China’s coming shift to regional trade

China realises how vulnerable its export-driven economy has become, and is setting itself up as the powerhouse in a post-peak oil regional economy.

The government understands that companies will reduce their orders for products from far-away lands during times of painfully high oil prices, and that the global economy will constrict as a result. So policy-makers are doing everything they can to implement an energy production system independent of forces outside China.

In the media, tag words such as “Conservation” and “Environmental Protection” are now spoken as frequently as “Harmonious Society”. But that's mostly talk. If you read China’s business news each day, which I do, you will find a breath-taking development in the area of energy. The business press suggests a concerted effort to break away from procurement of insecure energy resources outside China's control.

Instead, the country is building energy self-reliance, with environmental protection getting the dirty end of the stick.

China isn’t building great walls to keep away the barbarians anymore.

Outside the country, its oil companies are focused on buying up petroleum resources to give the Middle Kingdom a resource advantage as scarcity becomes more apparent. Inside China, industry is revving up oil infrastructure capacity and refining production to develop domestic self-reliance. Much of China’s IPO (initial public offering) frenzy is aimed at gobbling up investment cash worldwide to buy access to commodities now, while it is still relatively cheap and freely available on global markets.

A flattened economy

Imagine a world in which energy prices are in the stratosphere, and the West’s addiction to oil helps flatten the global economy. Western countries are in a tailspin. The world economy is shrinking as high oil prices eat into disposable income once spent on items imported from China. Those same oil prices have screwed up the economics of international shipping. Sound unrealistic? Read this.

In China, unemployment would reach stratospheric levels if there were greatly reduced factory orders from the rest of the world. Today, perhaps 100 million factory workers churn out products in China. What if 10 per cent were without jobs? You would need energy to provide public works projects to keep those workers employed. You don’t want ten million out-of-work, hungry factory workers showing up at your front door asking for change.

A partial solution to this nightmare is to strengthen regional ties, since regional economies consume less energy than global trade. Can China exist in a regional framework while continuing to expand its domestic economy under an energy program focused on self-reliance? If you buy the notion of peak oil, it seems like the best bet. After all, most of the world’s consumers live in China’s neighbourhood. The Chinese economy is based on exporting manufactured goods. The buying must not stop.

Propping up the greenback

Until recently, part of Chinese strategy was to hold Treasury Bonds issued by the US in the Chinese treasury as a financial tool. Purchases of these bonds helped the central government maintain a favourable exchange rate vis-à-vis the greenback for the yuan. Then came the made-in-America subprime fiasco, which led to a crisis in the world’s capital markets and the partial collapse of the US dollar. It cannot have been lost on China's central bankers that propping up the buck is an unsustainable long-term strategy.

As in the matter of self-reliance in hydrocarbon liquids, China will use its great energy to mitigate the problems it is facing. Expensive, scarce fuel means you need shorter trade routes, so China will certainly develop a land link through Myanmar (Burma) to the Bay of Bengal. This will greatly strengthen its hand in the regional economy. It’s a hop through Yunnan Province by rail, a skip to the coast in Myanmar, and a three-day jump across the Bay of Bengal to Calcutta or Madras. Consider the amount of fuel saved by going through Myanmar to India rather than skirting all of South-East Asia and travelling up the Straits of Malacca to India.

How will the investments of Western corporations fare as China focuses increasingly on a regional economy? Well, joint venture plants and factories will not be disassembled and repatriated to the investing nation. They will be utilised within China for China’s people.

The Great 100 Year Plan

The Chinese Government must be seeing parallels between the astonishing growth of its economy and the creation of Hong Kong. You build it, we keep it. You have set up our economy with your generous investments, built factories for us, given us your technology and know how to produce goods, and tutored us on oil refining and coal technologies plus solar and wind-power generation. You can go now.

Thanks for coming, but we will keep the factories.

The post-peak oil global economy will have a new set of ground rules.