New report on Chinese bauxite mining in Indochina

The Heinrich Boell Foundation, WWF and the International Institute for Sustainable Development have released a new report by Kate Lazarus on China’s involvement in bauxite mining in Indochina. Mining companies are present in Laos but have not yet started operations; in Vietnam they have so far secured construction contracts, but even that has  attracted opposition and the government may backtrack; whereas in Cambodia they have so far only been involved in road building on the Bolaven Plateau that has coveted bauxite reserves. The report points out the synergy between highly energy-intensive aluminium smelting and the development of hydropower.

The report can be downloaded here.

International Crisis Group’s new report on China-Burma relations

Following the conquest of Kokang by Burmese government troops and the reported flight of tens of thousands of refugees to China (described as Chinese businessmen in Chinese media; see earlier entry), the International Crisis Group has published a new report entitled China’s Myanmar Dilemma. The report suggests that there is a conflict of interest between Peking, which supports the Burmese government, and the Yunnan provincial government, whose primary interests lie in maximizing profits from border trade and which hence prefers to deal with the so-called “ceasefire armies” and keep the Burmese government at arm’s length. Many Burmese border towns rely on China for electricity, water, and telecommunications, which of course also provides China a powerful weapon: thus, after a series of abductions of gamblers in early 2009, the Yunnan government cut off utilities to the casino town of Maijayang to pressure the local authorities to shut down the casino. The closest relations are maintained with the 20,000-strong United Wa State Army: in March, a Yunnan Province official participated in the 20th century celebrations of the UWSA’s victory over the Communist Party of Burma (!), and its political leader, Bao You-Xiang, epxressed its thanks to China for its support. At the end of last year, both Kachin and Wa leaders wrote a letter to Hu Jintao appealing for investment and aid.

The report also details Chinese involvement in hydropower projects (at least 63, including the Tasang Dam on the Salween, which is to be the largest dam in Southeast Asia) and mining (the latest and largest project, the Tagaung Taung nickel mine, was approved in 2008 with an investment of $800 million). Official Burmese figures say that 99% of the foreign investment in 2008, or about $900 million, came from China.

While the authors of the report seem to have had privileged access to officials in China, parts of it — particularly those describing on-the-ground sentiments — appear to be based on flimsy evidence. Thus, in reporting on anti-Chinese sentiments in northern Burma, statements like “Burmese feel that they are being pushed out” and “It has been estimated that 60 per cent of Myanmar’s economy is in Chinese hands” are based on a single interview.

It is tempting to see the “special zones” in Northern Burma as a return to the “overlapping sovereignty” of precolonial times when many of the principalities in the region paid tribute to China but were under the loose military control of Burma. What continues to interest me is the role and conceptualisation of Chinese ethnicity in these borderlands today. Do people like Bao You-Xiang see themselves as Chinese, Wa, or both? And how are they seen by others?

New China-in-Zambia masters theses in Amsterdam

Sarah Hardus and Roos Apotheker have recently completed masters theses respectively on perceptions of Chinese aid in Zambia and on practices corporate social responsibility in the new Zambian mining landscape. Hardus’ thesis will soon be available as a MqVU working paper, while Apotheker’s can be downloaded here.

Both theses have an ethnographic component, and Hardus was able to speak to a wide range of actors, from ex-presidential candidate Michael Sata to officials at the Chinese embassy, resulting in some fascinating quotes that paint a picture quite different from previous research on Zambia.

“Buying mines in Africa” and the question of China’s “soft power”

About a year ago, an interesting post “Buying mines in Africa— so that you know how difficult it is for China to obtain overseas resources [非洲买矿记 (让你知道中国海外获取资源何其难！)]” was published on Tianya by a poster named “sheishi sheifei renpingshue 谁是谁非任评说”.

This poster “sheishi” claimed to be an heir of a famous mining family in China. Together with “world famous noble families” in the mining business, his delegation went to an unidentified country in Africa shortly after China’s president Hu Jingtao’s official visit in Africa in early 2007. (Other posters of the thread later suggested that the destination was South Africa). They hoped to be able to purchase an iron ore mine, and to invest in a processing factory to smelt high quality iron, which is a highly desired resource in China.

The purpose of posting this thread on Tianya, according to “sheishi”, was to help people to gain a deeper understanding of how difficult it is for China to exercise its “soft power” at a global scale, to genuinely connect with international trade protocols, and how unrealistic it is for China to purchase natural resources for strategic reserve [zhanlue chubei] with its abundant foreign exchange reserve.

The whole negotiation process of this deal was fascinating. “Sheishi” described how their African partners at first spent a great amount of time and money “entertaining” Chinese investors with banquets, sightseeing, charity activities and the like, to consume some days off their planned negotiation itinerary. (“Sheishi” wrote that Africans were quite savvy with the technique of hospitality [zhaodai] that the Chinese were so familiar with. It was quite a killer technique that even his team could not resist the power and art of reception.) This kind of unplanned delay had certainly added tension and anxiety in the later days of negotiation as the team had to rush through hundreds of pages of legal documents and contracts written in English.

As “Sheishi” and his team began to pay full attention to the details of contracts and conditions, they realised with great astonishment that what they originally thought to be a winning deal turned out to be a ‘trap’ that could cost them millions of dollars.

First, there is a “trap” in the contracts:

The iron ore mine was unbelievably cheap, but the cost of the proposed processing factory was unreasonably high. This was a puzzle that the Chinese delegation could not understand. After a careful examination of the iron ore sample that the Africans provided, the Chinese soon discovered that this iron ore mine was in fact a titanium-iron ore mine. Titanium is expensive in the international market, but this is not what China desires (China has abundant titanium reserve but not iron). The Chinese then realised that the processing factory would be used to extract titanium for the Africans rather than to smelt iron for the Chinese (hence the added cost). After the extraction of titanium, iron ore would be transported to China as ‘waste’ (therefore cheap). But this would become a sensitive issue: under this particular context, because iron ore would enter China as “waste”, the China Customs would not allow “imported trash” [yang laji] to enter the Chinese border. Eventually Chinese investors would be the ones to suffer serious consequences: if they would not be able to transport the iron ore into China, they had to shoulder additional costs to refill these “waste” back into the mine for environmental purposes. This cost would be hefty and if the local authorities find the effort unsatisfactory, they wouldn’t be able to obtain another permit in mining.

Second, there is a lack of knowledge in the legal procedures:

When “Sheishi” and his team consulted African local lawyers who practiced mining laws (whose hourly rate varied from $2,000 to $10,000), it occurred to them that Africa had already established quite a sophisticated legal system since the colonial era concerning the mining industry. In comparison, the mining law in China lagged far behind and all the legal consultants in the Chinese delegation lacked sufficient professional literacy in understanding all the legal frameworks regarding the mining law, lest finding any potential pitfalls that might put Chinese investors in a disadvantageous position.

Prior to the negotiation, the Chinese legal consultants prepared seven contracts that contained a few dozen pages of relevant documents. They soon realised that this kind of contract was far too simplistic and porous. In Africa, the mining law concerns not only the property rights of the mines, but also the right of land use, the right to use the underground areas of the mine, the right to use adjacent land (e.g. to obtain consent issued by users/owners of adjacent land), and strict environmental conditions (e.g. pollution control, underground water protection, waste management, etc). The seemingly sufficient legal documents in the Chinese mining industry turned out to be completely vulnerable or even useless in the African context.

Third, there is a lack of institutional care and support:

One overseas Chinese [huaqiao] told “sheishi” and the team that this particular African city was a dangerous place for the Chinese, because apparently the Chinese were the darlings of kidnappers. Chinese were known for their habit of bringing large amount of cash; they did not carry guns; and more importantly, the Chinese government / embassy wouldn’t intervene if the Chinese were robbed or kidnapped. (Local Africans were poor men and there was little to gain by robbing them; kidnapping white men would be unwise because it usually escalated into serious cases—international pressure would be placed on the local authorities, and extra forces would be used to rescue the victim, therefore the stakes were to high to kidnap a white man.) The local overseas Chinese claimed that if a Chinese were to be kidnapped or even murdered, the embassy would hardly exert any effort to issue even a diplomatic note.

Facing these three significant challenges, “sheishi” and his team cancelled their original plan and returned to China. In reflection, he commented on the kind of dilemma that Chinese private (or state-owned) enterprises are facing in relation to obtaining resources overseas.

The first dilemma is the lack of support. “Sheishi” claimed that Africa is the ‘playground for adventurers’ [maoxianjia de leyuan]; but without the security support of the state, even these adventurers would not dare to play in this foreign land. It is common to see the U.S. putting international pressure on other countries just for one citizen, and its army announcing wars overseas for their citizens…

But what do their citizens do? They are developing and exploiting  resources in foreign countries. The state is hiding outside in the whole process and everything seems to flow smoothly under the term of market exchange. Whereas in China, a private enterprise like ours can not dream to be protected by the state army.

If we are a state-owned enterprise, that’s a different issue—the state and the army will intervene but then it has become a political issue altogether; that’s why in Africa people talk about China’s neo-colonialism now. What we need is private enterprise doing business following the local rules and regulations: just like the Americans, the Europeans. They are private companies, and we are private companies as well. We are all part of the market economy and therefore the anti-Chinese forces can not point fingers at the Chinese state. What we need is ‘fair play’, but this ‘fair play’ has to be supported by the state from behind.

The Chinese state is not helpful not only in terms of the lack of security support, but also in terms of the restrictive foreign exchange control scheme [waihui guanzhi]. Because of this scheme, it is extremely difficult for private Chinese business to invest in foreign countries. Although buying mines falls under the investment scheme that the state supports, there still are strict evaluation and verification processes—unless the investors are state-owned enterprises. Without any affiliation with the state, or a foreign identity, investment has to be done in the form of trade or some other ways. “Sheishi” expressed his frustration and said that sometimes it seems that the Chinese government wants to push everybody out of the country!

The second dilemma is the lack of knowledge. When “Sheishi” returned to China, he could not find even one expert in African mining law. He said:

According to the (African) local rules, if you ask the lawyer a question, by law he has to answer this question truthfully—he will be fully responsible if he gives inaccurate answers or information. But if you do not ask, he does not have the obligation to remind you of such information. Now the problem is we can not even ask any questions, how can we begin to talk about doing projects? China knows so little of the outside world. We do not have our own expert. How can we not be cheated? It takes many years of education to make an expert and we don’t even know how to educate people. Therefore it is truly difficult for China to expand its “soft power” in the world.

“Sheishi” pointed out that the fundamental challenge that China faces now is truly the lack of soft power. His idea of what constitutes soft power is a bit different from Joseph Nye’s original notion. He claimed that:

Over the years our country has increased  its foreign exchange reserve significantly. But with the rapid economic development, we are facing a severe challenge: resource shortage. To invest elsewhere for resources has now become a popular voice in China, as if with money one can buy anything possible. But with my experience in Africa, my deepest realisation is China’s lack of soft power overseas. One can not rely simply on money to solve problems. Without any expertise in foreign laws, or the thorough understanding of the international mining industry regulation and rules, our money will be only cheated; without the state military power as a firm buttress, one’s personal and business security will not be guaranteed—how can one dare to buy anything without certain security support? Money is easy to accumulate, but the kind of soft power that enables profitable business overseas is difficult to attain. That is why China now owns so much foreign exchange reserve, but little has been spent to purchase resources or raw materials outside of China—we are still paying a high price to import the processed products. Until now, China has only been successful in takeovers of small mines or tailings, but not large-scale mining sites.

It is easy for Chinese scholars to give suggestion on how China should spend foreign exchange reserve on resources, but in reality this is a tremendous undertaking that China is not yet fully equipped to carry out. Many are flushed with optimism of China’s ‘rise’, or the expansion of China’s ‘soft power’ in terms of economic and cultural influences; few actually realise the weaknesses within China’s development plans and its international ambitions.

China in Latin America book out

Finally, after a dozen China in Africas, here is a China in Latin America, written by R. Evan Ellis. His post as “professor at the Center for Hemispheric Defense Studies” made me wary, but, even though the book is based on the usual combination of newspaper accounts and interviews, it is in fact good. It has a wealth of country-by-country information that is exceedingly difficult to obtain elsewhere (unlike the now-considerable overlap of sources about Africa), which includes very useful brief descriptions of Chinese immigration and everything else you would expect (from trade and infrastructural projects to military cooperation and what he calls “intellectual infrastructure,” which includes the teaching of Chinese). One shortcoming here is that there is no separate discussion of development aid, even though Ellis does mention low-interest loans.

The book really does fill a gap. For instance, I have long known about the large and new Fujianese immigration to Argentina and the fact that these migrants run a lot of groceries, and have wanted to know whether this group has anything to do with infrastructure investments from China. Ellis tells me that it does not, yet. He also confirms that although Brazil has the largest number of Chinese, Chinese megaprojects here have been relatively insignficant (partly because of a lack of excitement about Chinese loans and labour) and there is no rush on the Chinese language, unlike in Chile (though this section is made less reliable by the fact that Ellis uses only Spanish and English sources, no Portuguese ones). His data in some cases go up to December 2008, so that he is already able to account for some of the effects of the recession. As of that date, it appears that the ambitious transcontinental rail and road projects in which Chinese companies and banks have been mooted as investors and contractors have not yet taken off.

The book is not led by a preconception of what China is doing in Latin America — perhaps because it is not so easy to have such preconceptions, unlike in Africa. This makes the continent all the more interesting as a case study. Indeed, Ellis details how the resource-shopping of Chinese mining and metallurgy companies in South America often takes the form of joint ventures that are not unidirectional; thus, Chilean-Chinese and Chilean-Brazilian joint ventures have announced plans to open smelters and fertilizer plants in China, a Brazilian company owns Chinese nickel mines, and a Chilean wine makers has invested in wine production in Xinjiang. While nearly all current South American administrations are keen on contacts with China, this has not prevented them from taking measures such as Chile’s ban on Chinese fishing vessels using port facilities as retaliation for what they say is Chinese overfishing of the sea outside Chile’s territorial waters.

Ellis also notes that despite all the attention of China’s “strategic partnership” with Venezuela and its warm welcome by leftist Andean presidents, Chinese investors, like all others, prize political stability, transparency, and developed infrastructure. This means that they have been far keener to provide loans to Chile, Argentina and Brazil than, say, Venezuela. Like in Africa, Chinese companies (and presumably politicians) are keen to leverage their comparative advantage in unstable places shunned by Western investors (or where Western investors are unwelcome), but they are equally intent to enter larger, stabler countries and play by the rules if they have to.

Controversy over Chinese investment in Vietnam mining

The Wall Street Journal reported on 1 May (James Hookway, “Once Enemies, Vietnam Now Fights for China Funds”) that a controversy had erupted over the plan for a state company to create a $460 million venture with the Aluminium Corporation of China to extract bauxite in the Central Highlands. 97-year-old General Vo Nguyen Giap, a hero of the French and American wars, has “written open letters to the government warning of growing Chinese influence” and environmental damage, a point also made by a “chorus” of scientists and economists who question the project’s feasibility. “In comparison, there has been little outcry against a unit of U.S.-based Alcoa Inc., which is conducting a feasibility study for a possible alumina refinery in southern Vietnam.”

The Central Highlands is, of course, not only an area of relatively untouched nature but also one where the “Montagnard” ethnic groups, with their often conflictual relationship with the central government, are located. In this regard, the story is very similar to the Lao and Cambodian cases, but in a very different political environment — one where there is political alliance but also a strong sense of opposition to China (and the Chinese), both among the elite and the population, but where the state is governed to a way very similar to China’s.

China’s Minmetals buys OZ Minerals

Today’s Age reports that

China Minmetals Corp., China’s largest metals trading company, agreed to pay 2.6 billion Australian dollars ($1.7 billion) in cash for Melbourne-based copper producer OZ Minerals.

Most of OZ Minerals’ mines are in Australia, and the purchase comes in the wake of Chinalco’s purchase of shares in Rio Tinto. But what makes this interesting for us is that OZ Minerals also owns the Sepon mine, the only functioning copper mine in Laos, which ships mostly (or only?) to the Chinese market, but whose main customer has allegedly been executed for corruption. Recently the mine laid off 311 workers.

The mine´s former management has undertaken some “corporate social responsibility” projects, i.e., it has spent some money in nearby “communities” and financed the building of a stadium in nearby Savannakhet, so it has had a reasonably good relationship with the NGOs. It will be interesting to see if and how all that will change with the transfer of ownership.

See also the Sydney Morning Herald´s report here.

Donors press Congo over $9bn China deal — FT

An article by Barney Jopson in the 9 February issue of the Financial Times, also picked up by International Rivers, reports that Western donors have announced they will cancel a planned debt relief package of $11bn to Congo-Kinshasa if it accepts a $6 billion financing package from a consortium of state-owned Chinese companies to build roads, railways, hospitals and universities in return for the right to develop a copper and cobalt mine. This would be the largest Chinese investment project in Africa to date, according to the article.

The IMF has talked about making governments ineligible for debt relief and concessionary loans if they also accept commercial loans (which typically come from China), as that threatens to create new indebtedness. But this seems to be the first time it is threatening to apply that principle.

Most western donors have said they support the [Chinese] deal “in principle” because it gives Congo access to capital on a scale it could not receive from anywhere else. But, led by the Paris Club of creditors and the IMF, they have raised objections to specific provisions.

The focus of concern, according to western diplomats in Kinshasa, is that the deal would give the Chinese consortium unprecedented state financial guarantees, including some that earmark government revenues and make China a privileged creditor. But Wu Zexian, China’s ambassador to Congo, indicated that it would not be so easy. “They [western institutions] are wrong to ask Congo to remove the state guarantee. That is blackmail,” he said. “This is a poor country that needs to develop. Why force the country to modify the clause?

“We cannot accept that. It’s discriminatory.”

To my knowledge, this is the first public “clash of developments” between Western donors and China. It is interesting that the IMF is not demanding that Congo renounce the deal, only that it renegotiate it; unfortunately the article does not have the details. Many Africa specialists have commented that African governments typically want to keep both Chinese and Western lenders and companies in the game and play them out against each other to get the best conditions.

 Asked what lessons the rest of Africa could draw from Congo’s experience with China, Mr Kasongo [the deputy minister of mines] added: “Nobody should go it alone. We are the first ones to leave the door open to both of them [China and western institutions] because they are both servicing us.”

I am very interested to see how this plays out and how the Chinese p[ress reports on it.

Chinese iron ore project in Gabon delayed

According to a 29 January Bloomberg report (Antonie Lawson, “Gabon Urges China to Accelerate Development of Iron-Ore Project”) picked up by International Rivers,

Gabon urged China to accelerate the development of an iron-ore project in the Central African country, which has been delayed by the global financial crisis (…)

China National Machinery and Equipment Import and Export Corp. announced in July it signed a 25-year accord with Gabon’s government to build and operate a mine producing as much as 30 million metric tons a year of the steelmaking ingredient. The state-owned contracting company, known as Sinomach, will also build a 500-kilometer railway, a port and a water power station.

The total cost of the mine will exceed $790 million, according to China
Daily.

Interestingly, the process currently appears stalled by at the stage of the environmental study. This appears to be another sign that the recession is slowing down at least some of the projects.