China stocks up on bargain oil

by Chris O'Brien

BEIJING| -- China is forging ahead with an overseas spending splurge, snapping up resources especially oil at bargain prices and strengthening its long-term prospects for growth before Western economies can bounce back.

A series of high-profile energy deals and mining bids in the past month marked an end to the nervousness that appeared to impinge on Communist Party leaders at the outset of the global financial crisis. Attention has turned from hoarding foreign exchange reserves worth close to $2 trillion to locking up future supplies. Oil has emerged at the top of China's shopping list.

In February, China secured oil supply deals totaling $41 billion with Russia, Brazil and Venezuela.

Among the most lucrative: an agreement reached with Russia, in which China will lend $25 billion to Russian oil giant Rosneft and oil pipeline company Transneft. In return, according to Russian news reports, China will receive 300,000 barrels of crude a day for the next 20 years at a rate of about $20 a barrel less than half the current price of $45.

While touring Latin America, Vice President Xi Jinping signed a deal to lend $10 billion to Brazil's state-owned oil company Petrobras. China will receive up to 160,000 barrels a day, again over a 20-year period.

A subsequent announcement from China's National Energy Administration further clarified Beijing's intentions. China is considering setting up a fund for China's three state-owned energy giants PetroChina, Sinopec and the China National Offshore Oil Corp. (CNOOC) to purchase oil and gas companies overseas. The firms will benefit from low-interest loans and direct capital injections, the announcement said.

The oil deals complement efforts to buy into the Australian mining industry. China's biggest aluminum producer, Chinalco, has submitted a bid of $19.5 billion to buy an 18 percent stake in beleaguered mining company Rio Tinto. Chinese firm Minmetals has offered $1.7 billion for Oz Minerals.

China also is seeking diversification of its foreign exchange reserves, now heavily in dollars. The head of China's energy bureau, Zhang Guobao, said earlier this week that China should accumulate more gold and uranium as well as other strategic commodities.

The spending spree extends to fast cars. Last month, a delegation of 90 Chinese companies, headed by Commerce Minister Chen Deming, toured Europe. Purchases included 37,000 BMWs from Germany and 13,000 Jaguars from Britain.

The purchases were a shrewd diplomatic move, pleasing European manufacturers, making a small dent in China's huge trade surpluses and undercutting the U.S. "buy American" drive, a policy that Chinese officials have been quick to criticize.

Song Hang, a researcher at the Chinese Academy of Social Sciences, summed up the strategy in the China Daily newspaper on the eve of the European tour, saying, "Chen can take a positive message to the world: China, as a major trading power, has no interest in adopting protectionism."

Parliamentary sessions in Beijing have spurred lively debates about how best to deploy China's mountain of cash. Commentaries in state media have called for the country to push forward with overseas acquisitions.

China "should take advantage of the current weak commodity prices in global markets by boosting certain strategic resource imports and converting some capital reserves into resources reserves," said an editorial in Outlook magazine, owned by the official news agency, Xinhua.

Much less coverage has been devoted to possible political stumbling blocks if China wields its purchasing power too assertively.

China faces opposition from those who feel Chinese companies, propped up by state cash, have an unfair advantage.

Rumbles can be heard in Australian parliamentary circles in light of the recent mining bids. Critics in Australia fear China is being granted too firm a grip on the country's resource markets, enabling Beijing to influence the prices of commodities.

Similar concerns derailed a bid by CNOOC to buy Californian oil firm Unocal for $18.5 billion in 2005. The Chinese company withdrew the bid after Congress vehemently opposed the proposed deal. Unocal was sold to Chevron, which had submitted a lower bid.

Global intelligence firm Stratfor warns of a backlash as other economies stabilize.

"China's rush to buy up resources, allies and markets faces charges of imperialism on an epic scale, bottom-feeding and taking advantage of the downtrodden," Stratfor said in a report.

U.S. companies have received minimal interest from China. The Unocal affair sticks in the government's memory, nestled just behind recent investments in Morgan Stanley and the Blackstone Group in which China lost billions of dollars.

A major factor, said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, is that China's acquisitions have been focused on resources that tend to be found outside the U.S.

But if China starts looking at U.S. firms, such as the struggling car industry, it might avoid another Unocal moment. Western economies are in such a weak position that they may not be so selective.

"If there were some opportunities in the U.S., there might be less congressional opposition than with Unocal," Mr. Lardy said. "The focus is on the domestic recovery and there is a greater recognition in the Congress that as long as we save little, we depend on capital inflows."