By Neville Bennett China clearly thinks the present world economic order does not provide the security it needs. Hence the recent drive for control of energy and raw materials. This may be as challenging to the world order as Germany was in the nineteenth century and Japan was in the 1930's. This is a response to the developing credit crunch. In an earlier piece I predicted a changing world order, as we saw in the 1930's, with increasing protectionism. China's quest for reliable resources is partly opportunistic. Great bargains are available, at a time when the alternative of stockpiling US Treasuries is subject to very low returns. Some Australian commentators perceive sinister intentions behind the Chinese investment blitzkrieg. Confirmation seemed to appear in with the new chief of China's steel industry association, Shan Shanghua saying "This will help China break the duopoly in Australian iron ore supply over time" at the time of Chinalco's $US19.5 billion (NZ$30.5 billion) investment bid into Rio Tinto. The Australian media is focused on a plot to drive down the price of their commodities. Where the Australians are concerned about losing a few dollars a ton for ore, others also wonder also about potential impairment of their sovereignty and autonomy. But first, a look at China's exposure to US Treasuries.
China's reserves Hilary Clinton significantly used her very short TV time to stress that China and the US are intertwined; and that China needed to keep buying US Treasuries to keep the US strong. According to Bloomberg, China increased its holding of US debt to US$696 bln or 46% of the total. China's reserves stand at $1.95 tln, 29% of the world total. China worries about its commitment to US Treasuries, and especially about who will buy the US$ 2.7 - $4.2 trillion of debt expected to be issued over the next two years. It has demanded guarantees. It is apprehensive about a depreciating dollar lowering its investment's value and yield. Foreign buyers bought only $200 bln of the US's $459 bln 2008 deficit. There will be deficit of at least $1.35 trillion in 2009, together with more bank bail-out money. So the US may need to raise $1 trillion from domestic sources: an amount of money not present. Even if the US raised its saving rate to 8% (which I regard as a dream) it would create only $800 bln of new saving, little of which could be invested in Treasuries because of competing corporate, housing and municipals needs. Thus China has reason to believe US funding is problematic and its reserves are vulnerable. China and oil reserves China has invested $41 bln in February 2009 alone in oil projects. The China Development Bank lent Brazilian oil-giant Petrobras $10 bln in return for a guaranteed 160,000 barrels a day long-term. This deal was signed when Vice-President Xi Jinping visited Brazil and Venezuela. China committed $12 blm to Venezuela in return for security of supply. Venezuela routinely denounces American leadership. Meanwhile the Chinese Prime Minister met with his Russian counterpart and agreed to lend Russia's struggling oil-giant Rosneft, and Russia's oil pipeline company, Transneft, $25 bln exchange for 15 million tons of crude oil a year for 20 years. China's President travelled to Africa, where China is developing gigantic interests in resources. China is developing access to countries where American and European interests are weak. China and the "Lucky Country" Australia is facing cruel dilemmas in its relationship with China. China is its best customer, and Australia is happy to supply it with raw materials. Australia also welcomes some Chinese direct investment. But it is nervous about giving China control of key resources. Chinalco's $19.5 bln bid for a share in Rio Tinto's aluminum interests comes close to control. China maintained its diplomatic offensive by sending the head of its sovereign wealth fund to meet Australian business as well as Prime Minister Kevin Rudd, Treasurer Wayne Swan, and Future Fund chief David Murray. Rudd was unhappy about Chinalco's bid but relaxed about other deals. These include Chinese involvement in Oz Minerals and Fortescue Metals. Australia has been profoundly satisfied with its China relationship. It has enjoyed a huge, stable market for its resources. China has paid very good prices and indicated a desire for a long-term relationship. This has permitted business to accept the risk of mobilising vast amounts of capital, not only to create mines, but a transport infrastructure and expensive port facilities. The Chinalco bid changed that: Australians think they are losing control and being dragged into servitude. This panic is not easily explained since China has invested in Australian iron ore and aluminum smelting since the 1980's. Japan owns half of BMA, the world's largest steel-making coal supplier. Moreover, there is no record of China behaving other than a profit-maximizing corporation. Nevertheless, the Australian Foreign Investment Review Board reportedly asked for assurances that the deal would be "commercial". Rio's shareholders are furious about the preferential terms in the bid and a possible loss of control. There is an array of opinion on the deal among government departments. Kevin Rudd is in danger of being painted into a corner as an unpatriotic: "Our Chinese-speaking Prime Minister will undoubtedly favour the proposal," wrote former Treasurer Costello, who advocates that Australia should reject the Chinalco deal. Rudd may need to get something like a free-trade agreement to placate opinion. But the dilemma remains: whether to get even closer to China and enjoy the payoff of better access to capital and markets, or escape from the bear-hug and see Chinese investment flow elsewhere. Some trends China has felt insecure in competition with the West for reliable energy and mineral resources. It is using its huge cash reserves to get advantages that it has hitherto only dreamed of. Its exclusive contracts for reliable supply may seem a threat to the West, but its intent definitely seems defensive so far. China has faced restraints in boom times and is working against their repetition. It is providing much needed investment when banks lending has shriveled and many other development projects have been put on hold. ------------------ *Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared.