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Dollar Diplomacy, Chinese Style

Feb 23, 2009
By Alan Stoga

Secretary of State Hillary Clinton met with Chinese State Councilor Dai Bingguo in Beijing on Feb. 21, 2009. Photo by Liu Weibing/Newscom

During Secretary of State Hillary Clinton’s recent stop in Beijing, the Chinese leaders were polite when asked in public about their massive holdings of U.S. government securities. Their standard language these days is: “we have always managed the foreign exchange reserves with a long-term, strategic perspective, combining safety, liquidity and profitability,” and “overall, China’s assets are safe.”

Of course, if they said anything else, the value of their trillion dollar holdings of U.S. government bonds—along with the dollar—might drop like a rock.

But having $2 trillion dollars in foreign exchange reserves (as well as other holdings scattered through the public and quasi-public sectors) during the worst global financial crisis in 70 years provides lots of opportunities for creative diplomacy. A series of recent deals show how the Chinese are using their vast pool of dollars to reshape global economic relationships.

First, China has lent Russian oil companies $25 billion in return for the rights to 300,000 barrels of oil a day for the next 20 years. That’s almost 10 percent of China’s total import demand. The loan could conceivably pave the way towards linking Russia’s massive Siberian energy reserves to China’s insatiable energy demand.

The prices of gasoline and diesel oil in China have dropped by
140 yuan ($20.48) and 160 yuan ($23.40) per ton respectively since
January 15. 
Photo by CNImaging/Newscom

Second, Brazil’s Petrobras agreed to supply China with between 100,000 and 160,000 barrels of oil a day in return for up to $10 billion in loans. The Brazilian foreign minister blessed the deal, saying that “this is the most important South-South relationship.”

Third, Aluminum Corp. of China recently announced a $19.5 billion investment in Australian mining giant Rio Tinto (which produces iron ore, copper and aluminum in Australia, Chile and elsewhere) and a $1.7 billion purchase of Australia’s OZ Minerals (one of the world’s largest producers of zinc).

Fourth, Chinese Vice President Xi Jinping signed a deal with Venezuela for up to 1 million barrels of oil per day by 2015 in return for another $4 billion to top off an existing development fund.

Finally, China is in the process of completing a $2 billion takeover of Canada’s Tanganyika Oil, which has significant operations in Syria.

That’s a total of $63 billion to assure future access to natural resources and, presumably, the political and diplomatic alliances that go along with long term trading relationships.

Odds are that China has only begun to spend.

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