The Economy – Global View – Protecting Yourself

What Are the Chinese Buying?
By Chris Mayer

The financial crisis is not over yet. The banks still need capital. And more credit losses are on the way — from commercial real estate to credit cards and everything in between. The Great Deleveraging is still under way, and that’s one reason — among many — that gold should do well.

The ripple effects of the financial crisis have been felt in all sectors, though. In the world of oil and gas, we see lots of production cutbacks and projects shuttered or delayed. Getting financing is tough. About the only people spending money are the Chinese.

One of the interesting bits of news this morning is how Brazil — looking for someone to help finance its massive oil projects — is turning to the China. Today, Brazil’s president, Lula da Silva, will arrive in Beijing to meet with Chinese president Hu Jintao.

The Chinese have lots of money. They sit on mountains of reserves and have been looking for ways to invest that money. So far, they’ve bought gold and put money toward infrastructure projects. They are also buying up natural resources around the globe — everything from rare earths to iron ore.

The Chinese want to seal a deal with Brazil in exchange for guaranteed oil shipments. See, the Chinese are looking out ahead. They know the massive urban migration going on in their borders. They know how much oil they’ll need to fuel their growth.

Brazil’s state-controlled oil company, Petrobras, wants to spend $174 billion over the next five years. That’s one of the largest capital spending plans in the world among the big oil companies. And China is a willing and able source of funds.

China’s government is looking for ways to further its long-term energy security goals. It wants diverse global supplies. It wants its own oil companies to have a foothold and be competitive on oil regions. Already, China has made $45 billion in commitments to Russia, Kazakhstan and several other countries.

By contrast, the U.S. government is too busy trying to figure out ways to hand dying automakers over to the unions. The U.S. government also has two wars to deal with, a massive deficit and a frightening debt load. Furthermore, the biggest states in the Union are in financial crisis. America’s politicians seem to spend most of their time trying to figure out how to fleece citizens and businesses of more cash.

These misguided ambitions and warped priorities are costing the U.S. dearly. “America has a problem,” complains Sergio Gabrielli, CEO of Petrobras, the state-controlled Brazilian oil company. “There isn’t someone in the U.S. government that we can sit down with and have the kinds of discussions we’re having with the Chinese. The U.S. economy cannot easily afford losing access to vast portions of the world’s energy supplies. But that’s a problem for another day.

Over in the agricultural markets, the financial crisis is also making its presence felt. Farmers have delayed or reduced their buying in fertilizers and equipment. Since we are already in a position where grain inventories are low, this is going to put a strain on the grain markets.

There is also a lot of government intervention here. For one thing, the whole biofuel industry probably would not be anywhere near the size it is today without the government support it receives the world over. This means more acreage devoted to producing alternative fuels, crowding out and raising the prices for food crops like wheat.

In general, I think we are in an age in which political risk is high. Increasingly, we’ll have to take into account what governments are doing. Most of them are broke. Most of them seem intent on bailing out banks and other failing businesses in favored industries. So that would mean the printing presses will run amok. That’s good for gold and commodities generally, which ought to preserve their purchasing power, as paper currencies lose theirs.