China's oil needs make Iraq war a serious concern

BEIJING - A long, messy war against Iraq that causes a spike in oil prices could pose a threat to China - a key economy with a growing thirst for fuel and increasingly tighter ties to global markets, analysts said.

By (AP)

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Published: Sat 22 Mar 2003, 12:07 PM

Last updated: Wed 1 Apr 2015, 9:07 PM

The conflict also puts additional pressure on the new leaders who took over China this week, pledging to keep stoking economic growth. If the economy sputters, the communist rulers might be unable to calm the mounting unrest among impoverished farmers and legions of laid off workers in the northern rustbelt.

'Stability is crucial to China's economic development. The problem of energy supplies will certainly bring fluctuation,' Wang Zhengzhong, deputy director of the Economic Institute at the China Academy of Social Sciences, said Thursday.

Adding to China's worries, the nation doesn't have strategic oil reserves - an emergency supply that countries like the United States and Japan use as a cushion against wild swings in fuel prices.

'China could take a hit because it doesn't have a buffer,' said Fred Hu, managing director at Goldman Sachs China.

But other economists have said that China should be able to avoid a crisis as long as OPEC sticks to its pledge to increase oil production during the conflict. The country is also starting to build strategic reserves, and its major oil companies are buying stakes in foreign producers.

China's demand for oil has been expanding steadily in recent years. Newly affluent Chinese have been trading in their bicycles for cars, and foreign companies have been opening factories in booming coastal cities.

'There was a 60 per cent increase in the number of cars in China last year,' Hu said. 'That gives you an indication of the voracious new appetite for oil.'

Last year, China imported 69.4 million metric tons (76.3 million tons) of crude oil - a 15 per cent increase from 2001, according to customs statistics. About 40 per cent of the oil came from the Middle East.

Some economists say that war can be good for the shipping industry. Ships are in greater demand to transport supplies, and large manufactures ask suppliers to ship more parts that can be squirreled away during a crisis, they say.

But the giant China Ocean Shipping Company issued a gloomy outlook about its wartime business.

'Not only will it cause a big increase in the price of fuel and insurance, it will bring about a sharp rise in the overall cost of shipping,' it said in a statement.

Another possible source of trouble for China's economy is its growing integration in the global economy. China is already one of the world's biggest exporters, and it recently joined the World Trade Organization, which requires members to comply with global regulations.

China's closer links to the rest of the world could be a mixed blessing, Hu said. A sluggish global recovery caused by the war could reduce demand for Chinese exports. But it could give China a boost, making the country look like a prosperous 'safe haven' for investment, he said.

Pu Yonghao, a consultant for the Asian Development Bank, predicted that if the war drags on and oil prices keep climbing, the fuel costs could eat into China's goal of 7 per cent economic growth this year.

However, Pu doubted the conflict would seriously cut into China's exports because they are so diversified. They're also more resilient because production capacity continues to expand as more foreign companies relocate plants to China, he said.


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