China is sometimes accused of taking a “strategic approach” rather than a “market approach,” taking resources “off the market” and conducting a state-orchestrated, worldwide search for energy and resources. Some go even further to claim that international acquisition by China’s firms represents a national strategy which aims to use resource diplomacy to conceal its ambitions for strategic expansion. Simply stated, China’s overseas investment serves its foreign policy (more than its economic requirements).[1] These perceptions seem to derive from the fact that China’s overseas direct investment (ODI) is focused on natural resources, and is mostly conducted by state-owned enterprises (SOEs). The reality, however, is less sinister. China’s ODI reflects, and is an extension of, China’s domestic economic structure. The majority of Chinese firms involved in China’s domestic and overseas resource sectors are still SOEs, but their share is decreasing with the rapid market transition and decentralization occurring in China. China’s firms are mostly driven by profit motives and competitive pressure rather than energy security considerations or resource acquisition. The enterprises, rather than the government, generally initiate overseas resource investment decisions, although the government supports them to invest overseas.

Three factors underlie the outside world’s misunderstandings of China’s overseas resource investment: the perception gap between China and the West; Chinese enterprises’ inexperience on the international market; and finally, China’s unfinished transition from a planned economy to a market economy. To resolve tensions arising from this misperception of the nature of China’s ODI in the resource sector, it is important for China to push its transition to a market-based economy, and to encourage more private enterprises to invest overseas, as well as to be more open, while strengthening multilateral international dialogue and cooperation. The rest of the world needs to undertake more research on the reality of China’s ODI, and pay attention to the opportunities arising from China’s rapidly growing overseas investment, rather than simply taking it as a threat. Orville Schell, Director of China-US Relations at the Asia Society, has argued that the West should be “actively courting Chinese investment, not scaring it away”.[2]

I. Overview of China’s Overseas Resource Investment

In recent years, China-based enterprises have significantly increased the scale and geographic distribution of their investment in overseas resources. Chinese firms have invested in energy and metal ventures with bids for oilfield or metal mine development contracts, pipeline contracts, refinery projects, equity stakes, and engineering and technology services in Africa, Latin America, Central Asia, Australia, Canada and elsewhere. China had almost no overseas investment before the reform and opening-up in 1978.[3] Since the 1990s, enterprises like the China National Petroleum Corporation (CNPC) have been operating internationally in resource exploration and production.[4]

In 1992, CNPC established a subsidiary company called International Corporation[5] to improve cooperation with IOCs inside China and to invest overseas. The first major oil field development rights were acquired in Thailand in March 1993 and the first equity stake was in an oil field in Alberta in July, 1993 for $5 million. China National Offshore Oil Corporation (CNOOC) purchased a 32.5 percent interest in an oilfield in the Straits of Malacca in 1993.[6] China National Petrochemical Corporation (Sinopec) signed an exploration contract with Iran in 2000 and established a subsidiary company to focus on international exploration and production in January 2001. China National Chemicals Import and Export Corporation (Sinochem) expanded their business to explore and produce overseas in May 2002. Companies outside the energy industry, such as China International Trust and Investment Corporation (CITIC Group)[7] and China North Industries Corporation (ORINCO)[8], are also getting involved in overseas upstream oil exploration and production.[9] Since 2003, Chinese national oil companies (NOCs)’ overseas investment in oil ventures has gradually expanded to over 20 countries.

China’s overseas energy investment underwent another period of rapid growth after the world financial crisis in 2008. The number of overseas energy investment deals (including contracts) increased from five in 2005 to 11 in 2008, and then up to 16 in 2009. This equated to the deal value increasing from $6410 million in 2005 to $23.06 billion in 2008, and $29.85 billion in 2009.[10] By the end of 2010, the three big NOCs, had 144 overseas oil fields and other project investments, the combined deal value of which was $70 billion.[11] In 2011, CNPC’s overseas production was boosted to 89.38 million tons of crude oil and 17.06 billion cubic meters of natural gas, up 17.9 and 24.5 percent year-on-year respectively.[12] Sinopec’s overseas crude oil production was decreased by 28.5 percent to 18.36 mmbbl.[13]

Other resource sectors, especially minerals, started to invest overseas earlier than the energy industry. The first investment was made in Australia with an iron ore acquisition in 1987. However, the growth rate of ODI in minerals was far behind the energy sector until just after 2000. With the upsurge of metal and other commodity prices, China’s metal and minerals firms increased the pace and scale of ODI, the number of deals increased from four in 2005 to 18 in 2009, while the deal value increased from $2.21 billion in 2005 to $25.59 billion.[14] In 2011, China’s mining (including oil, coal, gas as well as metal and minerals) ODI flows increased about ten times to $14.45 billion from $1.38 billion in 2003, and the stock was up to $67.0 billion from $5.9 billion in 2003.[15]

II. International Complaints and Concerns

In the eyes of some Western analysts, China’s resource security policy can be explained as securing resource supply through upstream investment or by obtaining equity in foreign resource enterprises. China’s resource firms’ overseas activities have aroused concern that China might be “locking up” natural resource supplies, gaining “preferential access” to available output, extending “control” over the world’s extractive industries.[16] China is seen to perceive ownership to be the most important means of controlling world resources and materials. According to senior partner and managing director at the Boston Consulting Group (BCG) Hal Sirkin, “China wants to be an investor, not because it wants to invest, but it wants to get access to resources.”[17] To this school of thought, China’s resource policy is explained as a “worldwide search for resources” or a “global hunt for energy”.

The United States has grown increasingly uneasy about Beijing’s enhanced cooperation with resource-rich countries such as Iran, Saudi Arabia, Sudan and Venezuela, some of which are hostile towards Washington. For over a decade, some analysts have asserted that China would alter the political balance of the Persian Gulf through its substantial oil imports. In 2004, the United States blocked Sinopec and Iran from cooperating to explore and exploit oil and natural gas fields. Former US Deputy Secretary of State Robert Zoellick warned China that, “pursuing energy deals with Iran risks conflict with Washington.”[18]

Domestically, following CNOOC’s bid for Unocal in 2005, the “China energy threat” became a widespread concern in the United States. By a margin of 398 votes to 15, the House of Representatives passed a resolution declaring that CNOOC’s bid would pose a threat to US national security.[19] In 2010, the Anshan Iron and Steel Group announced its American subsidiary, Steel Development Corporation, would build a $175-million steel mill in Amory, Mississippi. In response to this news, 50 members of the Congressional Steel Caucus expressed concern that Anshan could gain “access to new steel production technologies and information regarding American national security infrastructure projects.” They wrote to then U.S. Treasury Secretary Timothy Geithner urging him to investigate whether Anshan’s investment should be blocked on national security grounds.[20]

In Australia, Chinese investment faces similar suspicion. Australian Treasurer Wayne Swan said Australia was screening Chinese investments through the Foreign Investment Review Board to ensure they are in Australia’s national interest. Swan added that “[we] also want to ensure that investment is consistent with our aim of maintaining a system in which investment and sales decisions are driven by market forces rather than external strategic or political considerations.”[21] Australian political commentator Graeme Dobell, argued “with its administration of foreign investment guidelines, Australia is trying to tell China it must ask politely, then wait a long time before it might be given permission to sit.”[22]

A number of Western analysts argue that China’s oil companies are being used to carry out the Chinese government’s energy procurement strategy and foreign policy. For example, London-based journalist and energy consultant Maria Kielmas argues, “China’s companies are essentially expected to be an arm of national foreign policy in their foreign investment, rather than to create value… Foreign investment by Chinese state companies may be a good way to develop the country’s foreign policy... such investment decisions are made by bureaucrats and are political, rather than aimed at providing an adequate return.”[23] New York-based political commentator, Paul Lin stated that, “No country today feels that it has the ability to invade China. China does not set out to save energy, but instead stirs up of a feeling of crisis in various places in order to whip up nationalist sentiment. The goal is to use oil diplomacy to cover up its ambitions for strategic expansion.”[24] Stanford University research director Ashby Monk has argued, “China isn’t just investing in minerals, oil, and other raw goods—it’s buying diplomatic favors and loyalty, too.”[25]

President of the Eurasia Group, Ian Bremmer argued that when state-owned companies go abroad in search of new contracts, they are not bound by shareholder opinion or reputation risk. As a result, they can do business in places and with people that their private-sector rivals cannot, and with a high degree of secrecy. “The biggest challenge for the world economy…[is] the shift from free markets and multi-national corporations being key economic players to something very, very different where we're now competing with a different and quite valuable model.”[26] To Bremmer then, the issue is one of competing forms of economic organization rather than conflicting national agendas.

III. Background and Rationale

As a new player on the world market, it is perhaps not surprising that China’s overseas resource investment has attracted international suspicion and criticism, though many Chinese people feel confused about this. Factors contributing to the fact that China’s overseas activities are not well understood by non-Chinese include: most of China’s ODI is directed towards the resource sector which is dominated by SOEs; the worldwide surge in commodity prices; an increasing sense of resource insecurity and scarcity; and ideological and cultural differences and perception gaps between China and the outside world.

Overseas resource investment can be seen as a reflection of China’s rapidly growing economy and outward investment. Since 1978, China’s economy has grown by about 9.5 percent per year, and China's GDP has risen from 364.52 billion RMB in 1978 to 39.8 trillion RMB in 2010. Since joining the WTO ten years ago, China has shifted from being the main recipient of overseas direct investment to being one of the main sources of ODI. According to Ministry of Commerce statistics, China’s ODI grew on average about 44.06 percent annually from $2.7 billion in 2002 to $74.65 billion in 2011, the total ODI stock increased from $29.90 billion to $424.78 billion.[27] The World Investment Report 2012 by UNCTAD showed that, global FDI outflows reached $1.69 trillion in 2011 with $21.17 trillion of stock by the end of 2011. Based on the above report, China’s ODI flows and stock in 2011 took global shares of 4.4 percent and 2 percent. China ranked 6th among all economies in terms of ODI flows and 13th in terms of stock.[28]

Despite the growth of China’s ODI flows, it is still at an early stage. Firstly, ODI flow is still much less than investment flowing into China. In 2011, Chinese investors invested in 3391 foreign enterprises with $60.07 billion non-financial ODI, and China received 27712 foreign enterprises with $116.01 billion non-financial FDI inflows.[29] Secondly, the efficiency and profitability of Chinese overseas’ enterprises is not as healthy as is often assumed. Economically，about one-third of China’s overseas investments have failed, 12 percent and 11 percent of China’s overseas bids in 2009 and 2010 respectively were unsuccessful, significantly higher than the United States (2%) and Great Britain (1%) for the same period.[30] Thirdly, Chinese enterprises’ degree of internationalization is comparatively low. The overseas operating revenue of 272 of the top 500 enterprises is only 3.46 trillion RMB, while its overseas TNI (Transnational Index) of only 8.1 percent is much lower than that of the 64.7 percent average level of world’s top 100. China’s TNI is lower than that of Russia (54%), India (41%), and Brazil (40%).[31] Chinese firms own less than five percent of global investment in international business, much less than Britain’s 45 percent in 1914 and the United States’ 50 percent share in 1967.[32]

China’s overseas investments are mainly, but not exclusively, directed towards primary resources. From 2005 to 2009, the growth rate of non-resource ODI was even faster than that of resource investment, though resource deals accounted for 52.7 percent of total ODI and the value of resource deals made up 62.41 percent of total ODI. The number of non-resource deals increased from two in 2005 to 34 in 2009. The value of non-resource ODI deals (including finance) experienced a 37-fold increase from $490 million in 2005 to $18.77 billion in 2009, while Chinese resource ODI increased four-fold from $8.62 billion to $45.02 billion. The percentage of resource deals in total ODI decreased from 82 percent in 2005 to 50 percent in 2009, while the deal value decreased from 94.6 percent to 70.5 percent.[33]According to Ministry of Commerce statistics, the share of China’s resource ODI flows decreased from 48.4 percent in 2003 to 19.4 percent in 2011, and the stock was down from 18 to 15.8.[34]

Overseas investment from local and non-state-owned enterprises has significantly increased, although central SOEs still account for most of the total. Typical examples from 2009 include Neosoft’s deal with Cisco, Suning’s bid for Laox, Shunde’s investment in Vallenar iron ore mine in Chile, and Geely’s bid for Volvo. Chinese local enterprises’ ODI increased 28 percent in one year to $6.14 billion in 2008 and increased by 54.5 percent to $9.45 billion in 2009. In the first half of 2010, Chinese local enterprises’ ODI had already increased by 126.7 percent to $7.48 billion.[35] There is still potential for even greater ODI as the government has just started to explore the potential that can be unlocked by encouraging more local or non-SOEs to invest overseas by supporting non-SOEs in the same way as their state counterparts.   By the end of 2006, local enterprises accounted for 18 percent of China’s non-financial ODI stocks.[36] By 2011, the figure went up to 23.8 percent.[37]

The leading role of resource SOEs in terms of ODI reflects the existing structure of China’s domestic economy, as these SOEs continue to dominate the market inside China. While private sector enterprises are growing dramatically after years of economic reform and political decentralization, SOEs are still very powerful in the domestic economy. The number of SOEs in China’s top 500 enterprises decreased from 356 (71.2 percent) in 2005 to 316 in 2011 (63.2 percent), and the percentage of the operating revenue of SOEs in China’s top 500 enterprises decreased from 86.3 percent to 82.82 percent.[38]

Resource sector enterprises are well represented in China’s top 500 enterprises list for 2011. The top ten in terms of operating revenue are Sinopec (1.969 trillion RMB), CNPC (1.721), State Grid (1.529), Industrial and Commercial Bank of China (ICBC), Bank of China, China Mobile, China Railway Engineering Corporation (CREC), China Railway Construction Corporation Limited(CRCCG), China Construction Bank, China Life Insurance, and the Agricultural Bank of China. The ten most profitable enterprises were largely monopolistic SOEs, they are ICBC, China Construction Bank, Bank of China, CNPC, Agricultural Bank of China, CNOOC, China Mobile, Sinopec, Bank of Communications (BOCOM) and CITIC. The profits of these top ten companies reached 866.84 billion RMB, accounting for 40 percent of the total profits of all top 500 enterprises.[39]

In some respects, China is following a similar path to U.S. and Japanese overseas investment. Overseas investment is a result of domestic economic development and the structural upgrading of industry. Overseas resource investment is not necessarily connected with domestic resource shortages. International historical experience shows that resources were the first sector invested in by now developed countries. Over time, they shifted their investment to the manufacturing and service sectors. During the 1950s and 1960s, Japanese ODI was directed towards activities in resource-rich countries, such as oil exploration in Indonesia, iron ore in India and Malaysia, and copper and timber resources in the Philippines. When Japan upgraded its domestic economic structure, overseas investment in manufacture increased by 30 percent annually during the period 1971 to 1980. The percentage of ODI in manufacture increased from 12 percent to 36.4 percent, while the percentage of ODI in mining decreased from 34.2 percent during the late 1960s to two percent at the end of the 1980s as domestic wages rose.[40]

Resource SOEs do have capability and financial advantages relative to other Chinese companies. The global upsurge in commodity prices has made the resource sector very profitable. A number of China’s resource SOEs have earned immense profits and come to dominate the top 50 companies in China and enter the list of the top 500 or 1000 enterprises in the world. In 2010, central SOEs achieved operating revenues of 16.7 trillion RMB, an increase of 32.1 percent on 2009 figures, and accumulated net profits of 849 billion RMB, which represents a 40.2 percent increase on 2009 figures.[41] These stronger SOEs also enjoy a number of advantages regarding financing and support from the government. It is much easier for SOEs to obtain finance from the Department of Foreign Currency Management or China’s state-owned banks than it is for non-state -owned enterprises.[42]

Chinese resource enterprises have more competitive capability than some of their counterparts in developing countries and lower labor cost than international resource giants. While it is becoming harder to cut costs because of increasing wages within China, the cost of resource extraction abroad is much lower than domestic resource extraction. The revenues and profits of China’s overseas companies are comparable to those of international oil companies, which have more experience operating abroad.[43] China’s NOCs had been incurring large losses because the cost of producing a barrel of oil in China was higher than the state-set price for oil products, which was well below the international market price. Compared with manufacturing, resource investment requires less high technology or advanced management practices, so a number of Chinese enterprises outside resource sector have become active in overseas resource investment.

IV. Why China’s Growing ODI Is No Cause for Concern?

The Chinese government is trying to get out of its role in commercial enterprises. As Chinese companies internationalize, they seem to be pursuing their own interests different or even opposed to China’s national interests sometimes. Politically motivated ODI contracts comprise a small portion of total Chinese ODI. Such political support is not unique to China---in fact many nations around the Asia-Pacific exhibit such behavior and this is not a cause for general concern.

China’s economy has been in the transition from a state-controlled economy to one that is more market based for over thirty years now. The Chinese government has worked hard to internationalize the economy by adopting the policies called “invite in” and “go abroad.”[44] “Invite in” means that the Chinese economy is open to foreign firms. Since China’s accession to the WTO in November 2001, the government has made specific commitments to trade and investment liberalization. “Go abroad” means getting involved in the world market and doing business overseas. In the resource sector, “internationalization” means inviting foreign investment into China’s mainland resource exploration and production, investing in overseas exploration and production, as well as conducting overseas business in technology and labor services.

A key motivation overlooked by detractors who portray Chinese NOCs as tools of the state is that companies invest overseas primarily for economic self-development. The “internationalization” of China’s energy sector also means eliminating or sharply reducing tariffs associated with imports for some classes of capital goods and eventually opening some areas, such as petroleum sales, to foreign competition. All three big Chinese NOCs held initial public offerings (IPOs) of stock between 2000 and 2002.[45] They have been working to improve their international standing; their strategic goal is to be internationally-competitive multinationals. Due to the limits of domestic reserves and production capacity, coupled with increasing wages in China, companies can only achieve scale expansion through involvement in the world market. Only through international investment can Chinese companies find low-cost reserves and develop into world-class companies.[46] Without such expansion, they face economic uncertainty. The TNI of China’s three big NOCs is still lower than the average level for developing country enterprises. According to “China Top 100 Transnational Enterprises and TNI 2011” released by China Enterprise Confederation (CEC) and China Enterprise Directors Association (CEDA), the overseas assets value of CNPC was 522.6 billion RMB, that of Sinopec 519.8 billion RMB, and CNOOC 181.9 million RMB. These three companies were listed first, second and fourth respectively on the list, yet their respective TNIs are only 22.56 %, 21.83 %, and 23.84 %.[47]

International exploration and production are a means of improving the technological, technical and managerial capabilities of China’s companies and facilitating the export of related facilities, technologies and labor. Chinese energy firms’ ODI is part of the worldwide internationalization of NOCs. In the past decade, NOCs from Russia and Algeria among others have followed companies like Statoil, Petrobras, Petronas and Saudi Aramco to become internationalized state oil companies (INOCs). Nowadays, there are more international upstream bids coming from state-owned companies.

The Chinese government’s support is mostly in general sense and based on following values and beliefs as well as the definition of support which are different from the West: the economy interest is an important part of national interest and main goal of foreign policy at this stage is to serve China’s economy growth; China’s enterprises need some kind of help or services because they are still at the early stage of overseas investing and lack experience and competition capability; the interest of enterprises to some extent is equal to national interest, China cannot be real world economic power without a number of enterprises stepping into world class multinational enterprises. For the enterprises, overseas commitments are basically decided by themselves based on their evaluation of the risks and returns. They would like to seek whatever government support they can secure. Anyway, they will continue their internationalization and overseas investment even without government support, especially for the non-state-owned enterprises and local SOEs, which enjoy less or no financial assistance in any case.

The interests of China’s resource companies and associations do not always accord with those of the government, and sometimes are in direct conflict with them. China’s transitional processes have created an economy which is ever more pluralist, with different interest groups playing more important roles in China’s policymaking. Chinese SOEs often choose to follow the government’s operational guidelines, as compliance helps to ensure government protection when necessary. However, there have been conflicts as companies have begun to lobby for their commercial interests when they believe that central government investment and business practice guidelines will adversely affect the bottom line. When the central government adopted price control policies to keep the price of domestic oil products low and produced huge losses for state refiners in 2005, the state oil companies including CNPC and Sinopec reacted by constraining crude runs, reducing imports, and increasing exports.[48]

Although high-profile oil diplomacy has yielded individual contracts and projects for NOCs, these contracts represent only a small portion of the investments made by these companies. In most cases, the NOCs recognized the opportunities first, initiated negotiations over the prospective investment, sought government approval of their investment plan, and lobbied for financial and diplomatic support if needed.[49] Erica Downs points out that NOCs’ foreign investments are primarily driven by the companies, which have different objectives from the government. One of the primary complaints Chinese policymakers and pundits make about the overseas investments of Chinese NOCs is that “each soldier is fighting his own war,” with each company placing their corporate interests above national ones. However, there has been greater coordination between the government and the companies since 2005.[50]

Government support for companies’ overseas resource investments is a common phenomenon in East Asia. China, Japan, and South Korea have been moving aggressively to shore up partnerships with existing suppliers and pursue new energy investments overseas, often downplaying doubts about the technical feasibility and profitability of new developments.[51] In the 1970s, the Japanese government set a target requiring equity oil to account for 30 percent of its oil imports and established the Japanese National Oil Corporation to organize and fund overseas exploration and production. In 2006, the Japanese government released the New National Energy Strategy to raise the percentage to 40 percent (from around 15 percent in 2006). Mr. Yoshikazu Kobayashi from the Institute of Energy Economy Japan pointed out that “in securing resources to raise the share of Japanese overseas upstream equity oil over its total oil imports to 40 percent, the strategy provides a comprehensive approach toward resource-holding countries to deepen economic relations,” and “a single large national flag company with a large bargaining power and a sufficient risk-absorption capacity would be an effective vehicle in enhancing a country’s energy security.”[52]

V. International Dialogue and Cooperation

One unintended consequence of China’s integration into the world economy has been heightened suspicion and insecurity over resources both within China and beyond. It is the contention of this article, that much if not all of these tensions are based on mutual misperceptions between China and the West, rather than truly conflicting interests. China’s ODI should be welcomed and used by others to interact with China so as to make use of China’s vast resource market potential, instead of restricting China’s overseas investment on the grounds that it constitutes a threat.[53] Orville Schell argues that if the Obama administration and EU officials cannot figure out the proper mix between economic engagement and protecting national security, investment capital from China will go elsewhere. That is a strategy that will leave the US and EU weaker, not stronger.[54]

China needs further international dialogue and cooperation to better explain its policies and learn those of its trading partners, as there are misperceptions or misunderstandings about other parties’ resource policies. Some analysts in the West, especially the United States, tend to believe that China wants to use energy diplomacy to achieve the goal of international expansion, and take China’s energy cooperation with some rogue states as a challenge to the existing international order. Some Chinese also worry that the United States and the West are intentionally containing China’s development and economic rise by interfering in China’s overseas resource cooperation and controlling its resource transportation routes.[55]

To deal with these challenges, China has started to pay more attention to international resource cooperation and governance. While actively developing bilateral energy relations with exporters and consumers, China has also sought to cooperate with international energy initiatives. China has joined international organizations such as the International Energy Forum, World Energy Council, World Petroleum Congress and a number of energy-related UN organizations. At the regional level, China is either an observer or member of the Energy Charter Treaty, Asia-Pacific Economic Cooperation, the Shanghai Cooperation Organization, and the Association of Southeast Asian Nations.

China’s international energy cooperation is still embryonic, especially in multilateral cooperation. China is a full member in very few international energy organizations, and those organizations are mostly focused on coordination and dialogue, rather than implementation. With the rapid growth of energy demand and growing energy ties with the outside world, China needs to increase transparency, strengthen multilateral international energy security cooperation and to deepen cooperation with global energy organizations and initiatives. In addition there ought to be a concerted effort to improve international exchanges, enhance education, share data and operational plans, etc., to enhance mutual understanding.

To bridge gaps between understandings of energy security priorities and definitions, China has enhanced exchanges such as strategic economic dialogues with the United States, where energy security is a key topic. These exchanges have been very fruitful. There have also been a number of dialogues on different levels among scholars in recent years. Many conferences and workshops have focused on energy security and climate change issues, such as the Carnegie-ERI Beijing workshop in 2007, involving think tanks and universities from both sides. This enhanced dialogue has highlighted, and in some cases reduced, some perception gaps. For example, some American analysts now realize that Beijing gives its relationship with the United States priority over the acquisition of foreign oil assets by Chinese NOCs,[56] and “the United States has no need to worry about China’s recent energy cooperation with Venezuela because although Venezuela is seeking this relationship as a geopolitical alliance, China is targeting it largely as a stable supply of energy.”[57] More Western analysts have realized that China's interests have not changed fundamentally over the past decade; China’s overseas activities remain more overtly in the realm of “geo-economics” rather than the “geo-strategic.” Chinese procurement efforts ultimately benefit the world system by pushing forward the diversification of output and enhanced competition among producers.[58]

VI. Domestic Rethinking and Reformulation

While strengthening international dialogue and cooperation both at the corporate and government levels, China also needs to be more market oriented and transparent in domestic policymaking by promoting steady economic, political and social transition. So-called non-market resource solutions and incomplete, market-based methods in China arise from the unfinished nature of the transition from the planned economy to a market economy. In spite of years of enterprise reform and market liberalization, healthy and orderly market mechanisms for the resource industry have not been established.

This incomplete transition has meant that the power sector has many power plants not yet separated from power grids to create competitive market conditions. Limited competition means that efficient performers are not necessarily rewarded, nor are inefficient ones driven out. The market price mechanism does not have effective links between coal generation, transmission, and consumption. Current institutional settings cannot guarantee optimal allocation of electricity generation resources. Those factors are obstacles for the power industry’s further development, falling into the pattern of “high input, high waste, and heavy pollution, coupled with low output and low efficiency.”[59]

It is also essential for China’s general population to have a better understanding of the world resource situation and be more confident in the world energy market. Since China lost its self-sufficiency in oil supply, many Chinese have been concerned about resource supply. Feelings of resource insecurity or crisis have become widespread among the public. Partly because China’s becoming a net oil importer and Chinese oil enterprises investing overseas coincidentally happened in the early 1990s, “go abroad” is easily misperceived to mean “take back.”

A number of Chinese analysts believe that Chinese oil companies going abroad can and should play an important role in ensuring China’s energy security. Anniwa’er Amuti and Zhang Shengwang have noted, “The key issue to solve China’s energy supply security is going abroad, to fully use foreign resources. ‘Go abroad’ includes two aspects: first, to import and purchase oil directly from the world market; second, to invest overseas on exploration, production and refining, exchange the oil back home with the investing return.”[60] Professors Shu Xianlin and Li Daifu argued, “To some extent, the solution of China’s oil security lies in overseas and oil companies’ going abroad. This is necessary for China to resolve the domestic oil shortages and to ensure overseas energy supply security.”[61] The author of China’s Oil Security, Wu Lei pointed out, “China’s ODI can strengthen our NOC’s financial positions and their ability to compete in world energy markets. This has positive and strategic implications for China’s oil security.”[62]

Yet a growing number of Chinese analysts are realizing that acquiring overseas equity has little impact on China’s energy or resource security. As market analyst Yu Sihe pointed out, “Domestic and international public opinion tends to believe that Chinese companies investing overseas and acquiring oil assets are satisfying rapidly growing domestic demand and safeguarding energy security in the long term. This is a misunderstanding. Overseas production and reserves mean much more for the investor than the consumer.”[63] Associate Professor Wan Weihan from the University of International Business and Economics argued that imagining that Chinese oil enterprises’ “going abroad” brings overseas resources back to China is a misperception formed due to a lack of basic knowledge of international oil market mechanisms and oil industry practices.[64] In 2010, of 60 million tons of overseas equity oil production by Chinese NOCs, only about five million tons was shipped back to China, accounting for only two percent of China’s 240 million tons of crude oil imports. The rest was sold on either local or international markets.[65]

In the long run, the best way to achieve China’s energy and resource security is to develop an efficient market for more efficient use of energy resources, though this has not yet been widely accepted by the Chinese population or policymakers. Fortunately, more Chinese analysts are realizing that the acquisition of equity oil will do little to help China deal with supply disruptions; the real risks to energy or resource supply come from domestic sources more than the outside world. Once this is accepted, then China’s energy security will focus on energy conservation, developing domestic resource markets, and demand-side management rather than ODI.

In this regard, columnist for Abu Dhabi-based The National, Stephan Glain, points out that Beijing has done something that could alter its relations with Washington in a profoundly positive way. “The centralized communist government has started using the free market to source its energy supplies. China’s participation in Iraq’s oil tenders was very significant in this regard, in that it signaled a shift away from the proprietary control of reserves toward a market-based approach. China's powerful national oil companies are at the vanguard of this trend, forcing them to hone their management and engineering divisions to compete and collaborate with global majors.”[66]

For the companies, while developing an understanding of the challenges of ODI, including cultural misunderstandings, they need to learn to cooperate more with international counterparts and improve their transparency and public relations capability. A lack of disclosure is often viewed with suspicion in the current environment. China’s resource companies are paying more attention to cooperation with multinational corporations and local companies overseas. China’s oil companies are cooperating with Indian oil companies to bid for overseas projects in Canada and Kazakhstan. CNPC won a contract to develop Iraq's Halfaya oil field along with Total of France and Malaysia’s state-owned Petronas. A BP-led consortium including CNPC secured a deal to develop Iraq's largest oil reserve, at Rumaila. In January 2010, Sinopec announced it was in talks with BP to collaborate on developing large shale gas reserves in China. News of the discussions followed an agreement by Royal Dutch Shell and PetroChina, yet another NOC, to jointly develop a shale gas reserve in Sichuan province.[67]

Domestically, there are also voices which regard some of China’s ODI deals as overly costly. The most famous example of a Chinese international transaction that suffered major setbacks is CNOOC’s thwarted bid for Unocal, although there are dozens of other examples. It seems that China’s companies have learnt from these reverses over the past decade and are making fewer blunders. Asia economics research fellow at the Heritage Foundation, Derek Scissors, noticed that problems in closing transactions seem to have lessened since 2005. There were far fewer troubled transactions in the first half of 2010 than in previous years. Chinese firms are improving as investors and yet more spending is on the way, including sophisticated transactions that were previously out of reach.[68]

SOEs’ losses in overseas investment are receiving more attention within China. Excitement over China’s ODI is cooling as criticism mounts over several failed bids and losses incurred on various SOEs’ overseas investments. The first case was released in 2004 regarding a $550 million loss to China National Aviation Fuel because of petroleum futures deals in Singapore. Since then, the media has reported more cases. As of the end of 2009, the loss incurred by three oil and gas projects owned by Sinochem was about $15.26 million.[69] A news report revealed that the deficit for the Saudi railway project undertaken by the China Railway Construction Corporation was over four billion Chinese RMB, or approximately $640 million. In June 2010, the Weld Range iron ore project owned by Sinosteel Group in Australia was suspended, with no specific loss statistics yet available. In the beginning of July 2011, Chinalco announced that its Aurukun project in Queensland had failed with a loss of 340 million RMB.[70] These losses and the mounting domestic concern within China are rarely reported by world media or foreign critics, yet the withdrawal or diminishment of Chinese ODI poses a far greater threat to global stability than the rise of Chinese investment that has been the main concern of critics until now.

Some Chinese scholars and specialists argue that about 67 percent of overseas investors suffer losses and deficits,[71] and one World Bank report claims that one-third of Chinese overseas investments make a loss.[72] A 2010 report by the China University of Petroleum mentioned that two-thirds of the three big NOCs’ overseas projects had operating deficits.[73] The outbreak of civil war in Libya resulted in billions of dollars of losses for China’s overseas investors. These new losses have come at a time when SOEs’ previous overseas losses had already aroused criticism and debate inside China. Most of China’s overseas investments are conducted by SOEs whose leadership often does not need to take responsibility for their losses, as the state has no alternative but to pay for the loss. Most SOEs can’t afford to cover them, but they are too big for the government to allow them to fail. Such state-subsidized bailouts are increasingly causing popular uproar.

To deal with these problems and challenges, the central government is adjusting its policy toward ODI. The State-owned Assets Supervision and Administration Commission (SASAC) decided to reduce risks by developing new rules and regulations on overseas investments. Later, on 27 June 2011, SASAC announced the “Overseas State-owned Assets Supervision Interim Measures” and “Overseas State-owned Property Interim Measures” to help prevent further losses like those incurred by SOEs which caused concern within SASAC over the previous two years. An anonymous expert from SASAC indicated that SASAC was paying more attention to the supervision of overseas property, internal risk control of SOEs and that the supervision of overseas assets was to be further strengthened. China has to rapidly build an indicator system to detect early signs of risk, and a complete legal system for monitoring overseas assets.

At the same time, the central government is encouraging more non-SOEs to invest overseas. Non-SOEs have comparative advantages such as lower costs, more focus on profit, and being more readily accepted by the host country, with fewer political restrictions. More analysts, including Sun Xiaohua, a member of the National Committee of the Chinese People's Political Consultative Conference and former vice president of the All-China Federation of Industry and Commerce, are suggesting the government give further support to non-SOEs’ overseas investments.[74]

VII. Conclusion

For its trade partners, many of whom harbor concerns about the motivations of Chinese actors, China’s overseas resource investments can serve as conduits to understand a rapidly-changing China. Fortunately, China and the rest of the world are getting to understand each other better through increased dialogue, transparency, and cooperation. More Chinese analysts have realized that acquisition of equity does little to solve supply disruptions, and Chinese firms are starting to cooperate more with international or local companies. Some Western analysts have noticed that Beijing gives its relationship with United States priority over the acquisition of foreign resource assets by Chinese NOCs, and China has started using the free market to source its energy and resource supplies. In order to further reduce perception gaps, all parties need to take the path of more effective dialogue, transparency, and cooperation.

Despite making progress over the past decade, China’s ODI is at the elementary stage of development. It is mostly focused on developing countries, low technology sectors, and is dominated by SOEs. The percentage of investment projects incurring losses is much higher than other IOCs, and Chinese SOEs face more political challenges. As research director of energy security at the National Bureau of Asian Research Mikkal Herberg pointed out, Asia’s NOCs do not currently present a major competitive threat to IOCs, who remain at the top of the industry’s “food chain” because of their comparative advantages in technological and managerial expertise.[75] To promote China’s ODI, the Chinese government needs to implement further domestic market-oriented reform, encouraging more non-SOEs and local enterprises to invest overseas, and strengthen international dialogue and cooperation. Chinese enterprises need to increase the pace at which they are gaining international management experience and educate their staff to be truly international in perspective as well as improve their public relations capability. Any other path will be detrimental to China and to the world economic system in which it plays an increasingly integral role. For example, a smaller government role in oversight and management of commercial activity to entrust the market is more likely to decrease the international suspicion of Chinese ODI.

Source of documents： Global Review