Skip to content

China’s Global Arrangement and Diplomatic Focus for Its Strategic Resources

[Editor’s Note: Chinese Cadres Tribune, which is published by the Party School of the Central Committee of the Chinese Communist Party (CCP), published an article on China’s strategy and diplomatic focus on its strategic use of natural resources. It argues that China relies heavily on the world for oil and mineral resources. To sustain China’s growth, it is critical that China follow its “going abroad” strategy and apply “natural resource diplomacy” to secure resources from other countries. It recommends encouraging Chinese natural resource companies to expand overseas, develop secure supply channels, increase China’s power to set prices in the global market, and create natural resource reserves. The following are excerpts from the article.] [1]

The Global Allocation of China’s Strategic Natural Resources

As the world’s third largest mining country, China ranks among the top countries in the world for storage of certain strategic natural resources. However, the amount of its total natural resources per capita is only 58% of the world average, or 53rd in the world. The supply for one-third of the 45 main mineral resources that China used in 2010 can be fully guaranteed; the supply for another one-third can be primarily guaranteed; and the supply for the remaining one-third cannot be guaranteed. China’s reserves of oil, steel, manganese, potassium, and other bulk-consumed minerals are low. In 2009, China imported 51.3% of its oil, breaking the 50% benchmark that industrial countries regard as the “energy security warning threshold.” China imported 62% of the iron ore that it consumed in 2009. In the first decade of this century, China’s iron ore consumption increased 3.5 times, and the import price increased 3 times.

China faces a great challenge in the supply of its strategic natural resources. Its domestic supply of certain bulk-consumed strategic resources is of low quality, low quantity, and limited reserves, but as the “world factory,” China is a classic resource consumption-based economy. Therefore, in addition to fully exploring the potentials from domestic supply, actively seeking and creating stable natural resource supply bases overseas is a must for China to maintain the security of its supply of strategic natural resources and sustain its economic growth. At the beginning of this century, China initiated the “going abroad” strategy. It is the right strategy to use the domestic and foreign “two markets and two resources” to achieve sustainable economic development. It is part of China’s historic mission to encourage and support Chinese companies to participate in international competition and achieve global optimal allocation of strategic natural resources.

In recent years, China’s resource companies have expedited their “going abroad” steps. From January to October 2010, Chinese companies spent $US24.6 billion on oil and natural gas related acquisitions. This accounts for 20% of the world’s oil and gas acquisition deals and represents a five-fold increase from China’s 2008 performance.

Since 2007, China’s companies have invested in 800 exploration, excavation, and acquisition projects for non-oil and non-natural gas natural resources overseas. These investments cover over 70 countries and are valued at $US50 billion.  Ranked by the number of projects that involve each mineral, the targeted minerals are: copper, steel, gold, lead, zinc, aluminum, nickel, uranium, coal, potash, and precious stones. Measured by the investment amount, the investments focus on steel (about 50% of the total investment amount), copper (20%), gold (8%), coal (5%), and aluminum, lead, and zinc (3%), followed by uranium, potash, and precious stones. Ranked by regions, the order is Australia (over $US20 billion, or about 45% of the total investment), Latin America ($US10 billion, or 16%), Asia ($US8 billion, 13%), Africa ($US7 billion, 12%), Europe and North America (11%).

Chinese resource-based enterprises own directly or jointly (via joint venture or owning foreign companies’ stock) the rights to a group of mines in countries with large mineral potentials. These Chinese companies range from state-owned enterprises to private companies and from mine companies to professional investment groups, covering a wide range of fund raising channels. The heavy-weights in acquisitions are mainly publicly-traded companies such as Aluminum Corporation of China, China Minmetals Corporation, China National Gold Group Corporation, Sinosteel Corporation, Wuhan Iron and Steel (Group) Corp., Angang Steel Company, China Shenhua, Zhongjin Lingnan Nonfemet Company, Jinchuan Group, Valin Group, and so on. Chinese companies have become more mature in international business, whether it is acquisition or investment.

The Focus of China’s Natural Resource Diplomacy

Nowadays, natural resource diplomacy is a primary means for a country to protect its own interests. China’s continuous economic growth will surely lead to a stronger demand for overseas resources. Back in 1939, the U.S. set safeguarding the sustainable, stable, and affordable global supply of strategic natural resources as the core of its natural resource diplomacy. China didn’t include “natural resource diplomacy” as a foreign diplomacy agenda item until the late 1990s. For the past ten years, via the continuous establishment and development of friendly, cooperative relationships and forming strategic alliances with resource supplier countries, China’s natural resource diplomacy has created a comprehensive, positive environment for China’s resource companies’ global operations.

China should actively execute natural resource diplomacy to establish a mechanism for national energy security and global resource allocation. China must follow the natural resource diplomacy and “going abroad” strategy to form a global oil supply system with diversified transportation channels and diversified supply sources. The Middle East is the first supply source for China’s oil imports (over 50% of the amount imported), the second is Central Asia and Russia, and the third is the Asia Pacific and Latin America. To safeguard its oil supply, China should adjust and identify critical supplying countries and regions so that it establishes a strategic oil supplier/consumer alliance with them. The Middle East, Central Asia, Northwest Africa, South America, Asia Pacific, and Russia are the key strategic regions. China should actively participate in the international oil business, participate in the Kra Isthmus Canal project, and enhance communications on the Sino-Kazakhstan pipeline and the Sino-Russia pipeline to ensure safe and stable operations of the oil transportation channels (by sea, by rail, by pipe, and by truck).

China should develop natural resource diplomacy and cooperation to establish a standardized global resource supply system. China’s demand for overseas resources will continue to rise as its economy keeps growing. As China carries out its natural resource diplomacy, it will lead to complicated strategic and security issues. This requires China to establish a global natural resource trading system that addresses the security and allocation of global natural resources. Though there are complicated political, economic, military, and strategic issues behind the trade in strategic natural resources, (China should focus on trade, as) free trade is still the main theme of the world economy.

China should establish a normal supplier/consumer and win-win cooperation mechanism between natural resource supplier countries and itself. Building a connection with the supplier country is a key point in ensuring the diversification and globalization of the supply of natural resources. China had a late start in non-oil and non-natural gas diplomacy, so it has very limited discourse power in aluminum, iron ore, and other mineral products. China should increase its power in discourse and price setting. China should pay extensive attention to the media environment. It should prevent Chinese companies’ overseas acquisitions from attracting the media’s attention too early. It should properly and orderly lead the media’s view and eliminate potential hostility or concerns. At the same time, it should focus on cultural differences between Chinese enterprises and companies in the resource supplier countries and absorb the good things from those foreign companies to ensure the acquired companies’ sustainable growth.

China should rely on technological innovation to establish a natural resource protection and reservation system. China has done little in the area of protection or technological innovation about rare earths. Thus it has not fully utilized rare earths in natural resource diplomacy. 97% of the world’s rare earth production came from China last year, but over-exploration, disorderly production, and vicious competition made China lose its power in setting rare earth prices. In October last year, China re-assigned the rare earth export quota based on the WTO’s regulations. It caused a big wave of protest from Western countries. Japan, the U.S., and Germany all criticized China. From the basis of equal trade, it is helpful to the world to maintain the stability and orderly development of the global resource market when China develops scientific plans to explore, excavate, and utilize its natural resources, sets export quotas, and implements protective excavation and reservation of these non-renewable strategic resources such as rare earths.

For natural resources such as oil, rich iron ore, potassium, and diamonds, which China has a great need of but imports heavily from other countries, China should acquire them as much as it can. Regarding those resources for which China does not have an urgent or great import need, but still relies on imports, China should find opportunities to excavate them overseas and store them domestically. This is a focus for China’s natural resource diplomacy work in the future.

[1] Chinese Cadres Tribune, “China’s Global Arrangement and Diplomatic Focus for Its Strategic Resources,” May 3, 2011.