With circa $2 trillion in foreign reserves to spend, developments in China command instant world attention these days. Last week there was a flurry of activity in the world’s stock markets when it was incorrectly reported that Beijing was about to announce a major new stimulus package. Premier Wen Jiabao announced last week that China is still on track to grow its economy by 8 percent this year despite a catastrophic drop in exports and a major drought that threatens to wipe out much of the winter wheat crop. This goal is to be achieved through increased investment in agriculture and infrastructure projects.
Beijing’s major problem is unemployment in a country of 1.3 billion that is evenly split between urban and rural dwellers. Some estimates place the total unemployed as high as 25-35 million out of a total non-agricultural workforce of 500 million. Redirecting a workforce of this size from producing goods for export to working on domestic infrastructure in a short period of time seems like a nearly impossible task.
In the meantime, China is capitalizing on low world prices for oil and other commodities to build up its strategic stockpiles in anticipation of a global rebound. With plenty of hard currency available, Chinese companies are increasing their holdings in foreign oil producing countries at a time when smaller Western companies are finding capital hard to secure..
For now Chinese oil imports seem to be holding steady as efforts to buildup a strategic reserve offsets declines in industrial production. Over the longer run Beijing’s success in maintaining its growth rate in the face of worsening global conditions will be one of the key factors in the oil market.
On a more ominous note, a recent poll of leading Chinese economists show that two-thirds of them now favor keeping state reserves in gold rather than US government securities.