Feeding the Dragon: Chinese Oil Investment and Economic Statecraft

Abstract

In the course of China’s immense export-driven economic expansion, the Chinese economy developed a critical reliance on imported oil and accumulated massive foreign reserves. In 1993, the oil needs of Chinese manufacturing outstripped domestic production, and China currently relies on imports for over 80% of its total oil demand. Since China’s continued ascendance as a great power and the Chinese Communist Party’s legitimacy both depend on maintaining economic growth, security of oil supply constitutes a critical strategic interest to Beijing. While importing the world’s largest volume of oil, China simultaneously exports enormous amounts of capital internationally in the form of investment and lending. Some critics claim that a portion of this capital, particularly in the Belt and Road Initiative, targets highly corrupt and/or debt ridden states in order to advance Beijing’s strategic interests. This thesis examines the intersection of these two economic realities of contemporary China by asking whether, and if so how, China leverages its financial might in vulnerable states to assure continued access to foreign oil reserves. This paper seeks to answer these questions by conducting a macro-level, empirical analysis of Chinese investment and lending with respect to corruption and debt, two factors identified as vulnerabilities conducive to establishing non-market arrangements. I employ a variety of statistical techniques, including k-means clustering, Kolmogorov-Smirnov tests, decision trees, and various regression methods, to quantitatively deliver a better understanding of whether, and if so how, Beijing financially targets such vulnerable states to enhance its energy security. The broader academic and political debate on this issue remains at conflict as to whether Chinese capital reflects liberal, market-driven economic interests or mercantilist, strategic motivations. Although previous studies have investigated the tendencies of Chinese financial activity at large, the debate regarding oil acquisition relies predominantly on case studies and suffers from a dearth of statistical analysis. To my knowledge, this thesis constitutes the first attempt to explore this topic through statistical means. With this investigation, I provide an empirically-evidenced conclusion that Beijing’s financial activity targets highly-corrupt states, largely independent of state financial conditions, in a manner that enhances Chinese energy security. I first find that Chinese FDI deviates from world patterns to a statistical significant degree when dealing with highly-corrupt, oil-producing states. I then investigate China’s corruption preferences when undertaking oil investments and discover that Chinese actors exhibit remarkably different approaches than their corruption-averse Western counterparts. Disaggregating investments by share-size and individual investor, I subsequently find that equity structures supportive of energy security concentrate in corrupt locales to a statistically significant degree and that investors with the mandate of advancing energy security engage with corruption at a much higher rate than investors without such objectives. Lastly, I explore the issuance of debt-for-oil contracts and find corruption, rather than debt, to be the ultimate determinant of this exploitative lending. Throughout these statistical analyses, I provide qualitative explanations and examples to elaborate on Chinese efforts to secure continued access to foreign oil reserves.