Thursday, 2 July 2009

China, Iraq and the collapse of the dollar

A title to chew over that is for sure.

This is an interesting New York Times article. The implications are potentially very serious. Imagine China selling up it's US paper - work it through and the dollar is in deep trouble. Will China risk it? Perhaps it will for oil.

As Iraq Stabilizes, China Bids on Its Oil Fields [New York Times]

HONG KONG — Oil companies from China, the world’s second-largest and fastest-growing consumer of oil, bid aggressively on Tuesday as Iraq began auctioning licenses in six large oil fields.


It is common in the oil industry for initial auction results to be followed by weeks of dickering over details. But the bidding in Baghdad on Tuesday was particularly contentious, as multinationals demanded that the Iraqi government allow them to keep more of the revenue from each extra barrel of oil they pump beyond levels previously sustained by Iraq’s chronically corrupt and technologically weak national oil industry.

Few Americans or Iraqis may have expected China to emerge as one of the winners in Iraqi oil, particularly after six years of war. But signs of stability in Iraq this year, and a planned American military pullout from Iraqi cities on Tuesday, happened to coincide with an aggressive Chinese push to buy or develop overseas oil fields.

The Chinese companies “have been interested in Iraq,” said David Zweig, a specialist in Chinese natural resource policies at the Hong Kong University of Science and Technology. “They were interested in Iraq before the war, and now that things have improved somewhat there, it’s on their agenda.”

Some experts contend that the West should not be concerned about a substantial Chinese presence in Iraqi oil fields, because it gives China greater stake in improving stability in the region.

“If you want China to be a responsible stakeholder in the world, you need to let China buy stakes in the world,” said Mark P. Thirlwell, the program director for international economics at the Lowy Institute for International Policy in Sydney, during a speech in Hong Kong on Tuesday.

The Iraqi government originally tried last year to award oil fields to Western companies through a no-bid process. That prompted objections from a group of United States senators, who wanted greater transparency, and the plan was replaced with the auction, which had the effect of letting Chinese companies play a much larger role.

China’s leaders were surprised by the steep rise in commodity prices early last year, which exposed the vulnerability of their country’s huge manufacturing sector to high raw material prices. When oil prices plunged in the autumn, China began buying, importing and storing oil in huge quantities, helping to drive a partial rebound in world oil prices in spring. And China stepped up its hunt to acquire foreign oil.

Chinese officials, economists and advisers have been almost unanimous in recent weeks in saying that their country needed to invest more in natural resources, while also voicing concerns about the long-term creditworthiness of the United States and the buying power of the dollar.

China has $2 trillion in foreign exchange reserves, mostly invested in dollar-denominated bonds, and has been looking for ways to diversify gradually into other assets like commodities, said a Chinese government adviser who spoke on the condition of anonymity because of the secrecy of Chinese reserve policies.

China’s central bank, the People’s Bank of China, called Friday for the development of an international currency other than the dollar that would be a safe repository of value, in the latest sign of China’s search for other ways to invest its international reserves.

Philip Andrews-Speed, a specialist in China’s oil industry at the University of Dundee in Scotland, said Iraq was clearly attractive for China and its oil industry.

More on the second page.


1 comment:



CHINA and BRAZIL announced yesterday that from now on, their trade relations will be held not in dollars, but in their respective currencies, according previously a fair change rate.

YUAN first appearance in an international trade agreement seems not to scare US dollar.

Nevertheless, this fact has, according to my view, an incredible psychological impact on the future trends....

BRAZIL is the main latinamerican economy. CHINA is the main economy in ASIA, together with JAPAN.

Then, two of the main economies in the world are ready to trade without the arbitrage of US Dollars.

The ALBA ( the populism movement in South America ) leaded by Chavez, Venezuela president, is ready to do the same with oil and other raw materials exports.

Once again, the future impact will depend on the capacity of CHINA economy to reduce exports to the US and begin serving its domestic demand. Analysts say this won´t happen till 2015.

This BRAZIL-CHINA movement is the 1st attack to the DOLLAR hegemony as a reference currency and therefore, as an arbitrage currency for foreign commercial agreements.

CHINA has to go planning the YUAN international show up to the world.
But, as usual, CHINA manages things their way, just like Frank Sinatra... CHINA will begin trading with those countries key for its economy, and step by step, it will be going out of its yuan fixed rate by billateral compromises.

In the middle of a global economic downturn, this is not good news for US Dollar. Since, and although americans want a weak dollar to begin exporting again,... we must not forget that the US is moreover an importing country.

If CHINA goes reducing its exposure to US exports, the US will have problems to stabilise its currency.

EURO seems to be absent from this battle, but obviously EURO has nothing to offer to the world, since EUROPE remains as a dead continent, only healed some times by Germany auto and heavy manufacturers, Italian fashion and car industries, and France, or Spain touristic acceptance.

I forecast a volatile currency market for the next 6-12 months, and a huge risk on US dollar stability. Therefore, my advice for EURO holders resides on keeping the EURO exposure vs USDollar and wait for future events.

Nevertheless, something with stronger impact seems to go rooting in the horizon. And it is not obviously green ...

The huge Public spending of OBAMA policies, the forecasted high inflation rates for the next 2 years will not help a lot.

Jose Luis Revilla Escudero
WWShares, Inc
-Global Wealth Management-