By All Means Necessary (8 page)

But the biggest popular focus of attention on how China might transform the structure of world markets hasn't been on minerals, natural gas, or food. It has emphasized oil, and it warns of drastic changes. These are severely overwrought.

Some have argued that Chinese investment (which we explore in more detail beginning in the next chapter) is “locking up” oil supplies and removing them from the global market.
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If that were indeed happening it would be disturbing; it could raise prices for others, inhibit market flexibility, and thus increase the vulnerability of other oil consumers. Yet there is no evidence that China is regularly removing large volumes of oil from world markets. Most overseas Chinese oil production, perhaps the target of greatest concern, is actually sold onto world markets rather than shipped back home.
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Moreover, even if it insisted instead on sending all the oil that its companies produced back to domestic refineries, the net impact on world supply and demand wouldn't change. Resulting world prices would also remain the same.

There is one more possibility, though, that could allow ventures abroad to affect the global price of resources, particularly the price of oil. China has historically controlled consumer prices for refined oil products (gasoline, diesel) in order to shield citizens from high and often volatile costs. Doing this was far easier when China controlled its own sources of supply. (The same was true for the United States when it relied only on domestic and captive overseas production.) As China has become reliant on oil imports, this approach has become untenable, creating intolerable financial burdens on state-owned oil companies having to procure expensive oil abroad only to sell the resulting products at a loss back home. As a result, beginning in the mid-2000s, China began to remove controls on prices for oil products. The consequence has been higher domestic prices, less demand for oil than would
otherwise be the case, and therefore lower world prices as the ultimate result.

Were Chinese firms at some point in the future to control enough overseas oil to supply fully the country's needs, it would become possible for the Chinese government to reimpose strong price controls without creating large and explicit fiscal burdens on companies at the same time. (Under these conditions, Chinese firms would not need to “buy” oil; they would simply transfer oil internally. Fiscal burdens could, however, still arise from costs associated with acquiring control of overseas fields and producing oil from them.) In this way, control of overseas oil could effectively create a separate world of “Chinese oil” and raise prices for everyone else. But the possibility is remote and distant at most; China shows no prospect of buying up as much oil as it expects to consume and has not shown a desire to use overseas oil ownership to return to the price controls of the past.

Chinese economic growth has led to demand for resource imports with far-reaching consequences for resource prices—though with distinct dynamics for each resource, and big price increases for some resources and much smaller impacts for others. The biggest impact so far has been on the prices of a host of critical commodities, most notably oil, but also several essential industrial minerals. That in turn has affected producers and consumers around the world, regardless of their direct relationships with China. The country has also been changed by its own resource quest—high resource prices resulting from strong domestic demand have been a prime motive for efforts to curb resource consumption and rebalance the domestic economy—yet these impacts on China have thus far been dwarfed by its impact on the world. Meanwhile, those who predicted that China would alter the basic structure of world markets have largely been proven wrong: oil, in particular, is still traded on open markets, contrary to what some foresaw. In some places where China actively sought to use its power to transform markets—most notably in iron
ore—the ultimate impact has indeed been transformational, but not in the way its leaders foresaw.

What about the future? Many believe that past price increases are a mere taste of things to come—that past will indeed be prologue for world commodity prices. Underlying market dynamics, however, suggest that the biggest price impacts driven by Chinese demand may well have largely run their course; it is considerably more likely than not that the price gains of the last decade will not be repeated again. Indeed, depending on how the Chinese economy evolves—partly in response to high prices themselves—those price rises could reverse in part. In the coming years, the bigger impacts of Chinese demand may be seen through transformations in the very structure of critical markets, particularly for natural gas. Ironically, given the popular fixation of China as a mercantilist and anti-market power, these changes are more often likely to point in the direction of more flexible and transparent markets rather than opaque and politically charged ones: China is slowly acquiring the ability to change the structure of global markets, though only if it pushes in a direction others also support.

But trade is only the start of how China's resource quest is affecting the world at large. This resource quest is far more likely to transform commercial relationships through the interactions between China and the countries in which its companies are increasingly investing than through its trade relationships. The dynamics on display there are fundamentally different from those we've encountered thus far.

MARCH
14, 2013,
BROUGHT
important news: state-owned China National Petroleum Corporation (CNPC)—the largest integrated energy company in China—planned to acquire 20 percent of a massive Mozambican natural gas field in a deal worth $4.21 billion.
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It would not be the first Chinese resource investment in the East African nation. Chinese companies were involved in coal, timber, agriculture, and more. Indeed, at first blush the fit seemed natural. Chinese companies had gained a reputation in recent years for availing themselves of every lever of national power to gain access to investments in the world's resources, and rarely were Beijing's relationships as strong as in the former Portuguese colony. China had supported the Mozambican rebels through their decades-long, and ultimately successful, fight for independence. All it took to confirm the still-solid relationship was a glance at the Foreign Ministry in the capital, Maputo, its pagoda-style roof a nod to the Chinese developers who had built it—and the Chinese government that had paid the bill.

Yet beneath this seemingly simple surface lay much more complex terrain. State-owned Wuhan Iron and Steel had indeed attempted to develop Mozambican coal but, as of 2013, had failed.
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The Chinese agricultural investments that were scattered throughout the country were then due mostly to small private farmers, not big state-owned behemoths. And CNPC's natural gas buy didn't come courtesy of crooked politicians and bureaucrats in Maputo. Instead, the company struck a deal with Eni, the Italian
oil company that had discovered natural gas off the Mozambican coast more than a year before.
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One thing about China's resource quest is decidedly conventional: as demand for resource imports has grown, it has followed a path well trodden by other countries, including the United States and Japan before it, by increasingly focusing on owning overseas resources outright. But the strategies driving the details of Chinese investment—and the tactics through which China and its companies have pursued their goals—remain opaque and puzzling to many observers. Is China merely doing what other countries have done before? Or is how it approaches investments in foreign natural resources fundamentally different?

The roots of Chinese resource investment abroad were established well before China became a major resource importer. Deng Xiaoping, who led the early efforts to open up China, believed that the future of China's economy rested in engagement with the outside world. In a scheme reminiscent of the imperial port system, Deng identified a number of cities and provinces (primarily along China's coast) as special economic zones. These areas were allowed to receive foreign investment, establish joint ventures, and export. As economic reform expanded domestically, Beijing loosened the reins on overseas investment as well. By the late 1980s and early 1990s, the range of players involved in overseas investment expanded rapidly. Beijing began to maintain control over large and nationally important state-owned enterprises (SOEs), in the process boosting their stature, while relinquishing its grip on less essential enterprises. This meant that SOEs in key industries, such as chemicals, minerals, energy, and heavy machinery, retained monopolies in the domestic economy and were permitted to operate internationally. Overseas investment was primarily a means to square a desire by these firms to expand with limited opportunities to do so at home. It also provided opportunities for officials and others to use overseas investment to transfer state property into their own names.
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Yet engagement with the outside world did not come easily. Chinese overseas investment grew slowly and was the source of fierce debate within top political circles. Some Communist Party officials believed that overseas direct investment was detrimental to the country because it would encourage corruption, capital flight, and capitalist influence.
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The early overseas projects were experimental, primarily small-scale efforts by cities and provinces to establish joint ventures with other developing nations. Between 1979 and 1985, only 189 such ventures were approved, totaling $197 million in government expenditures, and in all these early ventures the government held controlling equity.
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The reemergence of Deng Xiaoping to public life in 1991 after his formal retirement in 1989 put to rest any debate over the wisdom of China more deeply engaging in the global economy. During a well-publicized visit to Shanghai in 1991, Deng stated, “Reform and opening up includes taking over the useful things of capitalism.”
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He soon followed his time in Shanghai with his famous 1992 “southern tour, ” during which he criticized those who opposed further economic reform and urged the people: “We should be bolder than previously in the past in carrying out reform and our opening-up policies. We must not act like women with bound feet.”
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The next critical transition came under President Jiang Zemin, who served as general secretary of the Communist Party from 1989 to 2002 and president of China from 1993 to 2003. Jiang followed Deng's lead in pushing ahead with economic reform and opening. He became well known outside China for his ability to recite the Gettysburg Address, willingness to break out into song, and a positive disposition toward foreign businessmen. But one of his greatest legacies, along with that of then Premier Zhu Rongji, was the development and implementation of China's multipronged and integrated “going out” strategy.

Soon after assuming power, Jiang confirmed that economic liberalization was a core priority: “If we fail to develop our economy rapidly, it will be very difficult for us to consolidate the socialist system and maintain long-term social stability.”
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In 2001, under the leadership of Jiang and Zhu, China joined the World Trade
Organization (WTO). Jiang positioned international expansion as critical to development: “Foreign funds, resources, technology and skilled personnel, along with privately owned enterprises that are a useful supplement to our economy, can and should be put to use for the benefit of socialism.” Therefore Beijing should “grant to enterprises and to science and technology research institutes the power to engage in foreign trade, and…encourage enterprises to expand their investments abroad and their transnational operations.”
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Premier Zhu—perhaps China's most powerful economic reformer to date—formally invoked the term “going out” (
zou chuqu
) in a 1999 speech on the country's economic future. He asserted a connection between the paucity of resources (particularly oil) and a need to go abroad, claiming, “Domestic development and production of oil can no longer keep pace with the needs of the country's economic and social development, resulting in an increasing imbalance between oil supply and demand.”
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Zhu recommended that China implement a going-out strategy, encouraging enterprises with comparative advantages to make investments abroad, contract for international engineering projects, and increase the export of labor. To encourage enterprises to make investments, he urged Beijing to “provide a supportive policy framework to create favorable conditions for enterprises to establish overseas operations.”
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Beijing and provincial governments offered companies incentives including tax breaks, cheap land at home, and low-interest funding from state-owned banks. The government also established a special export credit insurance corporation (Sinosure) to advance international investment.

Zhu's push to promote Chinese firms investing abroad was not entirely new, but the political support Beijing provided to help ensure their success raised the effort to a new level. As part of the Tenth Five-Year Plan, announced in 2001, Beijing adopted new measures to encourage outward investment under state direction. The State Development Planning Commission (renamed the National Development and Reform Commission, or NDRC, in 2003) compiled a list of overseas opportunities for investment in those resources of which China was in short supply, such as oil, gas, and timber. The government encouraged overseas investment and
set out to develop fifty multinationals that would be part of the top 500 firms globally by 2015.

Today the government has a formal and well-articulated going-out strategy that nominally involves a wide range of players, among them state entities at every level of the political system and private actors as well. From the outside looking in, then, it often appears that China's going-out strategy is a well-orchestrated dance.