Mar 2005

This article is part II of a series. Click the following for part I, The Four Considerations.

When a nation collectively endures a traumatic event, the result is a psychological scar on the people's psyche. As a result of the Great Depression, for example, an entire generation of Americans developed a mistrust of banks and an aversion to paper assets that lasted most of their lives. The effects of the Great Depression reverberate to this day; if it takes another 30 years to resolve Social Security issues, historians will confirm the Depression's influence over a full century of American politics.

And yet, America's Great Depression was a mere mosquito bite in comparison to China's Great Famine.

American politicians were once known for promising "a chicken in every pot." The Chinese equivalent to this was Chairman Mao's "Iron Rice Bowl."Via the "chicken in every pot" analogy, it was implied that the average American would not just scrape by, but live well and enjoy the basics of prosperity. In contrast, the "Iron Rice Bowl" essentially promised that the people would not starve.

Even by this far reduced standard, Mao failed miserably. In a country known for famines, Mao presided over the worst famine of all in the late 1950s, claiming an estimated thirty million lives.

America's Great Depression happened three quarters of a century ago and, while times were certainly hard, few lost their lives. China's Great Famine happened more recently and caused far greater destruction, leaving most of China's leadership generation with vivid and painful memories. Is it any wonder China is obsessed with food security?

If geopolitics and national psychology were not key factors, China would be far more focused on importing grain than producing it. The middle kingdom does not have much arable land to speak of, relative to the population's needs, and severe water shortages are an ongoing concern.

But as it stands, geopolitics and psychology are indeed key factors… and thus China tries very hard to keep grain imports at less than 5 to 10 percent of consumption. This decision is highly influenced by the United States' dominance over the international grain market, and the pro-America tilt of most large grain exporters.

In China's view, confrontation with the United States is not a matter of "if," but "when." By ensuring food security, the middle kingdom kills two birds with one stone: lowered exposure to the international grain market gives America one less card to play in the event of confrontation, and self-sufficiency is good domestic policy with memories of Mao's famine still strong.

However reassuring it might be, China knows that absolute food security—100% self-sufficiency—is physically and logistically impossible. Land and water issues make grain production a state diktat rather than a profitable investment; a defensive imperative rather than a capitalist decision. Furthermore, as China's middle class expands and earns more discretionary income, internal demand for grain will explode. (Think six to ten pounds of grain for every pound of beef consumed... plus hundreds of millions of subsistence farmers increasing their daily caloric intake by hundreds of percent).

buying Brazil, wooing Australia

To ensure food security in the coming decades, China must focus on two areas: developing ties with grain exporting nations, and supplanting or neutralizing the influence of the United States over grain suppliers in any future conflict. In this regard, the dragon's roving eye is fixed on South America… Brazil in particular.China sees its relationship with Brazil as paramount, and the feeling is mutual: Brazilian President Luiz Inacio "Lula" da Silva has repeatedly emphasized the value he places on a "strategic partnership" with the middle kingdom.

As a major grain, minerals, and metals exporter, Brazil has a lot to offer China. Many Chinese enterprises, such as China Grain & Oils Group, Minmetals Group, and Baosteel Group, have already established partnerships with their Brazilian counterparts.

The strategic core of the China / Brazil partnership boils down to guaranteed long-term supply in exchange for up-front investment and guaranteed demand. The Chinese see an opportunity to purchase food security by investing billions of dollars in Brazilian infrastructure and development; in turn, Brazil sees the opportunity for an outside investor to fund massive industrial improvements that would be too capital-intensive otherwise.

In result, both parties win… while the United States gets left out. By spending billions on Brazilian infrastructure, China strengthens ties with a key partner, helping to ensure solid long term returns on its investment. And thanks to China's billions poured into infrastructure, Brazil becomes a stronger competitor in world markets, establishing better position to meet massive demand for everything from soybeans to steel. The United States' loss, meanwhile, is threefold: American farmers see one of their largest competitors grow stronger; US leverage over China grows weaker; and another erstwhile ally, Brazil, quietly switches sides.

A similar strategy is in play with Australia—albeit with a twist. Australia is a major grain exporter and a major ally of the United States; while China cannot hope to "buy" Australia with billions of dollars in direct investment, it can certainly weaken traditional US ties.

By tempting Australia with lucrative access to Chinese markets, the middle kingdom can potentially neutralize their value as a United States ally in any ultimate confrontation (and remember: for Beijing, confrontation is not a matter of "if" but "when").

Earlier this year (2005), Australia was the first outsider given access to China's state-run gold mining sector.Sino Gold, listed in Sydney, has received approval for a US $70m development project in Guizhou province. This is merely the tip of the iceberg. As China seeks to solidify relations with the land down under, the charm offensive is showing clear sign of working. Australia has long engaged in a national debate on whether they should consider themselves a part of the west or part of Asia; by extending the lucrative hand of friendship, China is happy to encourage such a question.

So who are the winners and losers in China's quest for food security? Brazil and Australia are but two examples. China will look to extend the pattern wherever it might apply: buying a foothold with infrastructure investment, and / or smoothing relations with special-access deals to boot. From an investment perspective, we should look to the countries and industries set to benefit from this trend.

Construction and development in Australia and Brazil would be one place to start, with grain producers in Eastern Europe potentially to follow as the pattern plays out. We can also look to dry bulk carriers, ship builders, and export specialists: as China's demand for grain inexorably increases, more of it will be traveling across the water.

As a second derivative, we can look to the innovators and technology suppliers:those companies focused on improving tanker technology, cutting the costs in infrastructure development, improving the efficiency of canals and waterways, and so on. Last but not least, we can look to those companies getting special-access deals, as Beijing trades favors for neutralized US ties and increased food security.

Next, Part III: Ensuring Energy Security.