NS4053 Fall Term 2013

Chinese Investment in Resources

China’s Global Investments

2

T. Moran: Feeding the Dragon I

• Theodore Moran, Feeding the Dragon, Milken Institute Review

• Asks question: • Has China embarked on a long-term strategy of

controlling access to natural resources from around the world?

• A plausible case could be made:

• Japan attempted to do something similar in the 1930s

• China may be anxious to reduce its dependence on the commercial goodwill of foreigners

• Rapid sustained economic growth would be far more difficult without large and growing imports of resources

• China might fear some sort of future resource-linked sanctions – human rights, refusal to join climate accords etc.

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T. Moran: Feeding the Dragon II

• Argues while can make a plausible case that China is trying to control world supplies of resources

• Chinese companies have taken equity stakes in African oil fields

• Extended loans to mining and petroleum investors in Latin America

• Written long-term procurement contracts for minerals and natural gas from Australia

• Important question is

• Whether or not these steps reduce other buyers’ access to world supplies, or

• Actually might these tactics actually serve the interests of non-Chinese buyers – increasing global supplies.

4

T. Moran: Feeding the Dragon III

• Need to look at the evidence.• Best done by examining Chinese natural-resource

procurement deals• Four broad types of Chinese resource transactions:

• 1. Equity stakes in large, established producers

• 2. Equity states in start-ups and small producers aiming for expansion

• 3. Loans to established producers in which the debt is linked to a purchase

• 4. Loans to back the expansion of small developing firms

• 1 and 3 simply gives a Chinese company a legal claim on the output of an established producer

• Has zero sum implications

• China’s access comes at the expenses of other importing nations

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T. Moran: Feeding the Dragon IV

• If deals were 2 or 4

• The procurement arrangements expands and/or diversifies output – all resource users stand to gain

• Moran then examines China’s 16 largest procurement deals from 1996 – 2009

• Resources included oil, natural gas, bauxite, copper etc• Some cases (3 of 16) where Chinese companies took an

equity stake to create a “special relationship” with an established producer

• Typical pattern (13 of 16) was for Chinese enterprises to

• Take equity stakes or

• Write long-term procurement contracts with producers that operate at the competitive fringe and need Chinese capital and expertise to expand

• Everyone gained

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T. Moran: Feeding the Dragon V

• Rare earths and Lithium – Exceptions to Rule?• More than 90 percent of rare earths used in U.S.

now come from China• Driven by cost not scarcity• However concern over Chinese restricting exports

• Many rare earths used in high-tech products, green technologies

• Potential danger here that China might try to lock up other supplies of rare earths

• Lithium important for high performance batteries

• China currently the leading producer

• However lithium available from many regions

• Half world reserves in Bolivia

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T. Moran: Feeding the Dragon VI

• Summing up• Finds much of China’s resource investment is

flowing into regions and countries avoided by Western investors

• Sudan, Iran, Zimbabwe

• China does not make demands for improved governance

• Feels concerns about China’s push to secure resources well grounded but probably misdirected

• Over-all effect so far has been positive

• Primary reason that Chinese policies are making resource markets more competitive rather than less is China’s willingness to invest where other’s won’t

• Concludes China a problematic partner in efforts to coax outlier states into the global civil society8