How do you maintain the flow of raw materials required to fuel the fastest (and largest) industrial expansion in history – one that last year swallowed up over a third of the world’s aluminium output, a quarter of its copper production, almost a tenth of its oil and more than half of the global trade in iron ore?
One answer would be that you try to guarantee access to a stream of natural resources for the foreseeable future. And for the suspiciously inclined this is just what is happening. We are all witness to China’s land-grab moment, as the nation of 1.3 billion grasps its once-in-a-lifetime opportunity to lock in its raw material needs.
To the naysayers, these commodity-driven transactions are more Faustian than far-sighted. Conducted in haste, they will be repented at leisure by the selling nations; the Chinese government is the real winner.
But if the critics are correct and Beijing really is orchestrating a scramble for resources, we would expect to see at least some imprint of intent and organisation on the current flurry of activity. So, do the charges stick?
In terms of current objectives, it is true that there seems to be a steer from the State Council towards commodity-related deals. In Australia, for instance, the country’s Foreign Investment Review Board is now mulling over offers for large chunks of Rio Tinto Group, OZ Minerals and Fortescue Metals Group from Chinese buyers. In Brazil, Russia and Venezuela it is oil rather than ore that is making the news – and the deals have already been done. Billions of dollars of Chinese loans have been exchanged for forward commitments to provide oil at pre-determined volumes and prices.
Certainly, it is an opportune time to be a buyer. Cash rich suitors are thin on the ground and many international companies are desperate for funds, especially those who bought assets at the top of the economic cycle and now find that commodity prices have slumped. China’s energy tsar, Zhang Guobao admitted as much in an interview with the People’s Daily: “The slowdown has reduced the price of international energy resources and assets and favours our search for overseas resources.”
But the focus on natural resources also marks the recognition that recent Chinese M&A in other sectors has been a long way short of masterful. A series of poorly timed investments in western financial institutions has led to voluble domestic criticism of the Chinese buyers. State-owned entities are accused of wasting resources and – much worse in terms of local opinion – of being duped by foreign sellers.
So the response has been to refocus on areas that can be aligned with more immediate national needs. “China has burnt its hands in the past buying liquid assets like Blackstone,” says Professor Liu Baocheng at the University of International Business and Economics in Beijing. “But here they have the chance to buy tangible, useful assets.”
This is a useful counterbalance to the view of a thrusting China, confidently swaggering onto the international stage. Of course, the focus on the resources sector makes strategic sense for many Chinese companies, as well as for the domestic economy at large. But for the cautious, it might also offer a safer path in an uncertain world.
Corporate confidence is also brittle. Recent difficulties at Lenovo, which has struggled to expand outside of the domestic market since purchasing IBM’s PC business, and losses at Chinese electronics firm TCL following its acquisition of the RCA brand from France’s Thomson in 2004, may have prompted unwritten rules to avoid investment in cross-border transactions. After all these types of deals pose integration risks or cultural challenges that make profits harder to come by.
So, perhaps this is a plan created as much by default as by design. The opportunity has presented itself, and external conditions have led Chinese leaders to focus on it. But even the most hastily assembled blueprint requires clear direction if it is to be executed effectively. What about the leadership of the current campaign?
On the face of it, China’s authoritarian governing style would seem to support a top-down approach, and the international press often implies just that. ‘China Inc’, ‘Team China’ and even just ‘China’ are interchangeable identifiers in many accounts of the various corporate-level initiatives overseas. It is as if a distinction between political and commercial power does not need to be drawn; instead we should imagine the State Council sitting around a whiteboard, scrawling up in marker pen the overseas assets that it fancies having a tilt at before lunch.
The problem with the analogy is that it does not reflect the fragmented nature of China’s governing structure. Competition between groups – especially in the administrative bureaucracy, as well as within the state-owned enterprises – can be intense, making centralised coordination a genuine struggle.
The China Investment Corporation (backed by the Ministry of Finance) competes with the State Administration of Foreign Exchange (staffed by the People’s Bank of China) for pre-eminence as the Chinese sovereign wealth fund, for instance. And a wave of commodity-related deals earlier in the decade was also complicated by internal conflict. Richard Lester and Edward Steinfeld at the Massachusetts Institute of Technology, and Erica Downs writing for China Security, highlight this in their respective research on the struggle between Sinopec and China National Petroleum for access to new projects in Africa and Central Asia. Much to the dismay of the Chinese government – the companies’ primary shareholder – the national oil companies regularly competed against one another to win business. In these instances, top-down diktat was blunted by bottom-up ambition.
This is not to doubt the desire of the State Council to exert more effective control over the situation and, according to Henny Sender at the Financial Times, the ultimate authority in the investment process is a political one. There are moments at which the governing elite does step in. Sender highlights the blocking of China Development Bank’s proposed investment in Citigroup last year (a wise move, it turns out).
But to exercise veto power is not quite the same as to be the puppet master. It is also more of a reactive approach than a proactive one. No doubt China’s governing elite realises this and the appointment of Xiao Yaqing (the former president of Chinalco) to a widely rumoured coordinating role for industrial policy on the State Council is thought to be an attempt to beef up centralised authority.
Central control of last month’s bids for the Australian iron ore producers was definitely lacking, according to Woo C Lee of advisory firm JL Thornton. Writing in this week’s Caijing Online, Woo thinks that Chinalco, Minmetals, and Hunan Valin Iron and Steel almost certainly failed to consult one another on their respective bids. Paradoxically, the flurry of unconnected announcements has made Australians suspect an organised assault on national assets.
A coordinating entity, the argument goes, would have been far more sophisticated in structuring a series of bids. It would have sounded out the Australian government first, as well as consider the sequencing of investment proposals as part of a wider strategic approach. It would have given short shrift to any independent posturing from state-owned entities involved in the process.
If this is Xiao’s new task, he has a lot of work to do.
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