By All Means Necessary (9 page)

Although many state actors are involved in the going-out effort, five in particular play central roles. The State-owned Assets Supervision and Administration Commission (SASAC), established in 2003, either outright owns or has a controlling share of 112 powerful SOEs (as of December 2013), some of which are the biggest resource companies in China. (Increasingly, private Chinese actors—including smaller mining companies, farmers, traders, manufacturers, and even independent workers—are also investing abroad in natural resources.) As the primary shareholder in each SOE, SASAC is largely concerned with growth and profit, which is often the spur for overseas investment.

The Ministry of Commerce (MOFCOM) is another powerful bureaucracy tasked with aiding outward-bound investment. It contains the Department of Outward Investment and Economic Cooperation, which regulates all Chinese companies engaged in international business with large investments. MOFCOM also plays a central role in foreign aid, distributing money to United Nations organizations and canceling foreign aid debt. Its Department of Foreign Aid also approves corporations' bids on aid projects—these projects are often proposed by the NDRC as part of a broader package of resource and infrastructure development projects—and is responsible for a project's overall management.
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In recent years, MOFCOM also has assumed significant responsibility for ensuring good relations between Chinese firms and the countries in which they invest, publishing an annual guide to the laws, challenges, and overall state of relations with China for each country in which these firms invest.

The Ministry of Foreign Affairs (MOFA) plays a critical role in diplomatic engagement and in calibrating China's foreign policy.
MOFA provides consular and diplomatic services for the hundreds of thousands of Chinese workers abroad, and increasingly it is asked to organize noncombatant evacuations and defend Chinese investments and property abroad.

Financing for Chinese projects is provided by state-owned banks. Two in particular stand out. The Export-Import Bank of China (EXIM Bank) oversees all the country's concessional loans and provides export credits for commercial undertakings overseas, primarily in infrastructure development. (A loan or other financial instrument is concessional if it is provided with terms that are more generous than those available on commercial markets; concessional loans are typically marked by lower-than-commercial interest rates in particular.) China Development Bank (CDB) provides inexpensive loans, notably to state-owned companies seeking to make large natural resource investments overseas. The country's sovereign wealth fund, the Chinese Investment Corporation, has also taken a role in buying stakes in foreign resource companies.

These formal contributions are bolstered by the Communist Party itself. The Party directly engages in the activity of the SOEs by appointing the top officials in the fifty most powerful ones through the Party's Organization Department. The department's influence is extensive; there is even a specialized school under its auspices that is charged with training top management from SOEs and financial enterprises. Top SOE officials may also be appointed to top party posts; for instance, Su Shulin, former chairman of the oil company China Petroleum and Chemical Corporation (Sinopec), was named the governor of Fujian province.
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The heads of these large SOEs, therefore, command a political role themselves, often enjoying minister or vice minister status. In this way, they help to shape China's resource acquisition strategy.

Even though there is more coherence to resource acquisitions than one finds in a country such as the United States, which does not attempt to coordinate its diplomatic, security, and economic policy nearly as tightly as China does, there is a strong current of independent action as well. Chinese SOEs often compete with each other for overseas contracts; for example, CNPC and Sinopec
battled for control over oil projects in Sudan in 2004.
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And some high-level efforts at coordination are less than meets the eye: NDRC may propose a sweeping investment plan encompassing an array of natural resource and infrastructure projects, but it cannot compel Chinese companies to participate.
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Moreover, despite nominal ownership of SOEs, SASAC often has difficulty forcing them to follow its orders.
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Conflict among the various parts of the bureaucracy is also not uncommon. In some instances, what appears to be a massive investment and trade and aid deal structured from on high may in fact be constructed largely from a bottom-up amalgam of various interests. Rather than being directed by the central government to acquire particular resources, SOEs are usually motivated by the possibility of profit; encouragement from the government typically comes more in the form of advantageous financing and a helping hand from MOFCOM and MOFA officials when needed rather than specific instructions to pursue particular projects. Leaders of SOEs may also, more subtly, integrate their perception of the national interest into their decisions, since success for them may well be promotion to higher political office.

Chinese companies' efforts to go out are therefore bolstered by supportive policy even while overseas investment is not necessarily centrally coordinated. This supportive environment appears poised to continue. The fourth-generation leaders were staunch supporters of the country's going-out policy, repeatedly reiterating their commitment to owning resources they believed were needed to support economic growth. Celebrating the tenth anniversary of China's entrance into the WTO in December 2011, President Hu Jintao stated, “China must strengthen its bringing in and going out….It is extremely important to our development.”
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He offered further support to the policy at the 2011 Boao Forum for Asia: “In the next five years, China will make great efforts to pursue the strategy of ‘going global.' We will encourage enterprises of different ownership structures to invest overseas in an orderly manner and carry out cooperation on projects that will improve local infrastructure and people's livelihood.”
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China's fifth-generation leaders appear equally committed to the going-out strategy. President Xi Jinping has made a point of stressing
the benefits to the host countries of Chinese investment. While in Angola, Xi noted, “It is the right time for China to implement a ‘going out' policy.”
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And during a diplomatic visit to Ireland, Xi commented, “Chinese development will bring economic opportunities to all businesses of every country. We equally support both bringing in and going out and look forward to developing international trade.”
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The combination of policies (particularly financial) put in place as much as a decade ago but sustained today, the willingness of Chinese government entities to help companies seeking investment opportunities, and the desire of Chinese corporate leaders to realize profits and be promoted can yield a result that looks very much like a coordinated strategy. As Shen Heting, president of Metallurgical Corporation of China Limited, a subsidiary of the behemoth state-owned China Metallurgical Group Corporation (MCC), told the Chinese newspaper
New Century Weekly
, “Central government enterprises that secure mines overseas are in reality securing resources for China.”
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In most cases, however, deals do not originate with the leadership but rather are driven by the individual incentives of the various players, all supported by a broader framework put in place to promote resource investment.

This is not entirely unlike the environment for many other multinationals. For example, when U.S. oil companies invest overseas, they benefit from tax provisions that treat overseas royalties like foreign taxes and can sometimes avail themselves of U.S. diplomatic help when problems arise. But Chinese support for its companies, even if it is inconsistent, is vastly more substantial and far ranging than that provided by Western governments to their firms.

The breadth of government support and incentives for overseas resource investment is not the only thing that sets China apart. Companies also often use tools that appear novel or different as they seek to win the right to own and develop overseas
resources: integration of foreign aid and resource deals, combined resource and infrastructure deals, and heavy use of “loans for resources” (most notably “loans for oil”) are the most often discussed. Some of these are genuine departures from past ways of doing business, but not all of them are fundamentally new or consequential.

China provides three types of economic assistance to countries with which Chinese companies do business: grants, interest-free loans, and concessional loans. MOFCOM is in charge of allocating grants and interest-free loans; it acts together with the EXIM Bank for concessional loans.
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As energy expert Erica Downs has noted, Beijing's financial largesse—through low-interest loans to Chinese SOEs and outright aid to resource-rich countries—has likely given its oil companies a competitive advantage.
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Certainly provision of loans to Chinese companies engaged in extractive industries is a priority for a number of the country's financial institutions. For example, in March 2012, Jiang Jianqing, the head of the state-owned Industrial and Commercial Bank of China (ICBC), urged the government to invest more in overseas minerals in order to protect the economy from “resource bottlenecks.”
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And the president of the Bank of China, Li Lihui, said that in 2011 the bank distributed over RMB 500 billion ($70 billion) in loans to stimulate overseas mineral acquisition.
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Chinese officials have explicitly claimed that foreign aid is designed to “create a strategic platform for Chinese companies to go global.”
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Such government support is not unique to Chinese resource companies, but they are frequent beneficiaries. In Gabon, for example, where China has pursued investments in copper, oil, and timber, it has built clinics, schools, the National Assembly building, and the Senate building. It also supplies scholarships to Gabonese students to study in China and has sent agricultural experts through the UN Food and Agricultural Organisation South-South Cooperation Initiative.
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For construction and infrastructure projects, which are often packaged with resource investments to secure deals, Chinese banks
sometimes provide concessional loans to countries, which then use the loans to engage the services of the Chinese companies undertaking the projects. Sometimes the firms themselves identify potential projects, while in other cases MOFCOM guides them to meet the particular needs of a host country. Such projects include a government office building in Guinea Bissau (where China invests in oil), a foreign ministry building in Yemen (where China seeks to develop oil and gas), the China-Pakistan Friendship Center in Pakistan (where Chinese companies are interested in copper, coal, and oil), and a high school in Tonga (where China invests in timber).
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The Chinese government's ability to coordinate bids that combine subsidized infrastructure projects and access to natural resource deposits creates a win-win situation for both construction companies and resource companies (though not necessarily for the savers who ultimately subsidize the loans).
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Chinese support for infrastructure development can also have indirect value for resource acquisition; for instance, companies have made timber exports more viable by engaging in railroad and highway construction in Latin America, Africa, and Southeast Asia.
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Combining resource investment with infrastructure development may also help China secure supplies in a crisis. Though Chinese strategists and policy makers have not discussed the possibility in public (or, to our knowledge, in private), the existence of deeper and more enduring economic relationships that go beyond natural resources means that resource producers will be less likely to cross China down the road. This is particularly true if the arrangements involve concessional elements (as many of the infrastructure packages do) that would not be replaced by others; a foreign leader considering a Chinese request for resource supplies on special terms during a crisis would need to weigh the possibility that China might withdraw its concessional financing if the leader said no. Even if the Chinese government does not anticipate taking advantage of this dynamic, it might still eventually benefit.

Packages of resource investment and infrastructure support set China apart. Yet some of the techniques Chinese investors use are less exceptional than many assume. Attention has focused on one in particular: loans for resources.

Loans for resources are most frequently (and worriedly) discussed in the context of loans for oil. The phrase appears to imply a creeping mercantilism: instead of “cash for oil, ” which is how international oil markets typically function, Chinese companies appear to many to be trading loans for crude. Since these loans have long payback periods, often extending over several decades, this appears to create the sort of rigid, nonmarket arrangement that many Westerners fear China promotes, locking up oil for China over the term of the loan.

Yet the reality is far more benign and far more familiar to the global oil business. The structure of a typical loan-for-oil arrangement is straightforward.
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The CDB provides a foreign government or state-owned oil company a loan to finance oil development. The oil producer in turn promises to sell a certain volume of oil to Chinese buyers every day until the loan is paid off, and to deposit the proceeds in an account it holds at the CDB. The CDB then withdraws its loan payment from that account.

But this is best understood as a way of providing security against default for the loan rather than as a way of increasing the security of Chinese oil supplies. The oil is typically sold at prevailing market prices and can be sold on to other countries or companies if desired, recourse the Chinese companies often take. Indeed, some loan-for-oil arrangements reduce the amount of oil that must be sold to China if oil prices rise.
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This makes sense if the goal is to provide security for the underlying loan—higher prices mean that given loan payments can be made with lower volumes of oil sales—but it would be illogical if the arrangement was supposed to provide China with secure oil supplies.