China and the Middle East

The Chinese have deployed a vice foreign minister to the Middle East, North Africa and West Africa to assess the security of Chinese energy assets there. Beijing is growing increasingly concerned by the unrest sweeping through the Middle East and the potential impact that will have — not only on oil prices but potentially on Chinese social stability.

Although the fifth-largest oil producer in the world, the Chinese are a major importer of oil as well, consuming more than twice as much as they produce themselves. In 2010, the percent of Chinese oil consumption that they had to import from abroad grew by an additional 50 percent. A large quantity of this oil comes from North Africa and the Middle East and from countries that are considered politically unstable. China currently gets about 3-3.5 percent of its oil from Libya. It’s increased its investment more than 25 percent in 2010 and, as we’ve seen, the Chinese have placed a lot of interest in the future of Libya as a supplier. The Chinese have had to work out the evacuation of more than 30,00 Chinese from the country.

What Beijing is trying to do is to determine both how long energy prices are going to stay high due to the unrest in the Middle East and whether there’s going to be a lasting impact on places that China has been able to sync their own investments in — gain access to more resources themselves.

One of the major issues for Beijing now is that, as energy prices rise, it has a compounding impact on the inflation problem that’s already raging in China. Chinese inflation in 2010 came in at about 3.3 percent. For this year, it’s estimated — prior to these crises — at reaching 4 or 5 percent. Those are the official figures — by many accounts, those figures are far below reality. The real number should be 6-7 percentage points higher. Inflation has long a problem for the Chinese and during periods of extreme inflationary jumps, China has faced significant social challenges as well.

Since the economic opening in 1979, China has had three major spikes in inflation: one in 1985, one in 1988-89 and one between 1993 and 1996. In 1985, inflation ran around 10 percent and the Chinese managed to hold things together socially. In 1988-89, the rising inflation contributed to what ultimately became the Tiananmen Square incident. In 1993-96, Chinese inflation was rapidly rising on the back of the rest of expansion in East Asia and the Chinese really were saved by the collapse of the rest of Asia where Beijing could rein in, it could hold things down domestically and then it could start to grab the export share that had fallen away from many of the Asian economic tigers.

As China watches the unrest and North Africa, they’re also looking cautiously at the so-called “Jasmine” revolution that’s just in its early stages in China. Thus far we haven’t seen very large numbers of demonstrators, but the Chinese security apparatus response suggests that they may be even more concerned about this than perhaps what people see from the outside.

For Beijing, several things come together right now that make this a particularly difficult period. One, you have the higher energy prices coming on top of inflation that already exists. Two, you have this attempt at public demonstrations that spread not only geographically but across socio-economic classes. Three, you have a change in communication strategies where information is able to move faster, its finding ways to circumvent Chinese censorship and it’s drying out people who have very different grievances. The fourth is that China is in a very different stage of its development right now. There really has become a growing middle class, there has been higher expectations given to the Chinese over the past few years — the government to deal with the economic crisis has tried to push domestic consumption, has done so by subsidizing, by giving rebates, by funding, and people are coming to expect more and expect more. These factors are combining at a time where Beijing is also focusing very heavily on the transfer of leadership from Hu Jintao to his successor.

At times like these, social stability becomes a top priority for the government. They want things to hold steady so they can carry out the political transition without any significant problems or impact. STRATFOR is watching very closely how the Chinese manage these different issues as they come at them very quickly. The Chinese government is not known for being able to move very rapidly, particularly at a time like this when they are undergoing a political transition and they’re working up a balance between the various political factions.

STRATFOR.com