Investor’s Business Daily
By Doug Tsuruoka
May 13, 2009

Cash-rich and hungry, it eyes pacts with more nations around globe

First Of Two Parts

Officials at cash-flush Chinese sovereign funds make the rounds in Indonesia, meeting with the president and other power brokers, and lending out billions to build ports, rails and power plants to support more exports.
Brazil’s national oil company gets a $10 billion Chinese loan to finance crude facilities. Oil-rich Venezuela holds talks on China sinking billions more into a development fund. And Argentina, a major exporter of iron ore, gets access to more than $10 billion in Chinese currency.
The generous aid-for-trade deals announced in Latin America in April join similar moves over the past several years in Asia and elsewhere.
These are the opening moves in what some say is an expanded trade strategy that, if successful, could recast China’s role in the world economy.

‘New Direction’

The goal, experts say, is to secure long-term access to resources, bring prosperity to rural China by continuing to grow its industrial economy and hone the country’s economic edge.
Along the way, China aims to expand its clout by offering a cornucopia of financial capital and other aid to nations, such as Indonesia, that are hard-pressed for cash from other sources.
Perhaps most important, Beijing’s new stance signals it no longer will toe the line on trade and financial rules that big developed nations impose.
“The demand that everything they do must be cleared by the Western countries is what irks (China),” said a Chinese investment official close to the trade plan in an e-mail interview. “China has already moved in a new direction.”

Filling The Lending Gap

Less bruised by the financial crisis than other countries, China has lots of cash to dangle in front of developing nations.
China’s aid offers are alluring at a time when lending from Western banks has dried up and commodities prices have fallen, pressuring local economies.
But Beijing’s helping hand has one overarching goal: to build an export-focused infrastructure beyond its borders and an alliance of cooperating nations whose single purpose is to benefit China’s economy in years ahead.
James Lilley, former U.S. ambassador to China, says Beijing’s helping hand makes these nations more disposed to back China on a host of geopolitical issues.
“One example is getting Brazil, Venezuela and Sudan to side with them over time on allowing countries to create a 200-mile Exclusive Economic Zone off their coasts (that would prohibit entry by other nations) — something which the U.S. opposes,” said Lilley, who served in China under President George H.W. Bush.
An international policy shift of this type would allow China to treat oil fields in the South China Sea as part of its territory.
The Chinese overture especially appeals to nations like Sudan, since Beijing never makes human rights an issue in signing these deals.
An April 16 article in the New York Times on a recent flurry of Chinese trade deals with Latin America portrayed the move as an opportunistic thrust by China outside its region.
The article said China is exploiting perceptions that the U.S. has ignored the region to gain entry to nations such as Brazil. Anti-U.S. leaders like Venezuela President Hugo Chavez rolled out a red carpet for the Chinese.
But sources close to China’s Communist Party as well as outside analysts say the trade strategy is far more grand and global in scope.

Global Power Grab

Sources also say China, angered at investment losses suffered in the subprime crisis, is kicking the strategy into a more aggressive phase.
Similar deals are being eyed in Africa, Russia, Eastern Europe and oil-rich countries such as Kazakhstan in Central Asia.
“At high levels (in China), there is a definite recognition that the world has changed and that China’s position in the world is stronger and needs to be asserted — not for any expansionist purposes, but just to protect their own economy,” said Robert Lawrence Kuhn, a senior Citicorp adviser on China and a biographer of former Chinese President Jiang Zemin. Kuhn is the author of a forthcoming book, “How China’s Leaders Think.”
Kenneth Lieberthal, a noted China expert and Brookings Institution scholar, says the trade strategy isn’t entirely new.
The Chinese have quietly pursued a version of it for at least three years.
In April 2006, China President Hu Jintao signed a memo of understanding with Saudi Arabia for China to get a minimum of 1 million barrels of crude per day by 2010. Volume agreements of this kind with a single country are rare.

Alternative Trading Plan

Sources close to China’s ruling party say Beijing began piecing together an alternative trading system that reduced its dependence on the West, and particularly the U.S., in 2005.
The new trade system creates a fallback network of markets and trade allies in the developing world as a hedge to major consumers of Chinese products like the U.S. and Europe.
They say it was spurred to hunt for new doors to trade after the U.S. Senate tried to block it from buying U.S. assets such as the Californiabased Unocal oil company.
Lieberthal says China has stepped up its pace to exploit depressed commodities prices and shown a thirst for investment and credit in developing countries.
“China is one of the few countries with a lot of cash to spend now” on a large-scale “go out strategy,” Lieberthal said in an e-mail interview. China holds more than $1.7 trillion in foreign-exchange reserves, mainly in U.S. Treasuries and other fixedincome assets.
Lieberthal helped shape the Clinton administration’s Asia policy from 1998 to 2000 as special assistant for national security affairs and senior director for Asia at the National Security Council.
Sources close to China’s ruling party say Beijing is moving more overtly now to nail down long-term resource deals on a global basis.
These sources say it boils down to an attempt to build a “parallel trade universe” with resource-rich developing nations that will ensure access to oil, ore, food and other resources to feed China’s growing economy.
The investment and trade footholds are long term and meant to be developed gradually over the next 10 to 20 years.
The alternative trade system is overseen exclusively by the Communist Party, rather than the socalled “official” economy overseen by state ministries and a network of companies run by China’s military.
Key players in the strategy are three Chinese sovereign funds quietly launched in 2006. The secretive funds have hundreds of billions of dollars for investment at their disposal. They are chasing investment deals in countries in the Association of Southeast Asian Nations, Latin America, Russia and elsewhere.
These party-tied sovereign funds operate in cooperation with each other or better-known Chinese government sovereign funds such as the State Administration of Foreign Exchange and the China Investment Corp.

Angered By Subprime Losses

The decision to move forcefully to implement its alternative trading system is said to have been made late last year by the upper echelons of the Communist Party.
China was egged on by the global financial crisis that began in October. Chinese banks lost billions of dollars to bad investments in subprime loans.
Key party officials are said to blame the U.S. and other Western nations for the crisis.
Kuhn says he hasn’t heard China’s leaders use the term “alternative trading system.”
But he confirms that the financial crisis triggered a pivotal new look at trade and financial ties with the outside world.
“The Chinese leadership was really caught off-base by the financial crisis,” Kuhn said. “Early in 2008, they were still putting the brakes on the economy, and a lot of (Chinese) were complaining. Now they realize the crisis really burned them and that they have to protect China.”

Favorable Prices

Sources close to China’s ruling party say the aid-for-trade deals target developing nations that aren’t part of the Organization for Economic Cooperation and Development, which is mostly made up of developed nations.
This means the trade deals are done outside OECD guidelines that try to level the playing field in officially supported export credits, cash payment requirements, repayment periods and other terms. China is not an OECD member.
Kuhn says there are sophisticated ways China can lock in favorable terms for oil and other long-term supply contracts.
“It may not look like a sweetheart price on the surface, but the longterm nature and the certainty of the pricing make it so,” Kuhn said.
While party elders feel China must respect World Trade Organization and other trade conventions that it has signed, sources close to party leadership say the consensus is that China no longer can tie itself exclusively to the world trade system dominated by the longtime economic powers.
Some see a darker aim in China’s chummy trade posture with non-OECD countries.
“There’s certainly an element in the Chinese (trade) strategy to take on the U.S.,” said Lilley. “(China is) doing what the Japanese did to the U.S. in Southeast Asia in the 1960s. That is: come in, underprice us, subsidize their exports, take the market away from us and then raise prices.”