SHANGHAI — Over the last year, the Chinese government and some of its largest companies have hopscotched the globe, from Australia to Angola and Canada to Sudan, writing huge checks. The idea is to secure supplies of oil and other raw materials with which to prime China’s formidable industrial sector.
Last month, as President Hu Jintao jetted around South America, Argentina won deals worth $20 billion, much of it in railways and energy exploration, and Brazil was not far behind, with China agreeing to build roads and pipelines to help get resources to market.
It is tempting to see this shopping spree as a sign of strength, or even proof of China’s emergence, finally, as a true economic rival to the United States.
But many analysts look at China’s global push for resources – and especially the hefty prices it is paying – as a sign of weakness and national insecurity.
The reason for Chinese anxiety, particularly in energy markets, is that big Western companies are already well established in the richest oil regions and can outdo China’s producersfinancially. China also sees the American military presence in places like Iraq, Afghanistan and Uzbekistan as part of a drive to control Central Asia’s rich oil reserves.
“China can be competitive in markets where they face the junior varsity, but not with the varsity,” said Andrew Thompson, a China expert at the Center for Strategic and International Studies, in Washington. “Paranoia is one way to describe their behavior. I would call it an acute awareness of their vulnerability. The new kids on the block who lack faith in the rule of law because they don’t have it themselves, they don’t see the international system as being in their favor, and engage in a constant quest for vertical integration in their business dealings, wanting to control every aspect of whatever it is they need.
“The basic reality, though, is that they don’t have the ability to compete internationally yet.”
While a few nations where China is signing expensive oil deals are major producers – like Iran, where Beijing committed $200 billion last month – most are niche players. China is spending a reported $1 billion in an oil deal with Brazil that includes building a pipeline, an investment that some analysts say may cost three times the market value of the oil involved.
China has also invested heavily in Sudan to find, drill and ship an estimated 70,000 barrels of oil a day, a relatively small return. In Angola, China recently committed $2 billion to exploit an oil field with an estimated daily output of just 10,000 barrels.
If it turns out that China is paying too much for resources, the world economy could feel the effects.
In one closely scrutinized deal, China’s state-owned Minmetals Corporation is bidding to purchase Noranda of Canada, the third-largest zinc producer and ninth-largest copper producer in the world, for a reported $5.5 billion. The deal is expected to include assumption of a substantial amount of debt not reflected in the cash price, and appears to be based on the assumption that commodity prices will stay high indefinitely, said Jason Kindopp, a China analyst at the Eurasia Group, a New York-based political-risk consulting firm. Mr. Kindopp said that China risked waking up one day to find itself holding vastly inflated contracts in a global recession in commodities, much the way Japan suffered major losses after having overpaid for international assets during its boom in the 1980’s.
The difference between Japan then and China now is that Japan’s economy was far better prepared to withstand such shocks.
“Wanting to go out and buy equity in natural resources is not inherently wrongheaded, but you have to travel pretty far down the road, in terms of conspiratorial views of the world, in order to justify the way they are going about it,” Mr. Kindopp said. “China’s economy is grossly imbalanced at this point, with an overwhelming dependence on investment versus consumption – possibly the most imbalanced country in human history,” he said, adding that “China is paying peak prices for commodities today, and if their economy stumbles in any significant way, we are going to see really significant declines in the prices and some very serious pain as a result.”
Other experts acknowledge a speculative bent in the way China is investing, but say the Chinese deem the prices justified by the sense of security they bring.
“Chinese companies are not as mature as Shell or BP, which can evaluate their risk better, but for now, their priority is to go out and find new supplies,” said Han Wenke, vice director of the Energy Research Institute, a part of the Chinese government’s State Development and Reform Committee. “It is very difficult to say if these investments will pay off in the long term. But all of these companies – state-owned companies – have stockholders, and they will control that.”
Copyright 2004 The New York Times