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
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
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.