Reaction of Western markets to a Chinese central bank announcement of a rate increase was a hint of troubles ahead. For, willy-nilly, the world is getting increasingly entangled in a horrendously distorted Chinese economy. Those distortions will inevitably lead to a bursting of the Chinese bubble, in some form or other, and for what measure of domestic economic and political fallout is unpredictable.
The rate increase — relatively small and less meaningful than such increases in the industrial economies — touched off a drop in the minerals and, even temporarily, the oil market. It was intended, as Chinese leaders said, to slow Chinese growth — which officially, at least, had jumped almost another percentage point in first quarter 2006 over the already 9.5 percent claimed for last year. If the brakes held, Chinese raw materials imports would drop. [In fact, there seems general agreement China’s rate of growth of fossil fuel imports has already slacked.]
The market recovered when second thoughts indicated it was less than met the eye.
A basic problem is few people know what is actually happening in the Chinese economy. That is a combination of many factors. But the level of corruption — almost weekly revelations of massive bank embezzlements, for example — is so great no one can do business in China, Chinese or foreigner, without to a greater or lesser degree participating. To talk frankly would be self indictment. So those who know don’t talk, and those who talk, don’t know.
Since more than half its economy still remains in government hands, decision making inside the government dictates what happens in the economy. And “government” means Communist Party, the new “mandarinate”, the privileged class which is the parallel, real governance. Party decision-making is opaque and economic decision-making often lies with leaders who while they have expert advice at hand more often than not make those decisions for purely narrow political reasons. The main political reason, of course, is to maintain Communist Party control
Reared in an environment where the most primitive “politics” was the norm, that means economic decision-making is often totally flawed.
Take the issue of China’s growing energy imports. The Chinese are hysterically running around the world, trying to “secure” supplies of oil, gas, coal — and even nuclear fuel in Australia. Often, as in Kazakhstan where they bought an oil property at a price well above market, they are paying premium prices [and bribes]. That may well be the case in Sudan where they bought out Canadian interests under pressure from human rights activists.
So, in effect, it is not only Chinese increased consumption — and energy inefficiency three to five times worse than Western Europe’s because of internal pricing and other policies — but its “uneconomic” transactions in the “:fungible” oil markets which is contributing mightily to the present worldwide price spike.
Yet is the Chinese leadership — through ownership of foreign oil properties — actually meeting the “security” needs of a Chinese economy increasingly dependent on imported fuel?
Not so as you could tell it. “Ownership”:of Sudan’s oil — as in other politically fragile producing states where Beijing is trying to make deals [the latest, troubled Nigeria] — is not going to insure China’s supply in any kind of international blowup. Ironically, China’s lifeline to Middle East, African — or Venezuelan oil [if it can learn to accommodate itself to that country’ peculiarly “heavy” crude] — depends on the U.S. Navy’s maintenance of the world’s commercial lifeline out of the Persian Gulf, through the Strait of Hormuz, through the Strait of Malacca, and the threat of growing piracy in the South China Sea. [Another attack on a supertanker occurred as May opened.]
If China is pursuing “peaceful rising” as its leadership tells the world, a shrewder energy policy would be to use other people’s money, superior expertise, and even political savvy to boost total world energy production and, thus, to lower prices for all importers..
In Japan’s period of similar super rapid growth, when it too was “the world’s factory”, it pursued just such a policy. Japan used the world’s oil industry to provide itself with the lowest fuel costs in the world. In the period before yen convertibility — much as the yuan now — the Japanese allocated foreign exchange to oil importers every six months. Those companies [the majors and their Japanese partners], who brought in the lowest priced oil, got the major share of increased allocations as the total market grew. [Later an adjustment was made for quality.] The policy served the Japanese well as they, like the Chinese today, depended on the American armed forces for the security of their Middle East pipeline.
But Beijing seems more intent on arm wrestling with the world’s oil veterans — just one instance of how China is a growing destabilizer as well as a godsend to raw materials producers and consumers of its cheap manufactures alike.
Sol W. Sanders, (solsanders@cox.net),
is an Asian specialist with more than 25 years in the region, and a former correspondent
for Business Week, U.S. News & World Report and United Press International.
He writes weekly for World Tribune.com and East-Asia-Intel.com.
