China and India are currently the engines of world economic growth. But India is still a minor part in the worldwide competition for scarce resources. China has become the world's second-largest importer of oil after the United States. It is building new cities and a network of superhighways, both of which are only deepening its appetite for oil, steel and other industrial materials. The rise in price for oil, which recently crossed $60 per barrel, has profound implications for Indian industry, since it continues to operate in conditions of chronic energy shortage.

In its ongoing strategic rivalry with the United States, China holds a trump card -- its nearly 800 billion dollars in foreign exchange reserves. Until now Beijing [Images] has been content to buy low-paying US government bonds, indirectly financing America's huge trade and budget deficits.

According to one view, there is a domestic imperative behind this policy. The Communist Party hopes to gain legitimacy in the eyes of its citizens that it lost after the Tiananmen massacre 16 years ago by appealing to nationalism by reclaiming Taiwan. By integrating its economy to that of the West, it makes itself immune to Western sanctions should it take over Taiwan by force.

In reality, China and America are already dependent on each other. Much of American manufacturing has relocated to China to take advantage of low wages. China cannot let its currency appreciate against the dollar, because then its products will be too expensive for Americans to buy, which would result in the closing of its factories, and social unrest and unemployment.

A new phase

The contest between China and the US has now entered a new phase. Beijing has moved beyond holding US government bonds to the purchase of American companies. Last year Chinese computer maker Lenovo bought IBM's PC operations for $1.7 billion.

More recently, fridge and washing machine maker Haier bid $1.28 billion for US domestic appliance group Maytag, and the China National Offshore Oil Corporation (CNOOC), which is 70 percent owned by the Chinese government, offered $18.5 billion in cash for the American oil company Unocal.

The bid by CNOOC is raising objections in the US on national security grounds. Unocal has global reach and its control would make China a formidable player in the new energy 'great game.' Beijing is pursuing several other initiatives to secure oil and gas that will bypass American or European companies before reaching China. This includes negotiating with Russia [Images] for a pipeline to bring Siberian crude to Daqing, China's northeastern oil hub.

As its economic power increases, China's foreign relations are being transformed by its energy imperative. Beijing is entering into deals with countries around the world to diversify its economic and trade relations. It has already become the second largest world economy as seen from the figures for GDP from the 2004 CIA World Factbook: