Wednesday, July 25, 2012

Chinese investment: a new form of colonialism?

Even in countries with more benign governments, resource exports still may not help to improve living standards for ordinary people, as resource exploitation often leads to environmental degradation and adverse effects from the so-called Dutch disease. China is routinely accused of importing resources from countries caught up in this ‘disease’, before then ‘dumping’ cheap manufactured goods on them. As a result, Chinese international investment is often seen as a form of ‘new colonialism’.

The reality is that Chinese resource companies differ very little from resource companies the world over — except that Chinese companies often operate in more marginalised countries, mostly because the markets in more secure countries are already controlled by Western companies. In addition, China’s resource-acquisition projects have been shaped by its domestic priorities, including those formulated by its domestic politics.

China’s desire to acquire natural resources is determined by its domestic industrial policy. While the government aims to lower China’s energy intensity to 40 per cent below 2005 levels by 2020, China’s energy policy does not encourage progressive savings on energy consumption, with the country’s energy prices currently set lower than in most other countries. For example, gas prices are about the same as those in the US and less than half of those across many European countries. But China’s low energy prices are supported by companies and ordinary consumers alike. Raising energy prices would be a very unpopular move for the government; hence its general lack of action on this particular front.

In addition to low prices, the growth of energy consumption is also supported by China’s industrial structure. The share of heavy industry in China’s economy has steadily increased since the early 2000s. China now produces more than half of the world’s steel and cement output, and the growth of heavy industry is one of the major factors responsible for China’s rising energy consumption. 

While the fast growth of China’s real estate sector and infrastructural building has increased the country’s demand for cement, steel, copper and other metals, the government’s role in this development strategy cannot be ignored. By providing subsidies and capital to the manufacturing sector, the Chinese government is effectively encouraging capital-intensive industries.

It is also worth noting that large state-owned enterprises are themselves active players in shaping the government’s policy on resource acquisition. Take, for example, the three big oil companies that have been at the forefront of China’s drive for natural resources — CNOOC, CNPC and Sinopec. The Chinese government often insists that the reason for supporting their purchases of overseas oil fields is that equity oil is crucial for China’s energy security.

Chinese oil companies are newcomers to the global oil market and there is now little room for them to enter politically stable countries; instead, they have focused their investments in countries with less favourable political environments. In turn, the Chinese government has also played a vital role in providing a guarantee for its oil companies by entering into country-to-country agreements with host country governments.

China’s overseas energy and mineral policy is the combined result of narrowing international investment space and domestic interest-group politics. Given this situation and the options now available to Chinese companies investing abroad, China should be aiming to wisely manage its international image. It has done a great deal of work on the ground by building schools, hospitals, stadiums and conference facilities, and by undertaking other public projects in resource exporting countries. But China also needs to learn to improve its international image in ‘softer’ areas, such as winning the support of intellectuals in recipient countries. Intellectuals shape the public discourse in the international community as well as inside those countries. It is crucial for China to win their support to manage a more positive image.

Yao Yang is Director at the China Center for Economic Research and Deputy Dean at the National School of Development, Peking University.
This article appeared in the most recent edition of the East Asia Forum Quarterly‘China’s Investment Abroad’.

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