2 trillion in foreign currency reserves, giving the country easy access to capital.

“What’s changed for China is that their key competitive strength has increased, and that’s capital,” said Andrew Driscoll, a resources analyst at CLSA, an investment bank. “A lot of companies are begging for capital.”

China wants reliable supplies of crude oil to fuel its growing transport sector; it needs iron ore for steel production, and copper and aluminum to build homes and consumer goods.

Analysts say there are still worries about whether China will compete with other nations, like the United States and India, for oil and other natural resources.

Analysts say China could continue to make deals this year for small oil and gas companies, mineral producers and mining firms.

This week, for instance, shares of the Fortescue Metals Group, an Australian mining company, rose after reports the company was in talks with China over a big investment to help the company expand operations.

In many cases, China has struck deals in countries that have access to large supplies of oil and minerals but where American and European countries are not well positioned, like parts of Africa and the Middle East. In one of the deals struck this week, China made an alliance with the government of Hugo Chávez, the president of Venezuela, who has denounced American leadership. While the oil deals announced this week vary in terms, analysts say they ensure China a steady supply of oil for decades to come, sometimes at favorable prices.