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Critical resources crisis looms in China

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Originally published WA Business News – Duncan Calder Thursday, 16 September, 2010

AT the highly successful In The Zone conference held at the University of Western Australia last year, the Australia China Business Council’s chief representative in China, Paul Glasson, spoke about certain “inescapable truths” that compel Chinese companies to pursue a ‘go out’ policy or ‘zou chu qu’ to invest overseas to acquire or develop energy resources for China’s economic development.

The facts here are well established: China has the world’s lowest per capita average of resources and the situation is only likely to worsen over time.

Water is a very serious issue in China. China has only 6 per cent of the world’s average water resource on a per capita basis.

China has only 4 tonnes per capita oil, while the global average is 25 tonnes.

China’s gas reserves are around 1,400 cubic meters per capita against a world average of 28,000. That is just 5 per cent of the world’s average gas resources on a per capita basis.

China has less than 50 per cent of world’s iron ore per capita, and the ore it has is largely low grade.

China does have a lot of coal. But its coal is often of low quality and highly polluting.

These facts suggest that, over the medium to long term, China really has no choice but to invest in energy and resources projects overseas to secure access to vital energy and natural resources required for its growth.

The Chinese leadership is acutely aware of these facts, which are key inputs to strategic plans to source long-term supply.

Consumer demand
But what is driving China’s demand for resources?
One is China’s economic growth. Since Deng Xiaoping launched China’s open door and reform policy some 32 years ago, China’s economy has grown by an average of 9.5 per cent per annum.

By most accounts, China has overtaken Japan in the first half of this year to become the world’s second largest economy. With this growth, hundreds of millions of Chinese people, more people than at any time in history, have been lifted out of poverty. More than anything else, this is the greatest achievement of the Chinese leadership.

According to the World Bank and Goldman Sachs, if China continues on its current growth trajectory, China could overtake even the US by 2025, a relatively short 15 years away.

The other big driver of China’s demand for resources and closely related to its economic growth is China’s rapid urbanisation.

With more urbanisation comes more need for housing, schools, hospitals, power stations, ports, railroads, bridges, all of which require raw materials of which China is lacking in.

Today, China has 89 cities with a population greater than one million.

With a population of 1.3 billion, China ranks amongst the poorest countries (105th) on a per capita basis, with an average income of US$3,600, less than 10 percent of Japan. There are 150 million people in China who live below the UN poverty line of a dollar a day.

So the hunger to drive growth remains strong, even against a backdrop of a seriously worsening demographic outlook.

China’s urbanisation still has a long way to go and what this means is that we can expect its demand for resources to be reasonably stable and likely to continue for at least the next 20 years, although there will be some hiccups along the way.

China’s growth has contributed greatly to the global demand for commodities over the last few years.
In terms of world share, China is now the number one consumer of seaborne iron ore, coal, steel, tin, aluminium, copper, zinc and nickel. It is only behind the US in oil consumption.

Niall Ferguson, the well-known Harvard economist, made the following comment at this year’s Diggers and Dealers: “The new world order is already here and it speaks Mandarin.”

Niall was highlighting the fact that in many respects, China has overtaken the US to be the new growth engine of the world.

Other statistics bear out this important ‘changing of the guard’. For example, China overtook Germany last year to become the world’s largest exporter.

Not only is China exporting the most, it is also becoming an important consumer market in its own right. This is epitomised by the auto market, long dominated by the US. Last year, China overtook the US to become the world’s largest auto market with 13.4 million passenger cars, buses and trucks sold.
And perhaps not surprisingly, the International Energy Agency recently announced that China has overtaken the US to become the world’s largest energy consumer.

Because of the ‘inescapable truths’ I mentioned earlier and the Chinese government’s ‘go out’ policy, Chinese companies, and particularly Chinese state- owned companies, are now scouring the world to invest in resources and energy projects to secure the resources essential to sustain China’s growth.
And in this regard, Australia, as a resources rich country, plays a very strategic role in China’s long-term development plans.

For example, China is about 63 percent dependent on imports for iron ore, and Australia has supplied around 40 percent of China’s iron ore imports so far in 2010. About one quarter of all steel produced in China uses Australian iron ore – and last year, China produced nearly one half of the world’s steel.

At this year’s ACBC Chinese New Year Dinner at which he spoke as the keynote speaker, the Australian Ambassador to China, Dr Geoff Raby, made a number of telling points about China’s overseas investments:
China’s outbound investment has grown exponentially in recent years
Australia’s world class resources, open and well-developed regulated frameworks, and technological and managerial know-how, make us a highly attractive investment destination
Since November 2007, the Australian Government has approved nearly 140 Chinese investment proposals worth over A$44 billion. However, not all of these proceeded.
Of these, only five have been subject to undertakings, amendments or conditions designed to protect the national interest.According to the Chinese Ministry of Commerce, for the first eight months of 2010 there were 58 major Chinese outbound deals and the region that attracted the most Chinese investment was Australia with 14 deals, followed by the US and Canada with 6 deals each.

As Ambassador Raby said, the importance of Australia as a central plank in China’s overseas investment stems from our world-class resources, and our open and well developed regulated frameworks.

However, while we are fortunate to be blessed with the resources that China requires for her development, we must always be mindful that we are not the only game in town for the Chinese.

With boom conditions, there is always the danger of hubris setting in with us thinking that China needs Australia more than we need China.

China does need Australia, but perhaps not as much as we think it does.

We must not fall into a delusion that besides Australia, China has no other options for the supply of needed raw materials.

Africa, Brazil, Russia, the Central Asian Republics are all competitors to Australia for China’s investment dollar.
By the end of 2009, an estimated 2,180 Chinese companies have invested in Africa. There are now some 8,000 China-African cooperation projects ranging from power stations, airports, roads, medical clinics, and hospitals to solar power generation and wind power generation projects.

China is of course focused on resource extraction in Africa as shown by the recent announcement by Chinalco and Rio Tinto to co-develop the world class Simandou iron ore deposit in Guinea.

Chinese investments in Africa have been very much focused on infrastructure such as ports and roads, which of course helps China to gain brownie points with the governments of African countries.
Trade partners
I would now like to look at the other side of the fence, to give my personal views on how Australia views its relationship with China.

The fact is that unlike many important bilateral relationships, that between Australia and China is highly complementary.

Australia is not the US, which has at the basic level, a strategically competitive relationship with China.

Australia exports its comparative advantage in agriculture, iron ore and energy to China, which provides inputs for China’s manufacturing base.

With its huge labour pool, China takes raw materials from Australia and exports its comparative advantage in labour-intensive manufacturing goods such as white goods, apparel and machinery. And this provides Australia with cheaper goods for consumption.

China is now our largest trading partner. Two-way trade is now valued at $85 billion, or nearly 17 per cent of Australia’s total trade with the world. The growth in trade looks set to continue.
Australian exports to China last year hit $42 billion, with Western Australia accounting for 63% of those exports.

On the investment side, China is now our fastest growing foreign investor, but there is still an awful lot of catching up to do.

And this is where the imbalance in our relationship lies.
Because Chinese investments started from a very low base, the total stock of Chinese investments in Australia, is still very, very low compared to our traditional investment sources like the UK, the US and Japan.

While Chinese investment in Australia has almost doubled to $16.6 billion, China still owns less than 1 per cent of total foreign investment in Australia – less than even France or Canada, and far less than the 27 per cent owned by US investors and the 26 per cent invested by the British.

Despite attracting the lion’s share of the media focus, China accounted for just 5 per cent of new foreign investment inflows in Australia in 2009. Yes 5% as compared to 59% for the US.

The reality is very few Australians and would have the correct perception of Chinese investment given the media reporting of Chinese investment, which at times borders on the xenophobic and, in my opinion, does us a disservice as a nation.

In my view, relative to the size of our huge bilateral trade, China has actually seriously under-invested in Australia.

The constant media focus and the questions from our parliamentarians regarding Chinese investment does highlight that as a country, we are still tentative about China.

But the increasing role of China on the world stage means that it is us that will have to change and adapt to China and not the other way round. Like it or not.

The most important question we have to ask ourselves is whether we are preparing ourselves for a future world in which there would be two economic superpowers – the US and China.

So if the new world order is already here and it speaks Mandarin, what is Australia as a country doing to prepare itself to engage with this new world order?
Our performance to date in encouraging the study of Chinese language and culture has been disappointing.

In Western Australia, which enjoys the strongest trade with China, we had less than 20 Chinese language students graduate last year.

In contrast, there were around 155,000 enrolments by Chinese students in Australia last year and more than 350,000 Chinese tourists visited Australia last year.

Is your business doing enough? Are your children’s schools and universities doing enough to prepare us for the future?
* Duncan Calder is President of the Australia China Business Council in WA and was the partner responsible for founding KPMG’s National China Business Practice in 2008. This is an edited extract from his speech to the Next Generation Mining Conference on August 26, 2010.

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