CHINA BUILDS BRIDGES TO FUEL ITS ENGINE ROOM / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

China builds bridges to fuel its engine room

By Hongyi Lai

Published: July 4 2010 20:44

Recent signs that China’s growth is stalling have added to fears that the global journey back from financial meltdown could be losing momentum. Suggestions that the “engine room” of worldwide recovery is slowing are especially worrying when the continued success of Asia’s economies is crucial to a sustainable upturn.

Yet these are fears China does not necessarily share. Chinese growth had been expected to dip below double-digit levels amid government moves to cool the property market and curb bank lending, and Beijing will not be especially concerned by occasional fluctuations in manufacturing data. Nor will it be unduly worried by the current debate over the renminbi. Instead, China’s focus remains firmly on another period of growth – the one still to come. That much is plain from its growing appetite for one element vital to any engine room: oil.

A prodigious hunger for resources has long moulded Chinese foreign policy. Record oil imports this year have only added urgency to the government’s moves to reshape its geopolitical strategy. China’s crude oil imports reached a new peak of more than 5m barrels a day this April, and imports for the first five months of this year were up 30 per cent. Securing a stable and long-term oil supply is the essential component of China’s national economic security, and to succeed it must diversify both its oil sources and the ways in which oil crosses its borders.

In recent weeks it has made advances on both fronts. Angola is Africa’s largest provider of oil to China, but China has upped its efforts to broaden its oil arrangements on the continent. The signing in May of a $20bn-plus deal with Nigeria to build oil refineries and infrastructure represents a crucial breakthrough.

A broader shift away from the Middle East towards Africa as the chief source of crude oil is also under way. Africa’s share of Chinese imports rose from 24 per cent in 2003 to 30 per cent in 2008. China regards the Middle East as unstable and subject to US dominance. Its reliance on Iran, its third-largest source of crude, also leaves it open to international criticism as it battles to temper US-led sanctions.

However, more imports from Africa will only serve to magnify an issue that has been unnerving China’s leaders for decades. As much as 80 per cent of its oil imports passes through the Strait of Malacca, a 1,100km-long shipping channel between the Indian and Pacific oceans that is by far the shortest sea route for China’s Middle Eastern and African imports.

It is a reliance that China is desperate to dilute. The waterway is vulnerable to piracy and terrorism, but the real concern is the threat of foreign intervention. Blockade of the strait is the ace card the US can play in the event of a catastrophic deterioration in China-US relations. So part of China’s new strategy is to seek alternative routes for transporting oil. In June it signed a deal for an oil and gas pipeline from Burma to southwest China. The pipeline will have the capacity to transfer 20m tonnes of crude from the Middle East and Africa.

China has also explored the possibility of a pipeline, as well as a highway and railway, from the Gwadar port in Pakistan to China’s western province of Xinjiang. Concerns about bitter winters along the route, along with the threat of sabotage by Pakistan’s Baloch nationalists, have delayed plans, but talks are likely to continue. Another possible route is a railway across south-east Asia between China to Singapore, which may be completed by 2015.

However, for China the least problematic solution to its oil conundrum is to look directly west. A leap in oil imports from central Asia and Russia seems especially likely. China recently completed its branch of Russia’s Eastern Siberia-Pacific Ocean pipeline, which will supply 15m tonnes of crude a year. Last month President Hu Jintao also signed a deal that is set to double the oil transferred through the pipeline from Kazakhstan by 2013. China and Russia’s dual reliance on strong energy ties will also ensure they remain close as they bid to whittle down US influence in Asia.

China is also making rapid progress in what the US views as its back-yard. A recent loans-for-oil deal, signed in May, will take its Brazilian imports to 200,000 barrels a day, further inflaming American critics who warn that China is undermining US strategy in Latin America.

Irrespective of any slowdown in growth, these numerous deals show China’s quest for oil is progressing at speed. Just as crucially, its hunt for resources is extending in new directions. As its growth – albeit slightly diminished – continues this increasing demand for oil will not only impact prices, but shape geopolitics. How China manages its thirst remains to be seen.

The author is associate professor at the School of Contemporary Chinese Studies at the University of Nottingham

Copyright The Financial Times Limited 2010.