China is strengthening its capacity to arm trade, says a new report

China diversifies supply of critical natural resources – a move which will strengthen Beijing’s ability to arm trade against its geopolitical rivals, according to a report recently published by risk consultancy Verisk Maplecroft.

“If China has a soft belly, it is highly dependent on foreign natural resources,” the report said on Thursday.

China is a major consumer of important commodities, including crude oil and iron ore. But the country relies heavily on imports to meet its domestic demand for these goods.

One way the country diversifies its import sources is by buying stakes in foreign companies, said Verisk Maplecroft. This will increase the proportion of Chinese-owned resources in total imports from the country, the report said.

For example, the consultancy mentioned the number of base metal and gold companies owned by China in Oceania increased from zero in 2000 to 59 last year. The report accounted for about 22.6% of all foreign owners in such companies.

Oceania is a region that includes Australia, Papua New Guinea, New Zealand, Fiji and many island nations.

“China seeks to strengthen control over global supply chains through investment and overseas partnerships with major international companies. Beijing has supported Chinese state-owned enterprises [state-owned enterprises] “To become global” and to establish control of resource bases abroad since the late 1990s, the report said.

China imports critical goods such as crude oil, natural gas, metallurgical coal and iron ore from a “highly concentrated” group of trading partners, Verisk Maplecroft said.

In diversifying its import sources, China prefers suppliers from “stable autocratic regimes” to democracies that may involve frequent changes in governments or potential policy changes, she added.

“Our data show that China is pivoting on more autocratic regimes that represent greater stability for its supply lines than democracies that are or can become hostile to Beijing,” he said.

“By providing diversified sources, China will be in a better position to arm trade with geopolitical rivals, while increasing economic dependence on new and existing partners,” he said.

But democratic countries dominate the production of resources – one of them is iron ore.

China’s largest supplier of iron ore last year was Australia, an American ally that was recently hit by trade restrictions in Beijing.

Australia delivered a monthly average of 60.86 million tonnes of iron ore to China in 2020, accounting for more than 60% of total Chinese imports of goods, Refinitiv data showed.

That’s why China has strengthened trade ties with other iron ore producers, such as Brazil and Guinea, according to the Verisk Maplecroft report.

“Despite a tougher line on Beijing under President Bolsonaro, Brazil remains a priority in China’s diversification strategy, while Guinea is well positioned in front of Beijing amid democratic development,” the report said.

Such geopolitical tensions could persist as China accelerates its efforts to reduce its dependence on “unfriendly” resource providers, Verisk Maplecroft said.

“The ban on coal imports from Australia was a prime example, but more are likely to follow, with a significant impact on global trade in goods and the likely geopolitical landscape,” he said.

“Companies and investors are in the direct spotlight of Beijing’s diplomatic moves and will have to prepare accordingly.”