How China's Resource Quest Is Changing China
Trevor Houser is Partner at the Rhodium Group and Visiting Fellow at the Peterson Institute for International Economics.
China's economic emergence has been a defining event for global energy and commodity markets. Over the past decade, China has accounted for more than half of the growth in global energy demand and today consumes more than half of the iron ore, cement, copper, and a host of other commodities produced around the world. The stock of global direct investment by Chinese companies has grown from $53 billion in 2004 to $609 billion in 2013, a significant share of which is in natural resources.
In By All Means Necessary: How China's Resource Quest Is Changing the World, Elizabeth Economy and Michael Levi help us make sense of Chinese natural resource trade and investment. While the title suggests the book might succumb to the alarmism and hyperbole that often dominates both public and academic discussions of China's rise, it is in fact an exceedingly nuanced, balanced, and well-researched assessment. The combination of Economy's deep China expertise and Levi's natural resource market and energy policy acumen provides an extremely valuable contribution.
The book's chief strength is its combination of compelling storytelling and in-depth analysis—a commodity rarer than any resource Chinese companies search for around the globe. The authors put recent Chinese natural resource trade and investment trends in context, discussing precedents from Chinese history as well as from the economic emergence of the United States and Japan. They debunk the view, widely held in the West, that Chinese companies work in lockstep with the government, seeking to improve the security of the Chinese state at the expense of companies and countries elsewhere in the world. The book shows instead that Chinese companies are primarily commercially driven and that their motivations and interests often differ from the government's, just as is the case in Europe, Japan, and the United States.
Economy and Levi rightly note that the most significant global impact of China's resource quest to date has been the country's rapid growth in energy and commodity consumption. This has put upward pressure on global prices and helped enrich resource-producing states. But what Chinese demand giveth, it can also taketh away. The growth of Chinese resource consumption has slowed dramatically over the past few years, leading to a sharp correction in the price of many commodities. Iron ore and copper prices fell by more than one-third between 2011 and 2013, and aluminum, steel, and coal prices have declined sharply as well. This development has been painful for resource exporters, from Australia to Chile and Brazil. And if the leadership is successful in “rebalancing” the Chinese economy from investment and industrial production toward services and domestic consumption, the resource-intensity of Chinese growth will likely continue to decline.
Economy and Levi judiciously evaluate the positive and negative impacts of global resource investment by Chinese companies, both for recipient countries and competing firms. As the authors point out, Chinese resource investment has had less impact than Chinese imports of foreign-produced goods, despite attracting equal if not greater attention by foreign policymakers, scholars, and the press. Chinese companies are late to the resource game and often must pick through the scraps that U.S., Japanese, and European companies do not want to touch. Diplomatic support from Beijing and low-cost capital from state-owned banks help Chinese companies compete for investment opportunities in many developing countries. The relationship between the companies and the government, however, is a liability when it comes to investing in developed countries. Politicians and regulators in most developed country markets give foreign investment by state-owned enterprises extra scrutiny. This is bad news for Chinese companies, as the U.S. shale boom and Canadian oil sands development have shifted the center of global energy investment to North America. Chinese companies have successfully invested in both countries but face political hurdles not shared by their Japanese, European, or Indian counterparts.
Finally, and most importantly, the authors discuss the ways in which China's quest for natural resources is changing China itself. The country's surge in resource demand alarmed policymakers in Beijing as much, if not more, than policymakers in Washington, Brussels, or Tokyo. While growing resource demand has likely increased Chinese assertiveness in territorial disputes in the South and East China Seas, it has had positive domestic impacts as well. Concerns over resource adequacy have helped catalyze policy initiatives aimed at improving energy efficiency and environmental protection. Chinese diplomats no longer offer blind support for commercially driven investment around the world and are increasingly seeking to ensure that the behavior of Chinese companies abroad reflects well on China as a whole. Greater demand for and investment in foreign resources have made China a more committed stakeholder in many of the international institutions established by the West and increased Chinese companies' familiarity with international business norms.
These positive effects will likely grow in the years ahead. My colleagues Daniel Rosen and Thilo Hanemann estimate that the stock of global direct investment by Chinese firms will grow to $1-$2.5 trillion by 2020.  While the first wave of Chinese foreign investment was directed at trade facilitation and resource extraction in developing countries, in recent years Chinese capital flows have gravitated toward developed economies and are increasingly motivated by the desire to gain access to technology and markets for higher-value-added products. As the Chinese economy is maturing and the growth model is changing, Chinese firms are increasingly targeting brands, technology, and consumer-related assets in advanced economies. Given that the business practices and government relationships Economy and Levi identify as most problematic in past resource investments are also Chinese companies' biggest liabilities as they look to compete in developed countries, including for non-resource assets, this shift in investment focus will likely continue to change Chinese practices in constructive ways. By All Means Necessary serves as an excellent and balanced assessment of the first chapter in Chinese overseas investment and as a perfect scene-setter for the chapter to come.
 Daniel H. Rosen and Thilo Hanemann, “An American Open Door: Maximizing the Benefits of Chinese Foreign Direct Investment,” Asia Society, Special Report, May 2011.