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.