NS4960 Spring Term 2018 China: Resource Investment Strategy Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

T. Moran: Feeding the Dragon I 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.

China’s Global Investments Smart Planet Daily, October 23, 2013

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.

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

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

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

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 society

China’s Risky Portfolio FT Big Read: China, October 14, 2016