Convert exchange pile into energy resources

Energy is becoming an important attribute for world financing circles. China, as a fast-growing economy with increasing energy demands, should raise its awareness of energy financing to the national level and take concrete measures.

The development of energy's attribute of finance has helped those countries dominating the world's energy finance gain a huge profit in a restructured global labor division system. To reduce the impact brought by a devalued dollar and global financial bubbles on its foreign return, China should convert a major part of its mammoth foreign reserves into energy resources or into a strategic reserve stockpile. For an economy like China, the establishment of a solid reserve of energy in kind remains a critical step toward promoting an integrated energy finance system.

To promote the move's smooth implementation, China should first work out a set of integrated energy finance policies. Currently, the country's overseas energy development strategy is encountering a range of risks, from the booming inter-continental resources cooperation, geopolitical interests, unfair international financial order, to an imbalanced exploration of global resources. The integrated energy finance policies aim to take into consideration financial security and energy security, divide the country's huge foreign reserves into ones of currency, resources and futures to help domestic energy companies gain a stable return in the fluctuating international markets and then shirk risks.

To this end, a special energy fund should be set up. The establishment of such a fund, which serves as the core of the energy finance system, is expected to help promote an effective combination of the energy industry and financial capital. Also, the foundation, which comprises the funds for overseas acquisition, industrial development and risk investment, should be used to financially support domestic resources enterprises in their overseas moves ranging from energy prospecting, to purchase of the right for oil fields exploitation, investment into fine chemical industry and evaluation of major projects.

Besides, a special bank for energy investment and reserves should be set up as soon as possible. According to predictions by the International Energy Agency, a total of $2.3 trillion are to be invested by China's energy departments from 2001 to 2030. The country's common banks are obviously inadequate to meet such an enormous investment demand. To advance the development of the country's fledging energy sector, a special energy investment and reserve bank is thus badly needed.

In addition, greater effort should be made to promote innovation of domestic energy enterprises. China has entered a stage of energy insufficiency, technological upgrading and rising energy demand. This makes it necessary for the country's oil and petrochemical enterprises to get well prepared to export capital and import resources for further development. In the first two months, China's import of primary products suffered a negative 10.6 percent growth rate from the same period a year earlier, of which the import of crude oil declined by 13 percent and refined oil declined by 6.4 percent. Along with a dwindling demand, the aggravating difficulty in trade financing has also contributed much to the drastic import decline. Under these circumstances, the country's enormous foreign reserves should be used to fund domestic enterprises in their "go-abroad" campaign. Energy sectors could be allowed to issue convertible securities, bond financing and long and short-term liabilities financing. Multilayer financing channel should be set up to control risk.

Also, substantive efforts should be made to step up the process of China's renminbi as an international currency for oil trading. According to statistics, about $800 billion to $1 trillion-worth oil dollar is being circulated, brewing a huge risk for exchange rate risk and devaluation of the dollar. As the dollar's dominant status as a global reserve currency now lacks strength in the face of new challenges, the creation of a diversified oil pricing system and transaction currency will be irreversible in the future. China should try to step up and expand yuan-denominated trade with neighboring countries to expedite the process of the yuan toward becoming a regional reserve and settlement currency. This is the first and inalienable step to develop yuan into an international currency.

Currently, the world's oil demand is roughly 84.30 million barrels per day, out of which China consumes 7.5 million barrels or 9 percent of the global total. The growing oil consumption makes it necessary for it to set up its own oil finance strategy and thus form the "China's market prices" in global oil deals.

For this purpose, the country should encourage more domestic oil firms to enter the world's oil market and actively push for settlement of oil deals in renminbi, in an effort to offset the impacts brought by fluctuating international oil prices.

Also, the implementation of an agreement recently signed between China and some neighbors on the use of yuan as their trade settlement currency will inevitably help the yuan go international and lay a solid foundation for the Chinese currency to become an oil trade currency.

The author is an economics researcher with the State Information Center.

(China Daily 04/28/2009 page8)