from Follow the Money

Russia is to China as …

December 31, 2004

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Canada is to the United States?

Large in area, scarcely populated, cold and a major supplier of natural resources to its large southern neighbor ...

Well, not yet.

Russia, I think, generally exports its energy to Europe, not to China. The pipelines flow west, not south and east.

But that may be changing.

It seems like the Yukos stake formerly held by western investors is being offered to China. Before, Khodorkovsky controlled Yukos and foreign -- mostly western -- investors had a minority stake; now, the Russian state seems likely to gain majority control, with China getting a minority stake.

There is one clear difference between Russia and China and Canada and the US: the state plays a much bigger -- and a much less transparent -- role in both the Russian and Chinese economies ...

China clearly does not just want to buy the world’s surplus (production in excess of national demand) oil. It wants to own a share of the companies that are producing the oil China expects to buy. Look at Iran, Sudan and now Russia. China’s state oil companies go where the oil is ...

Make no mistake, if you forecast out China’s future demand for oil, China is gonna be a big buyer. China’s government has plenty of cash. The Wall Street Journal reports China’s reserves reached $542.7 billion at the end of October, up an amazing $28.2 billion in a single month. There is a pretty natural marriage between China’s surplus cash and the world’s surplus oil: oil companies supplying a growing Chinese market are likely to earn more than US Treasuries (or Agencies) ...

Billmon, in one of his comments to an earlier post, asked whether China at the turn of this century is to the US as Germany was to Britain at the turn of the last century, or as the US was to Britain at the turn of the last century.

Few questions are more important. Consequently, the (hidden) battle between private US companies (and investors) and state owned Chinese companies for control over existing oil fields (or more precisely, for minority stakes in locally owned oil firms that have control over most countries domestic oil fields) is worth watching. The really high stake game, though, is for control over new oil fields which, with foregn investment, can be brought on line to meet the world’s growing demand for energy -- not for control of the world’s existing oil fields.

US grand strategists presumably would rather China invest in say Exxon, and then rely on Exxon to supply oil to meet China’s growing need for energy. China seems to have other ideas.A (long) aside: the Economist compared Mexico to its platonic ideal of a market economy, and found it lacking. That more or less was the Economist’s explanation for Mexico’s comparatively low growth since its 94-95 peso crisis.

Of course, if you compared China to the Economist’s platonic ideal of a market economy, it would be found even more lacking. Afterall, massive state-owned banks intermediate a very large fraction of China’s savings, the Chinese state controls bank lending rates (though perhaps not all that effectively) and offers administrative guidance indicating who should get access to credit, the state limits (though not always very effectively) labor mobility, Chinese peasants do not own their own land (and thus do not profit if their land is in the way of a growing city and thus prime property for luxury real estate development) ... I could go on and on. I don’t think China’s domestic oil fields are any more open to foreign investment than Mexico’s, for example.

Compare slow growing Mexico to fast growing China and look for lessons, and you might well conclude the state plays too small a role in Mexico’s economy. I don’t believe that. Nor do I believe that the extensive role of China’s state in China’s economy has been a net plus for China. China’s state run banking system right now probably has as many problems as Mexico’s just privatized banking system had prior to its devaluation. The eventual revaluation of the undervalued renminbi will test China’s banks just as the devaluation of the overvalued (back in 94) Mexican peso tested Mexico’s banks, though in different ways.

But I do think that the Economist should have mentioned Mexico’s comparatively low savings rate, which, given Mexico’s prudent post-crisis macroeconomic management, generally translates into a low rate of investment. That alone probably explains a large share of the growth difference between Mexico and Asia. Putting all the emphasis on structural reform seems off when Asia’s structural problems -- using the Economist’s implicit definition of structural problems -- are at least as big as Mexico’s. If you can finance investment of well over 40% of GDP out of domestic savings, you are likely to grow fast, even if structural problems mean a large fraction of domestic savings is being invested inefficiently ... that, it seems to me, is the real lesson as Asia’s post war miracle, and China’s current economic miracle.

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