Why the West should beware of Beijing’s commodity splurge.

Financial experts have been sparring lately over how China will spend the $1.5 trillion in dollar reserves it amassed selling sneakers and toys to the United States. Some claimed Beijing would diversify by buying euros and sterling to shrink the dollar's impact on its portfolio. Others swore China would use some on gold as a hedge. But recent acquisitions show they're all plain wrong. While the West is hobbled by recession, Beijing's been splurging on cheap foreign commodities. And Washington should worry. China's positioning for a rebound. And hoarding scarce materials for the future.

Take oil. China is now the world's second-largest consumer of the commodity after the United States. And it's hungry. The state is more than doubling its oil reserves to 270 million barrels by 2014. It plans to spend $4.39 billion on stockpiling facilities that can hold 169 million barrels. And it's ramping up oil production capability in faraway places like Iraq and West Africa. Last week, a partnership between the China National Petroleum Corp. and BP won the first contract in Iraq's auction of seven oil fields. Last month, China's largest refiner, state-owned Sinopec Group, agreed to buy Canadian oil-exploration firm Addax Petroleum for $7.19 billion in the country's largest takeover to date of a foreign firm. Late last year, Sinopec paid $2 billion for another Canadian company, Tanganyika Oil, which has a production agreement with Syria. Clearly, Beijing means business.

And the Chinese spree doesn't stop there. The State Reserves Bureau has just completed the purchase of 235,000 tons of copper from several Western mining firms in a deal so huge that world prices for the commodity shot up when news broke. Sinosteel, a state-owned trading firm, imported 10 million tons of iron ore in the first five months of the year, according to Shanghai Securities News. The newspaper reported that China was upping its share of imported ore from 50 percent to 70 percent of that used in the country because imports are so cheap. The Aluminum Corp. of China, meanwhile, is buying $1.5 billion worth of shares in Rio Tinto Group, the world's largest mining firm.

The West should wake up to this spree. Its economies have yet to touch bottom, but things will change. In a year or 18 months from now, the industrial world will return to growth to find critical materials have been taken by China. That will make their recovery much tougher.

And what about that debate on China's dollar holdings? Well, the Chinese aren't changing their reserve policy anytime soon. A lot of the speculation against the dollar was prompted by data showing that Chinese investments in U.S. Treasury bonds had dropped from $767.9 billion in March to $763.5 billion in April, the first such decline since June 2008. But Brad Setser, a U.S. academic who follows Chinese reserve policy, is sure Beijing didn't sell Treasuries in April or May. "Best I can tell, China shifted from [Treasury] bills to short-dated notes in April rather than actually reducing its overall Treasury portfolio," Setser said. So Beijing may be rebalancing, but it isn't selling out. It's readying for a future industrial policy.

With the West mired in a slump, it's a clever time to buy. Commodities tend to move in the opposite direction to the dollar, so they offer a good hedge against the recent decline in the dollar. Plus, it's not just an investment: China needs the materials. Unlike the anemic United States, China's GDP is expected to grow 7.75 percent this year and 9.25 percent in 2010. "The Chinese economy is now rebounding strongly from the slowdown," said the Organization of Economic Cooperation and Development.