Does the future belong to China?

David Ernsberger

China's emergence as the only country with a credible chance of challenging America's status as the globe's only superpower has dramatically reshaped the way commodities like oil, coal, and nonferrous metals are traded and valued.

IT IS BY NOW OLD NEWS THAT IN LITTLE more than two years China has blown through most of the world's major commodity markets with more force and lasting impact than any of this year's Atlantic hurricanes.

China, Inc.

After introducing major market reforms under Deng Xiaoping in the late 1980s, China has emerged unchallenged as the world's factory, sucking in raw materials and spewing forth cheaply priced consumer products from refrigerators to sweaters. China's role as a cheap manufacturer has helped keep world inflation low, and consumers well-clothed and -supplied with durables. Along the way, China has swung from being an exporter of raw materials to an importer of most of them.

All of this is old news, except in China itself. One of the most striking things about spending time in China is how few people seem to realize how differently their country is being viewed by the rest of the world—whether by commodity traders in Europe and the U.S. or by governments and the public at large.

As headlines on popular magazines like the May 9, 2005, edition of Newsweek blared, "Does the Future Belong to China?" Chinese magazines and periodicals at the same time have been asking, "What's all the fuss about?"

It's not uncommon to meet well-informed, highly educated commodity market experts in China who state categorically that, at best, China remains nothing more than a popular sideshow for traders of commodities futures contracts in New York and London. Many in China's elite industry circles will tell you that, at worst, China is being made both a scapegoat for and the biggest victim of high prices for copper, oil, and other key commodities.

This feeling is at its strongest among some of China's key policymakers in the energy sector. Zhang Guobao, a vice-chairman of the National Development and Reform Commission, summed up the current mood of the Chinese establishment well in an editorial published in state media in late September and carried by the overseas edition of People's Daily in early October. China, wrote Zhang, is weary of being blamed for oil shortages and high oil prices. "China's energy consumption dependence on other countries is rather small and the world has no reason to overreact over China's energy consumption growth," wrote Zhang. "Meanwhile the international community should respect China's right to development and the Chinese people's desire for getting rid of poverty and living a well-off civilized life."

Zhang's comments were illuminating. Perhaps most importantly for commodity markets, they underscored his commission's unchallenged grip on price-setting power for key products like gasoline, jet fuel, and diesel fuel. But from a more human point of view, the comments also reveal a state of mind that has become common among China's commodity workforce. For many folks in China, the debate about their country's role in driving world commodity prices higher is almost diabolical in nature and seems to stem from a neocolonial drive to keep China from reaching its full potential.

These days, the opinion that speculators are on a mission to bankrupt China has blossomed into a fully blown national passion that regularly fills newspaper columns. As recently as late October, Zheng Jingping, a spokesman for the National Bureau of Statistics, told reporters in Beijing that China's economy would find a way to weather the storm of high oil prices. Speculators would get their fair dues when oil prices crash, he said. "The current oil price couldn't represent the relationship between supply and demand," said Zheng, as reported by the state-run Xinhua news agency. "Speculation has played a more important role in the increase of oil prices."

Dragon tales

If the temperature in China seems a little high these days, it's not without reason. China's business leaders are still smarting from some of the fury unleashed in June on the floor of the U.S. House of Representatives after CNOOC, China's third-largest state-owned energy company, tried to buy Unocal.

Unocal, which holds gas assets in Asia that are vital for the long-term viability of CNOOC's many different initiatives in importing liquefied natural gas, was snapped up by Chevron in the end.

Many in China still struggle with the belligerence that dogged CNOOC's bid. At the time that CNOOC's bid surfaced, Congressmen Richard Pombo (R-Calif., Resources Committee chairman) and Duncan Hunter (R-Calif., Armed Services Committee chairman) issued a public letter to President Bush saying that the bid raised "many concerns about U.S. jobs, energy, production and energy security." Among other things, the congressmen asked Bush to review the bid under the U.S. Defense Production Act. The act is America's primary legislation for ensuring domestic availability of industrial resources and critical technology items essential to national defense.

The review wasn't needed in the end, and the relative merits of the U.S. reaction would be ample fodder for a different editorial. But the comments set off a massive and ongoing debate in China about America's motives and rationale in dealing with China's role in the world energy markets.

Tempers have cooled since June, but they will need to settle even more if the U.S. and China are to avoid coming to a similar war of words the next time a Chinese state-owned company bids for a U.S. energy company. That day will almost certainly come. And the secret to handling it lies in bridging the misunderstandings that dog America's perception of China, and China's perception of the U.S.

Missing link

If the story of a giant country elbowing its way onto the world energy stage to enable a burgeoning middle class to pursue a better life sounds familiar, it should. The occasional paranoia and bouts of defensiveness from a country that really should be big enough to know better will have a familiar ring to most readers. After all, the country that has the most in common with China is, in many ways, the U.S. Maybe not so much the U.S. of today, but certainly the U.S. of the Industrial Revolution, or the emergent U.S. of the 1950s.

Shanghai is New York; Beijing is Washington, D.C.; Guangzhou, even, has a twin in Houston. The cities, like the countries and the people of both, have more in common—good, bad, and ugly—than most folks walking the streets in either country are likely to discover in this generation. Indeed, friendly critics of China, including modern Singapore's founding father Lee Kuan Yew, point out that all China really needs to make itself felt in the world is the "soft power" that would come from a Los Angeles of its own. A Chinese Hollywood is, for now, quite a distant prospect, and maybe that's the biggest gulf that remains between the two nations, even on issues like commodities trading.

Like the U.S., China will need to spend 2006 and probably 2007 coming to terms with the consequences of its enormous energy demand. Car sales rose another 17% in the first nine months of 2005, topping 2.8 million new cars on the road. GDP increased by 9.5% again in the third quarter of this year. Such growth comes at a cost, and China, like the U.S. and the other great global powers before it, will have to find a way to reconcile itself with high commodity prices and devise a strategy to cope with them.

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