China’s Greatest Weapon

By Christopher Hancock June 22, 2007

A couple of months ago I walked into the Ritz Carleton in Washington D.C. for a meeting with a Russian hedge fund manager.

Over some painfully uninspired eggs, burnt toast and multiple cups of coffee, we spent the better half of two hours solving the world’s problems.

He shared his opinions on America’s long-term commitment in Iraq… I voiced my concerns regarding Moscow’s capacity to intentionally disrupt energy supplies for political capital.

He quickly responded, “Why do you think America is even in Iraq?”

I laughed…to beat the Chinese to the oil, of course. He laughed.

He certainly didn't disagree or show much concern. Maybe he knew something I didn’t…maybe he was privy to the possibility that Iraq would court (of all nations) China in their efforts to rebuild the nation's oil production.

In fact, that’s exactly what’s happening. Baghdad hopes to revive a $1.2 billion dollar oil deal originally established with China National Petroleum Corp. before the war.

That’s the principal reason behind Iraqi President Jalal Talabani arrival in Beijing on Wednesday. The two nations are expected to discuss international and regional “issues” of common interest.

Iraq is slightly more than twice the size of Idaho, sporting a 64.8 percent annual inflation rate and a GDP per capita on par with a month’s mortgage payment here in Baltimore. So apart from phosphates, sulfur and sand, the only tangible assets of any value to the Chinese are, of course, oil and natural gas. Iraq controls the world’s third largest oil reserves. Iraq's economy is dominated by the oil sector, which has traditionally provided about 95% of foreign exchange earnings. So we’re not so surprised to learn that Iraq plans to actively seek foreign assistance in the reconstruction process, as we are to see their active pursuit of America’s greatest competition in the race for dwindling oil supplies.

We'll let you decide. But for me, I find it quite interesting to see that after spending more than four years and nearly $500 billion in Iraq, we're left with nothing more than arguably the world’s most unstable government openly seeking Chinese assistance in fixing their most valuable domestic resource.

In pre-departure statements, President Talabani told reporters that he hoped "Iraq's debts to China would be written off."

Debts to China… Are you kidding me? I’m sure Washington loved that one.

But before losing all hope, it’s true that many Western companies want nothing to do with Iraqi oil right now. I certainly don't blame them.

But you have to hand it to the Chinese on some levels. I don't remember any cries from Beijing in the past five years over losing their $1.2 billion oil exploration deal. And that's real restraint considering China's ever-growing dependence on oil imports.

Beijing basically sat still and waited. Why America's international image eroded, the world's opinion of the Chinese has only strengthened.

The French philosopher/mathematician Blaise Pascal once wrote, "Most of men’s problems arise from their inability to sit quietly and alone."

I'm not sure what Washington plans to do next, but I can tell you what I believe the Chinese will do. They'll sit back and watch. They'll wait for their moment... They'll know when the time is right, and then they'll pounce.
Before you know it, the Chinese will have established deep economic ties with governments all over the globe.

And despite sensationalist headlines toting China’s “massive” military buildup, they won’t use force to do it either.

They’ll use a weapon more potent than bombs or bullets. They’ll use debt. It worked in Iraq. I suspect it may work here as well.

You see, the Chinese know it's best not to use a cannon to crush a mosquito.

Until next time,Chris Hancock