Search Wednesday December 31, 2003

China's hunger for resources grows
Beijing's focus shifts
By Philip Bowring (IHT)
Wednesday, December 3, 2003

HONG KONG: When Prime Minister Wen Jiabao of China visits Washington on Dec. 9, he will carry with him a new perspective on international trade. While most of the world worries about the competitiveness of Chinese manufactured goods, policymakers in China are turning to the strain that rapid economic growth and demand for natural resources will place on its balance of payments. The shift in emphasis has strategic as well as international financial implications.

The reassessment results from a 40 percent leap in China's imports over the past year, which has made a huge dent in its trade surplus. The rise is partly the result of a self-reinforcing trend in commodity markets. China's growth has been the biggest single factor pushing demand ahead of supply of many mineral and some agricultural commodities, driving prices and China's import bill higher.

Some of this may be temporary, the result of domestic stock building and international speculation. But it is also a consequence of years of weak global investment in minerals and plantation agriculture, and the depressant impact on global production of farm price distortions caused by export subsidies. It is quite likely that demand growth in developing countries, headed by China, will ensure a sustained bull market in commodity prices. If that is the case, China's trade surplus will soon be history.

A sense of future vulnerability partly explains China's reluctance to revalue its highly competitive currency, and its willingness to increase foreign exchange reserves to levels that seem unnecessary and have contributed to excessive credit creation. Revaluation - under pressure from countries such as Mexico as well as the United States - still looks likely and will not drastically reduce the competitiveness of China's manufactured goods.

But there is concern in China that economic growth led by manufactured exports may be constrained for years by current overdependence on a saturated U.S. market, and by new barriers in other countries to Chinese market penetration. China's fixation on foreign investment in manufacturing to create jobs and modernize industry is beginning to shift as it looks toward sustaining economic growth in less benign global circumstances.

The expansion of domestic demand must and will continue, but it requires physical as well as financial and human resources. China's economy is at a stage of development involving especially large increases in raw material inputs.

Indeed, what many now regard as possible excessive investment in manufacturing will put downward pressure on finished product prices and thus increase demand for the raw materials that go into them.

China will be spending an increasing amount of its foreign exchange on buying foreign resources companies, or buying into supply sources. Various foreign oil and gas deals this year are probably just the start of huge investments in new and existing capacity. China is competing openly with Japan for priority access to Siberian energy.

With his recent visit to Australia, President Hu Jintao gave notice that China regarded Australia's position as a reliable resource supplier as rather more important than its playing regional "deputy sheriff" to the United States, a role that China finds distasteful but unthreatening.

China's future resource investments alone suggest that its appetite for low-yielding U.S. debt will diminish, whatever happens to its overall balance of payments. Investing just 20 percent of China's $350 billion in foreign reserves would have a huge impact on corporate global resource ownership. Although some U.S. commodity exporters will continue to benefit, the longer-term implications are negative for a United States needing foreign capital.

The implications are positive, however, for countries whose economies are complementary to China, such as Brazil, Russia, South Africa and most of Southeast Asia, as well as Australia and Canada. Countries able to offer resources and able to buy more Chinese manufactured goods in return will attract China's strategic investment, as well as trade, as it seeks both to secure supply and profit from its own demand. China's resource vulnerability will shift the focus of global attention over the next few years.