When the US administration announced massive spending in response to the ongoing economic downturn, China was left with the dilemma of what to do with US trade surplus dollars now that Treasuries would be a bad bet going forward thanks to inflation. Gold and precious metals are not an option, though China has stockpiled gold reserves in the past several years.
A recent Bloomberg piece points to what is going on with China's apparent stockpiling of resources.
China, the world’s second-biggest energy consumer, will provide the [$10 billion] loan to the [Brazilian] oil company known as Petrobras, which will supply 150,000 barrels of crude a day to the Asian nation this year and 200,000 barrels in 2010...
Lula, 63, is seeking to attract investment and open China’s markets to Brazilian exports ... to help blunt his country’s sharpest economic contraction on record. China is securing energy resources to power its economy, the world’s third-largest, by offering loans to oil-producing countries including Russia, Venezuela and Kazakhstan.
China also agreed on Feb. 17 to provide Russia with $25 billion of loans in return for 300,000 barrels a day of oil for 20 years. Venezuela’s Petroleos de Venezuela, known as PDVSA, will provide 200,000 barrels a day to the Asian country to pay down a $4 billion loan from China Development Bank Corp.
With this, the pieces begin fall in place. What we are seeing is a hybrid strategy which resembles both global economic stimulus and resource colonialism.
Wall Street analysts who view Chinese stockpiling as indicating recovery are mistaken. Stockpiling is more properly viewed a strategic move as well as a stimulus measure.
China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline, according to the Royal Bank of Canada.
Stockpiling props up current resource prices, reducing the need for companies to shutter mining capacity due to cash flow and profitability concerns. At the same time, loans provide much needed capital to developing economies, and secure longer-term access to needed resources at favorable prices, thanks to the impact of the ongoing economic crisis upon emerging markets. This combined investment boosting resource extraction infrastructure will moderate the impact of any resource supply squeeze when economies eventually ramp up, at least for the Chinese economy. It can even be argued that China is also countering peak oil concerns by investing in efforts to bring new supply to market.
