China Goes on a Smart Shopping Spree

China Goes on a Smart Shopping Spree

The world might be sinking into its worst recession in generations, but
China is on a wild shopping spree. Sitting some $2 trillion of cash
reserves, Beijing is taking advantage of the woes of others to cement its
grip on new sources of commodities ranging from olive oil to crude oil —often at fire-sale prices.

China’s growth rate may be slowing in concert with the world economy, but
even at that slower rate, its economy continues to expand, requiring a
steady increase in supplies of oil, copper, aluminum and other minerals. And
laying in sources of supply for those commodities also helps it prepare for
the next boom. As economies across the world shrink, Chinese officials have
told reporters in Beijing in recent weeks that they see a rare chance to
expand its sources for primary commodities. “There are editorials in the
Chinese press saying that this is a one-in-one hundred-year’s opportunity,”
says Erika Downs, China energy fellow at the Brookings Institution in
Washington. “There is a sense that this is a moment to be seized, that with
competition lower they can get a good deal.”

Recent deals with Brazil and China highlight Beijing’s ability to use loans
a means of securing energy supplies. In mid-February, Beijing negotiated a
$10-billion loan to Brazil’s state-owned oil company Perobras, as well as a
$25-billion loan to Russia’s state-run oil company Rosneft. Both companies’
revenues have plummeted in recent months as crude oil prices fell by more
than two-thirds. China offered large cash amounts in a tight credit market,
but rather than require that the loans be serviced and repaid in cash,
Brazil and Russia will repay the loans in crude oil supplies to China over
the next two decades. Russia will ship eastern Siberian oil, while in
Brazil, China hopes to get a share of major offshore fields which have
recently been discovered. So, no matter what happens to the global economy,
China is assured steady oil supplies over the next 20 years from two major
oil-producing countries, in regions which are far more politically
stable than China’s suppliers in Africa.

But China’s shopping spree has gone far beyond oil. The Australian
government is examining a bid by the Aluminum Corp. of China or Chinalco
to buy an 18% stake of the heavily indebted minerals giant Rio Tinto,
for about $19.5 billion. It is also considering a bid by the Beijing trading
company Minmetals to buy Australia’s mining company Oz Minerals for about
$1.7 billion — enough to wipe out that company’s debt. Meanwhile, Chinese
president Hu Jintao made a five-country swing around Africa in early
February, signing deals in Tanzania and Madagascar on agriculture and
telecommunications, and promising debt relief to the poorest continent.

China’s appetites are good news for manufacturers in demand-depressed
Europe. Last Wednesday, Beijing’s Commerce Minister Chen Deming arrived in
Germany with executives from about 90 Chinese companies, on a
multi-billion-dollar shopping trip around Europe. The delegates signed more
than $10 billion worth of deals in Germany alone, and another $400,000 worth
of deals on a brief stop in Switzerland. Next stop was Spain, where the
Chinese party bought about $320 million worth of goods ranging from auto
parts to olive oil. Finally, in Britain they signed deals worth about $2
billion, including ordering 13,000 Jaguar cars. And while thousands of
German auto workers marched in protest at layoffs in the country’s
debt-ridden auto industry, the Chinese delegates signed a deal to buy $2.2.
billion worth of BMWs and Daimlers. Germany’s new Economy Minister
Karl-Theodor zu Guttenberg told reporters in Berlin that the Chinese visit
had “come at the right time.”

The shopping spree serves China’s purposes, too, helping to head off
possible retaliation from Western countries against the huge trade surpluses
maintained by Beijing. An unnamed European diplomat in Beijing told the
Financial Times on Wednesday that China’s “biggest nightmare” is
being ordered by the U.S. and Europe to raise the value of their currency by
30% or face a 30% rise in tariffs. The pressure to revalue the Chinese
currency could come as early as April 2, when the
Group of 20 richest countries in the world meet in London, and where
President Obama is scheduled to meet Chinese president Hu Jiantao for the
first time. In the run-up to that crucial meeting China’s buying spree
is aimed at soothing Western anger about the country’s economic policies.
“This is a smart diplomatic move,” says Damien Ma, China analyst at the
Eurasia Group in Washington. “China is seen as whittling down its trade

China’s buying spree has, however, been selective. The United States was
conspicuously absent from its global shopping itinerary. The last major
Chinese bid to buy a U.S. company ended in diplomatic disaster, when the
China National Offshore Oil Corp. or CNOOC offered to buy the California oil
company Unocal in 2005, in a deal worth about $18.5 billion, and a backlash
in Congress prompted the angry Chinese to withdraw the offer. Unocal was
finally sold to Chevron. More recent Chinese investments in the U.S. have
also fared badly: Beijing has lost billions in recent months from
investments in Morgan Stanley and the Blackstone Group, and Chinese
officials who approved those investments have now come under fire in
Beijing. “People are saying, ‘Why did you invest in that’,” says
Downs of the Brookings Institution. “They feel they have been burned in the
U.S. and they don’t want to be burned again.”

Still, for many in Europe, Asia and Latin America, the Chinese offer welcome
relief. And it’s not as if there are any rival suitors right now.

Photos: China’s Electronic Waste Village

Photos: China on the Wild Side