Could the World Drown in a Chinese Perfect Storm?

By David Lee Smith, The Motley Fool

 08/15/12 

We all know that Europe may be ineluctably sinking financially, and the U.S. is barely staying afloat. Now, potentially even more seriously, comes last week's confirmation that China, long considered the life raft of the global economy, may also be taking on water.
Unfortunately, that's not the only sobering news from China of late. You likely picked up on the news last month that China, through CNOOC (NYS: CEO) , its biggest offshore oil and gas producer, aims to spend more than $15 billion to buy Nexen, a big Canadian operator. But you may not have noticed that the world's most populous nation has been rattling sabers in both the South China Sea and the East China Sea, causing consternation among its neighbors in both areas. Add to those events an obviously destabilized internal political situation, and you just might have a figurative perfect storm that could endanger the entire planet.
Worse than we thought?My primary focus is normally on oil, gas, and other natural resources, and it will be here as well. But before examining China's potential effect on those commodities, let's take a glance at the country's economic and political malaise. For instance, you may already have noted that China's banks provided a relatively minuscule 540.1 billion yuan (that's $85.1 billion) in July loans. That's down a whopping 41% from June. Further, the country's exports grew a paltry 1% year-over-year, and slid meaningfully from the 11.3% rate just a month earlier.

I could continue to recite all manner of slowing statistics, but the real key is that China's economy may be far worse off than we'd realized. After all, the nation's numbers are the product of home cooking, and it's been noted that they may have been sweetened to mask reality. Indeed, it wouldn't constitute a voice in the wilderness for one to classify China as teetering on the edge of a recession.
Preparing for a changing of the guardThen there's the murky -- and lately more unpredictable -- internal political milieu. As Martin Feldstein, a Harvard professor and erstwhile chairman of the Council of Economic Advisors under President Ronald Reagan, told Wall Street Journal readers after recently discussing China's softening economy, "The political problems are even more difficult. Corruption, income inequality, and party governance are at the top of the list of domestic issues."
After delving more into the specifics of the corruption and other issues, Feldstein concluded that, "The new Chinese leaders who will begin their 10-year terms this fall have much to do at home and abroad if they want their country to continue its successful and peaceful rise in the global economy."
More acquisitive in the WestObviously, "much to do ... abroad" refers in part to the steady Chinese movement into the world of Western oil and gas. The proposed CNOOC-Nexen combination -- which Sen. Charles Schumer, D-N.Y., has vowed to contest -- is the biggest, but hardly the first, of China's forays into the acquisition of North American energy assets.
Chinese giant Sinopec (NYS: SHI) earlier this year coughed up $2.2 billion for a stake in Oklahoma-based Devon Energy (NYS: DVN) , and the Chinese company is currently reported to be sniffing around Texas. Earlier, CNOOC had hooked up with Chesapeake (NYS: CHK) in Eagle Ford and Niobrara partnerships.
But are Beijing and its corporate minions due for a breather from Western energy purchases? Probably not. If the U.S. continues to stiff-arm TransCanada's (NYS: TRP) efforts to build the Keystone XL pipeline from northern Alberta to Texas, it will almost certainly encourage a more acquisitive China, which in turn would rile Sen. Schumer -- who, by the way, has opposed Keystone -- and his colleagues.
A newly nasty neighbor?Closer to its home -- in both the South China and East China seas -- China has become significantly more bellicose with its neighbors. To the south, it's used the aforementioned CNOOC as its proverbial front man and its actions there could threaten the Nexen purchase.
As the Journal observed earlier this month, China's decision to establish an island military outpost in South China Sea waters to which China, Vietnam, the Philippines, Malaysia, and others claim at least partial ownership has "renewed U.S.-China tensions over the sea (and) threatens ... to complicate a push into North America by CNOOC Ltd." Along with its numerous international trade routes, the South China Sea is believed to contain significant reserves of oil and gas.
But if China's intent to fortify a group of relatively uninhabited South China Sea islands is making waves, its leering at Japan's Ryukyu Islands in the East China Sea could be even more upsetting. The Ryukyus include Okinawa, which the U.S. returned to Japan in 1972 after capturing it in the final major battle of World War II. Encroachment vis-a-vis Okinawa appears to stem from a three-way dispute involving China, Taiwan, and Japan over five islands and three barren rocks, the Senkakus, also in the East China Sea.
China now claims a flimsy historic justification for its right to help itself to Okinawa, a sizable island dotted with U.S. military bases. Having once been ensconced in one of the U.S. Marine Corps' less sumptuous "resorts" on the island, I'm not sure why anyone would become especially belligerent over ownership of "the rock." Nevertheless, were China to press its claims to Okinawa, it obviously would set off a conflagration that would pit it against Japan, the U.S., and probably others.
The Foolish bottom lineSo, without even delving into China's role in supporting Syria's besieged President Bashar al-Assad, along with Russia and Iran, it's clear that Hu Jintao's country is proverbially kicking up its heels on several fronts. Where all this will eventuate is hard to forecast, but it's less difficult to see how the potential contretemps could render global crude prices far less stable than they might appear to be.
In any event, I'd strongly urge Foolish investors to, at the very least, add CNOOC to My Watchlist. The company is in the middle of lots of action, some merely interesting and some potentially catastrophic.

http://www.dailyfinance.com/2012/08/15/could-the-world-drown-in-a-chinese-perfect-storm/