The Asia-Pacific Economic Cooperation Summit, Which Took Place the Week of November 14-21

OPEN SOURCE REPORT 004 LONG DTD 13 NOV 04

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Editor’s Preface

This is the original “long report” that inspired us to ask the author for a concise “Op-Ed” version suitable for executive readers. It is provided for information. The observations and conclusions are the author’s own, and no Command endorsement or acceptance is implied. We simply consider this useful information worthy of sharing. St.

Introduction

China’s pursuit of long-term strategic objectives is leading the country to increase its presence in Latin America, with serious national security implications for the United States. Moreover, because of the underlying demographic and economic trends shaping the Chinese strategic calculus, China’s increased presence in this hemisphere is likely to both endure and expand. This paper discusses the principal causes and characteristics of this increased Chinese presence, how it may impact the economic and sociopolitical dynamics of the hemisphere, and some foreseeable futures.

Although China’s increased global engagement in recent years may be attributed to the maturation of its national power, such engagement is also China’s response to the strategic imperatives and opportunities that it faces, as interpreted through the lens of a particular set of leaders and a unique cultural context. Within this framework, China’s strategic imperatives are driven by significant and sustained demographic growth and economic development. Although the country’s current population growth rate is only .73% and falling, even this modest rate will add more than 131 million people to the nation between 2004 and 2025.[1] Reflecting a combination of population growth, industrialization and modernization, China’s economy has expanded at an annual rate averaging 9% over the past 20 years,[2] with growth in 2003 reaching a level of 9.7%.[3] The expansion of the Chinese economy currently accounts for 25% of all global economic growth.[4]

According to state projections, the growth of the Chinese economy and its associated demand for raw materials is expected to continue.[5]Moreover, because this growth is linked to a deliberate government plan to extend industrialization to the interior of the country, China’s demand for both energy and other material resources are likely to grow at levels equal to or greater than the rates of growth of its economy.[6]

As China continues on its path of sustained, dramatic growth, the country’s energy needs are outstripping domestic production by increasing margins. Chinese imports of crude oil, for example, are projected to increase 40% during the current year.[7] By 2025, the Energy Information Agency (EIA) forecasts that China will import 9.4 million barrels of oil per day. At the same time, Chinese attempts to secure sources of oil, including projects in the South China Sea as well as pipeline deals from Russian and Central Asian fields have been beset by a series of difficulties.

Figure 1: China’s Rapidly Expanding Need for Imported Oil

In a similar fashion, Chinese economic growth and industrialization are also driving an expansion in the nation’s demand for strategic minerals and other resources. China is currently the world’s largest importer of iron ore, with its iron ore imports increasing by 33% in 2003 alone.[8] Likewise, in the copper sector, Chinese demand grew by 11.5% between 2002 and 2003,[9]causing China to surpass the United States to become the worlds largest consumer of copper. The current compound annual growth rate in Chinese demand for strategic minerals is 17% for copper, 15% for zinc, and 20% for nickel.[10] Such increasing resource needs, in combination with problems in meeting them within Asia, increasingly creates a long-term imperative for China to look further abroad to secure long-term sources of supply.

In its ongoing search to secure strategic resources to sustain future growth, Latin America is simply too large for China to ignore. Although Latin American oil production is relatively small by comparison to the Middle East, it is still significant enough to merit China’s attention as part of a larger global strategy. According to the International Energy Agency (IEA), oil exports from Latin America to all OECD countries in the first two quarters of 2004 was over 12 million metric tons, a little more than 5.5% of total exports.[11] Similarly, with respect to copper, a strategic mineral identified by the Chinese state as an item in short supply,[12]China currently purchases over $1billion of the mineral from Chile per year.[13]. Vice President of the Canadian Asia Pacific Foundation Yuen Pau Woo explains the interest of China in the region, which was very evident at the November 2004 Asia Pacific Economic Cooperation Forum (APEC) forum, as follows: “China has come to Latin America to assure its supply of energy and gain international recognition.”[14]

Figure 2 – Focus of Chinese Interest in Latin American Strategic Materials

Figure 2 depicts the current focus of China in Latin America’s strategic materials, and the principal countries that possess them:[15]

While Latin America is not the only regions in which China is developing its long term resource strategy, it is currently the principal economic focus of China outside Asia, and as shown at the November 2004 APEC summit in Santiago, Chile, China is now engaged in a course that demonstrates its willingness to significantly raise its visibility in the region. In this strategy, China is not simply looking to Latin America as a vendor of ever increasing quantities of the strategic materials that it requires for economic growth. Rather, it is pursuing an integrated strategy in which it purchases a stake in the key foreign industries to which it requires access, as well as investing in the transportation infrastructure of the target country to facilitate bringing the product to market. In short, China is pursuing an integrated, multidimensional strategy in Latin America to achieve a secure, sustainable supply of key strategic materials that it requires to keep its economy growing.

Figure 3 – Chinese Foreign Investment in Latin America - 2003

At APEC, Chinese president Hu Jintao announced $100 billion in new Chinese investment initiatives in the region,[16]including $30 billion for Chile, Argentina and Brazil alone.[17] The significant jump in Chinese investment in Latin America has two components. First, Chinese foreign investment globally has expanded tremendously in recent years as a function of a Chinese effort to “internationalize” key businesses. Second, and more importantly, Latin America is by far the central focus of the new foreign investment strategy. As shown in Figure 3, even before considering the significant expansion announced at APEC, 2003 data show China investing more than $1 billion in the region in 2003, over 77% of all of its investments outside Asia.[18] Moreover, Chinese investments in Asia, its core region, are only 44% larger than its investments in Latin America.

In parallel with the growth in Chinese investment, Chinese bilateral trade with Latin America has also increased dramatically over the past several years, although beginning from a relatively low base. Total Chinese bilateral trade with Latin America more than doubled from $12.6 billion in 2001 to $26.8 billion in 2003, and is on track to reach $30 billion in 2004.[19]

The remainder of this section analyzes Chinese interest, patterns of trade, and major initiatives in select countries in the region.

Chile

Chile is strategically significant to China, not only as a supplier of copper and other minerals, but also respect to its foodstuffs, and in terms of its commercially developed pacific ports, which provide potential Chinese access to a number of Latin American markets. With respect to foodstuffs, the potential of Chile as an agricultural supplier was emphasized in the November 2004 APEC summit. Chilean agricultural exports to China increased 45% from January to September 2004 alone, with exports of $273 million in that period.[20]

Major Chinese initiatives in Chile include the following:

Chinese Acquisition of Canadian Minerals Firm Noranda. On September 24, 2004, The Chinese firm Minmetals announced its entry into exclusive negotiations to purchase the Canadian minerals firm Noranda, a transaction of approximately $5 billion.[21]. Noranda is one of the world’s largest producers of nickel and zinc, and a major producer of copper in Chile.[22] When viewed from the perspective of Chinese interests in access to strategic minerals,[23]it is important to recall that copper is currently considered a “short supply” item by the Chinese government.[24] and that the Chinese state firm Minmetals recently signed a treaty with Coldeco valued at $1.93 billion, assuring access to Chilean copper over the next 20 years.[25]

Chinese Investment in Coldeco. In October 2004, Asian interests purchased 30% of a new bond issue released by the Chilean state copper firm Codelco, supplying Coldeco with $150 million in capital.[26] The transactions represented the first time that Asian interests had participated in a Coldeco bond issue.

Brazil

Brazil plays an important role in China’s relationship with Latin America. The nation is both a large, mature market for Chinese manufactured products, as well as a major supplier of a number of strategic minerals, petroleum, and a range of foodstuffs. In terms of specific countries, Chinese trade with Brazil increased from $1.84 billion in 1999 to $7.98 billion in 2003, and is on track to reach 14.9 billion for 2004.[27]. This includes an increase of 79.9% over 2003 alone, concentrated in expanded exports of iron and soy products.“[28] Brazilian exports of iron registered the most significant expansion, increasing by 500% over the past year.[29] During a state visit by Chinese president Hu Jintao to Brazil in November 2004, the two nations announced that China anticipates investing $10 billion in Brazil over the next three years, and that within this period, the nations expect bilateral trade to double to $20 billion per year.[30] Key Brazilian products of interest to China include not only iron, but beef and chicken, reflecting the need by the Asian giant to supplement its small agricultural belt to feed its population. In support of its interest in helping Brazil export products of interest, China also has made significant commitments to invest in the modernization of Brazilian transport infrastructure, including $4.82 billion in the modernization and expansion of the Brazilian railway system.[31]

Key recent Chinese initiatives in Brazil include the following:

Sinopec Construction of a Trans-Brasilian Gas Pipeline. Sinopec, the second largest Chinese petroleum firm, was selected by the government of Brazil to construct a gas pipeline that will span Brazil from north to south.[32]

Sinopec – Petrobras Accord for Joint Exploration and Refinery Construction. In May 2004, Sinopec signed an accord with the Brazilian petroleum giant Petrobras to cooperate in the areas of exploration and refineries. Petrobras anticipates doubling its exports of petroleum to China over the next year. The accord includes the creation of infrastructure that would support these oil flows, including the construction of petroleum storage facilities in the Chinese port of Ningbo to receive Brazilian oil.[33] The accord comes on top of a series of other recent steps strengthening the Brazilian – Chinese relationship in the area of petroleum, including a state visit by Brazilian president Lula da Silva to Brazil, and Petrobras opening a branch office in Beijing.[34] In a November 2004 interview, Chinese spokesman Yang Yang observed that cooperation between China and Brazil was advancing even more rapidly than that with Argentina because Brazil had clearly outlined specific areas of possible cooperation to the Chinese.[35]

China-Brazil Joint Space Projects. Through this project, China and Brazil jointly developed and launched two earth research satellites, with two more planned by 2008.[36] The first satellite, the China-Brazil Earth Resources Satellite (CIBERS-1) was launched in October 1999, while the second was launched in late 2004. Although the environmental monitoring satellite did not have significant military utility, it assisted China in developing real-time digital photo technology, thus increasing the capabilities of Chinese military IMINT satellites, and also gave the Chinese access to Brazilian satellite tracking facilities, helping them to gain a comprehensive picture of the flight paths of US satellites.[37]

Argentina

Current Chinese interest in Argentina revolves around access to that nation’s limited iron and petroleum fields, as well as the potential role of Argentina as a mature market for Chinese products. In Argentina, the level of bilateral trade with China reached 3.176 billion in 2003, an increase of 122% over the previous year.[38] Exports by Argentina to China alone increased by 143.4% to $2.56 billion. The value of Argentina to China is limited, however, by the difficulty of transporting goods to Asian markets--either across the Andes to pacific ports, or through the Panama Canal. Accordingly, as in Brazil, China has expressed interest in investing to develop the Argentine transport infrastructure with an emphasis on its railway system.[39]

Major Chinese initiatives in Argentina include the following:

Chinese Investment Commitment for Argentina – In conjunction with a state visit between Chinese president Hu Jintao and Argentine president Nestor Kirchner at the November 2004 APEC summit, China announced an investment package for Argentina that could be worth up to $20 billion, including $5 billion in investment commitments for the exploration and production of petroleum products.[40] With this investment, Argentine president Nestor Kirchner is believed to be seeking a path to cover Argentina’s short term debt payment obligations, and over the long term, to free Argentina from the policy oversight of the International Monetary Fund.[41]

Chinese-Iron Mining in Argentina. In mid-2004, the Chinese firm Ling Cheng was awarded a contract to re-activate a mineral field in Pategonia, the only proven iron deposits in Argentina.[42]

Chinese Oil Exploration in Argentina – The Chinese petroleum firm Sonangol is currently engaged in a joint venture with the new Argentine state energy firm Energía Argentina SA (Enarsa), in which it has committed $4.82 billion to explore potential oil fields off the coast of Argentina, and to investigate secondary extraction of oil from mature oil wells.[43]

Chinese Support to CONEA to Develop Nuclear Reactor Prototype. China is currently exploring possible collaboration with Argentina on the development of a new fourth-generation nuclear reactor. Initial design work on the mid-size reactor has been done by the Argentine National Atomic Energy Commission (CONEA), in partnership with the firm INVAP as part of the ArgentineCenter for Nuclear Reactors project (CAREM). CAREM is currently exploring Chinese funding and collaboration on the construction of a 27 kilowatt prototype reactor, as first step in the construction of a 300 megawatt design that could meet the power needs of small and mid-sized economies such as those found in Latin America.[44]

China-Argentina Joint Space Projects. Although at a lower level of effort than its space cooperation with Brazil, China also helped Argentina to develop and field its first surveillance satellite, SAC-C.[45]

Venezuela/Colombia

The major Chinese interest in Venezuela appears to be petroleum products. Although these products currently must be exported through the Panama Canal, infrastructure projects are under consideration which could ultimately allow the export of Venezuelan oil acrossColombia to Pacific ports. Chinese interest in Venezuela is also shaped by the populist, anti-US posture of Venezuelan president Hugo Chávez Frias. On one hand, Chávez is a potential ally in the region. On the other hand, he is also a potential threat to Chinese interests, insofar as his Bolivarian revolution and support for indigenous populism and anti-globalist causes could foment instability in China’s trading partners in Latin America, and undermine Chinese access to the resources of the region. Major Chinese initiatives in, or involving Venezuela include the following:

Purchase of Venezuelan Ormulsion. China’s commercial agent Petrochina, a subsidiary of China National Petroleum Corporation (CNPC) is currently in negotiations with the Venezuelan organization Bitor, to purchase orimulsion.[46] In December 2001, CNPC and PdVSA established the joint venture Orifuels Sinoven, S.A (Sinovensa) and invested $330 million to develop a capability to produce 6.5 million metric tons of Ormulsion per year by the end of 2004. In conjunction with this effort, in November 2003, CNPC began constructing a special, new type of power plant capable of burning Ormulsion in the Guandong province of China.[47] The new power plant is critical in enabling China to use the orimulsion, which is a low-grade, high-pollution content petroleum byproduct that has not traditionally been regarded as a marketable product

Maracaibo-Puerto de Tribugal Petroleum Pipeline. In 2002, Ecopetrol (Colombia) and PDVSA began studies on the construction of a 1100-1300 km long petroleum pipeline that to carry Venezuelan oil from the Maracaibo region across Columbia to the Pacific at the Port of Tribugal for export to the Western United States and Asian markets, including China.[48] Commitment to the pipeline was a key element of recent summits between Chávez and Uribe, including meetings on September 9 and July 14, 2004.[49] In conjunction with the pipeline, Colombia has discussed the construction of a future oil port on its PacificCoast with the explicit purpose of refining and exporting petroleum products to China and other Asian markets.[50] Such a pipeline would significantly increase the viability of Venezuelan oil sales to China, given the inability of modern supertankers loading on Venezuela’s Atlantic coast to circumvent the Panama Canal.

Guarija-Maracaibo Gas Pipeline. In July 2004, Venezuelan president Chávez signed a deal with Colombian president Uribe to build a 177 km long natural gas pipeline from the Guarija region of Colombia to the LakeMaracaibo area (Venezuela’s main oil producing region). The pipeline may also eventually extend across Colombia to the Pacific Ocean at Puerto Ballena. When completed, the pipeline will have a capacity to transport 150-200 million cubic feet of gas per day.[51]

Chinese-Venezuelan Investment Partnership. In 2001, Venezuela and China signed a memorandum of understanding facilitating cooperation and technology transfer in oil exploration and petrochemical engineering. The agreement included a 3-year arrangement for the supply of Venezuela crude to China, as well as an accord between the Instituto Nacional de Geología y Minería de Venezuela and the Office of Geological Investigations of China to develop advanced oil and minerals exploration technologies in China.[52] China currently has over $1.5 billion invested in Venezuela—the largest investment position of any country in the region.[53]