182) China's checkbook diplomacy: just for natural resources

Is China Using its Checkbook to Lock up Natural Resources Around the World?
Theodore H. Moran
Peterson Institute for International Economy, January 13th, 2010

Backed by the Chinese government, Chinese companies have been acquiring equity stakes in natural resource companies, extending loans to mining and petroleum investors, and writing long-term procurement contracts for oil and minerals. These activities have aroused concern that China might be locking up natural resource supplies, gaining preferential access to available output, and extending control over the world’s extractive industries.

The empirical question addressed in my work for the Peterson Institute for International Economics (PIIE) is whether Chinese equity acquisitions, loans, and long-term procurement contracts help consolidate a tightly concentrated supply base while securing preferential access for Chinese buyers, or—instead—help multiply sources and diversify the supply base, thus making the provision of output more competitive for all buyers.

My empirical work examines the 16 largest Chinese natural resource procurement arrangements and assigns them to one of two categories. If the buyer-seller arrangement simply solidifies legal claim to a given structure of production, I label the outcome “tying up” or gaining “preferential access” to supplies. Such an arrangement has zero-sum implications for other consumers. If the buyer-seller arrangement expands and diversifies sources of output more rapidly than growth in world demand, I label the outcome “expansion and diversification” of supplies. Here the zero-sum implication vanishes as other consumers have easier access to a larger and more competitive global resource base.

My scorecard of China’s procurement arrangements shows a few instances (3 of the largest 16) in which Chinese natural resource companies take an equity stake to create a “special relationship” with a major producer. But the predominant pattern (13 of the largest 16) is to take equity stakes and/or write long-term procurement contracts with the competitive fringe.

Overall, therefore, the rapid emergence of China as a major industrial power poses a complex challenge for global resource markets. On the demand side, the Chinese appetite for vast amounts of energy and minerals puts tremendous strain on the international supply system. On the supply side, Chinese efforts to procure raw materials can exacerbate the problems of high demand or help solve the problems of high demand. The evidence from these 16 largest Chinese natural resource procurement arrangements shows that Chinese efforts—like Japanese deployments of capital and purchase agreements—fall predominantly into categories that help expand, diversify, and make more competitive the global supplier system.

Chinese attempts to exercise control over “rare earth elements” (REE) mining may constitute a significant exception, however. China has pursued an aggressive policy of acquiring equity stakes in new producers, in particular in Australia. Deng Xiaoping, the Chinese leader who promoted China’s growth as a market economy starting in 1978, once noted that while the Mideast has oil, China has rare earth elements. How should national authorities react to the prospect of Chinese investment in offshore REE companies? The foreign acquisition analytics in the rare earth sector fit well within the broader framework laid out here: Chinese investment in a small independent producer whose impact can do nothing except help expand supply and make the industry more competitive should be encouraged; Chinese investment in a more major producer that perhaps puts the Chinese owners (and Chinese government) in a position to control or constrain production should be viewed with circumspection, and perhaps be blocked.

My investigative focus here is deliberately narrow and precise, assessing the impact of Chinese resource procurement on the structure of the global supply base. I conclude by raising other separate important issues, including the impact of Chinese resource procurement on rogue states, on authoritarian leadership, on civil wars, on corrupt payments and the deterioration of governance standards, and on environmental damage. Such effects may make patterns of Chinese resource procurement objectionable on grounds quite apart from the debate about possible “lock up,” “tie up,” and “control” of access on the part of China and Chinese companies.

Theodore H. Moran, a nonresident senior fellow at the Peterson Institute for International Economics, holds the Marcus Wallenberg Chair at the School of Foreign Service at Georgetown University.