NEW YORK (ResourceInvestor.com) -- The boardrooms of the largest mining and energy companies are likely to start investing a lot of time strategizing on China. Naturally they want a slice of the action in terms of supplying goods into the ballooning market or exploiting mineral deposits. But that is also balanced by concerns over China's acquisitive appetite and the operating basis of its companies.
Chinese companies are starting to invest at scale. Last year direct foreign investment by Chinese companies increased more than one quarter to $3.6 billion. Of that $2.5 billion was spent buying equity in foreign companies with $1.9 billion going to mining investments.
$1.9 billion is tiny relative to last year's total resource sector transaction value, but the trend is everything, as is the context.
The companies making the investments are quasi-commercial adventures allowed by the Chinese Communist Party. State owned can also mean a division of the People's Liberation Army or even the People's Armed Police.
Government "corporations" (an oxymoron if ever there was one), irrespective of nationality, have little concern for trifling things like the cost of capital or return on investment. Indeed, we have seen repeated examples of Chinese parastatals undertaking investments where national interest overwhelms the investment case. If there is a shortfall, it can be made good from the national treasury, few questions asked.
That is not ordinarily a threat to be concerned about because you cannot persistently ignore the iron laws of the capital markets. However, the "pinstripe" companies also know that China can afford its inefficiency for quite some time given the capacity for continued growth in the country.
Mining and oil companies operating on sound business principles and answerable to shareholders could find themselves squeezed to compete for acquisitions or supply contracts on an equal basis.
At the same time Chinese diplomats are blanketing the world signing trade and investment agreements with resource rich countries. In essence, China is taking a portion of the trade surplus it earns from America, and purchasing favours and loyalty from targeted countries.
China's military-industrial complex that overlays this activity leaves the U.S. resembling Denmark. It cannot be ignored that China's foreign investment activities have a marked strategic intent that is more akin to buttressing an ambitious military than merely laying in supplies for a burgeoning domestic market. You do not systematically overpay for assets if domestic consumers are the overriding concern.
Publicly traded resource companies play by a very well defined set of global rules governing markets, the environment and social issues etcetera. Companies are held to account on multiple levels through shareholders, multilateral institutions, regulators, lenders, NGOs and so on.
They must compete against Chinese companies that have little concern for social licensing issues.
For example, the Darfur genocide has been directly linked to demands for rapid exploitation of oil concessions in the region. China is a major investor in the owner of those concessions and Sudan's biggest oil pipeline. There were no televised mass rallies outside Chinese embassies demanding its withdrawal; no NGO smashniks breaking heads and windows; no Catholic priests threatening to have the concessions stripped away unless the Janjaweed were brought to heel.
Related Recommended Reading |
Compare that with the energy that has been devoted to trying to have Ivanhoe Mines [IVN] pressured to withdraw from its joint venture with pariah state Myanmar.
Indeed, China (together with Russia) was able to use its U.N. Security Council veto to very good effect to block sanctions on Sudan, and hobble peacekeeping intervention whilst the Janjaweed continued to make the area ready for production. The same thing is going on with U.N. sanctions being considered for Iran over its nuclear programme, with China heavily invested in Iranian energy.
If you're listed in New York or Toronto, the best you can hope for is a sympathetic ambassador or trade consul to plead your case. That's too little when Chinese competitors are dialled in to the Security Council and immune from the shame of bad press.
It's not clear how Western domiciled resource companies can compete without compromising best practice. The best hope is that China can be rapidly brought into alignment with global standards. Raising China's compliance costs is better than risking a race to the bottom, but it is a far from certain conclusion.