Tracking China's Resource Quest

Wednesday, January 29, 2014
Elizabeth C. Economy

C.V. Starr Fellow and Director for Asia Studies, Council on Foreign Relations

Michael Levi

David M. Rubenstein Senior Fellow for Energy and Environment and Director of the Program on Energy Security and Climate Change, Council on Foreign Relations


President, Council on Foreign Relations

CFR Fellows Elizabeth C. Economy and Michael Levi join CFR President Richard N. Haass to discuss their recently published book, By All Means Necessary: How China's Resource Quest is Changing the World. The authors outline the economic and political implications of growing Chinese demand for natural resources. From increased Chinese investment in the developing world, to a more assertive military posture in the East and South China Seas, Chinese economic growth has spurred major changes, both for China and the rest of the world.

HAASS: OK. Good evening. I'm Richard Haass and I want to personally welcome everybody here to the Council on Foreign Relations tonight. Tonight we are here to celebrate, to recognize and, ultimately, to buy and read.


ECONOMY: Especially buy.


HAASS: Especially buy, yes. Forced to choose between buying and reading, we know where the authors come out.




The title of the book, By All Means Necessary; the subtitle of the book, How China's Resource Quest is Changing the World. The authors of the book, Liz Economy, who is the C.V. Starr senior fellow and director for Asia Studies here at the Council on Foreign Relations.


And her co-author is Michael Levi. And Michael's the David M. Rubenstein senior fellow for energy and the environment, and directs the program at the Council on energy security and climate change. And they are the coauthors of this new, important and readable book.


So let's begin, as they sang in that movie, at the very beginning. Why this title? Why—What does 'By All Means Necessary' refer to, Liz?


ECONOMY: OK. Before I get into that, let me just have my Oscar moment and thank you, Richard...




... for providing...


HAASS: You want to say how everybody loves you?




HAASS: You can have your Shirley McLaine moment too.


ECONOMY: I thought it was Sally Field, but anyway.


HAASS: Sally Field, whatever. Sorry about that.


ECONOMY: That's OK. No, but thank you, Richard, first off for providing such a terrific environment in which Mike and I could write the book, and such patience as well too for us to give birth to this book.


And also I think we want to thank our scores of research associates and interns who provided us with enormous assistance and, in particular, our two current research associates, Will Piekos and Alex Mahler-Haug. And I think I want to thank our fifth floor friends as well because they really sustain us through all of this.


HAASS: Just to be clear, fifth floor is their colleagues, not the mice.


ECONOMY: Yes. OK. So those are my thanks. You may have your own thanks to make as well.


Why don't I take the—I'll take the title then. And maybe you want to take the subtitle, because they really reflect two different parts of the book and I think two different things that we're trying to get at.


The title really is a reflection of all of the tools that China has at its disposal to secure resources from outside its boundaries.


So this can be everything from, you know, Xi Jinping's personal diplomacy to sort of vast trade, aid and investment deals that we see China attempting to strike when it goes to resource-rich countries.


To the low-cost financing and labor that Chinese firms can bring to the table, often times seeming to undercut Western multinationals. To other kinds of things like corruption and back door deals that can get struck between some leaders of resource-rich countries and their Chinese counterparts.


It can also mean things like a willingness to put down stakes, money-losing stakes for long periods of time with the hope that a deal will pay off down the line. So the Chinese have a long time horizon in many instances.


HAASS: Can I ask (inaudible).




HAASS: The risk of getting into the substance. When you say so the Chinese are willing to put down stakes and even take a loss for quite some time in the hope—and I think your words were "the deal will pay off." What does pay off mean?


How does—how do the Chines measure the value or—is it by economic? Is it strategic? Is it something else? What's their yardstick?


ECONOMY: That's an excellent question.


Actually, it depends on who you're talking about. You know, for the Chinese government it can mean the strategic sort of element. So for example, some of you may have just seen—I think it was in the Financial Times there was an article talking about the National Development Reform Commission telling the Chinese steel producers that they should continue to go out and take stakes in iron-ore production, right.


But Chinese steel producers have no interest in that. They have overcapacity. They don't want to do that. But the NDRC came out and said well listen, this is important for strategic reasons, and because we want to have a say in global trade. It's important for our voice in the global trading arena.


So that's an example of where there's a difference between the interest of the companies to make money and the interest of the government to kind of have a big political voice.


HAASS: And I assume when there's a slight difference of interest it's not always the company that wins?


ECONOMY: No, but it's surprisingly sometimes the companies have some passive aggressive ways of dealing with it.


HAASS: Michael, before we get much further. Talk about the subtitle, which is 'How China's Resource Quest is Changing the World.' Is it changing the world, and if so, how and how much?


LEVI: So, first, I want to echo Liz's thanks to everyone. I won't repeat all of them, but thank you all to everyone.


HAASS: You can thank me if you'd like.


LEVI: Particularly Richard for creating such a fantastic environment.


So we picked the subtitle mostly for search engine optimization.


ECONOMY: Oh my God. I didn't even know what that meant.




This is what I get for having Mike as my coauthor.


LEVI: But secondarily we couldn't call it "Why China's—China Resource Quest was Changing the World." We're focused on identifying the different places where China is changing the world, but also the places where it isn't.


So this is not a book about how China's resource quest is changing everything in the world, but about seeing what's real and really what's myth out there. And I'm not going to list all the different ways in which it's changing the world, but maybe I'll highlight two or three.


There's enormous focus on Chinese investment in countries. But where the biggest economic consequences have come so far is actually from Chinese trade. Chinese demand for minerals, for energy, for food have helped drive up prices, with huge consequences for economies around the world, regardless of whether China is an investor in those.


So if you want a headline, top way that China's resource quest is changing the world, resources are more expensive, people want more of them and the economic consequences for producers and for consumers are huge.


Another really interesting place where China is changing the world is in its efforts to make sure that there are secure routes for those resources to get back to China. And we tend to take this integrated nature of the global economy for granted that something produced in one part of the world can be moved to another very quickly.


I don't know that the Chinese do, particularly when they look at their backyard, at the sea lanes near them, congested, contested by a lot of different countries, for a variety of different reasons, not just because of resource trade. But increasingly I think you see China paying attention and asserting its interests in that region. And we'll see increasing security consequences from that.


HAASS: There's an urban, I don't know if it's legend or myth or assumption surrounding the subject. And the only reason I know it because I'm an expert on neither China nor Africa.


Is every time—many times when I speak publicly about foreign policy and international relations I get asked the question along the following lines, which says, shouldn't we be worried about what China is doing in Africa? Aren't they cornering the market for some purpose, be it financial, strategic or both? And aren't we going to wake up one day and regret it?


What is your sense—is this, if you will, an urban or nonurban myth? Or is there actually something to this? Should we be worried about China's quest?


ECONOMY: I'll start and maybe, Mike, you want to pick up. I think, to Mike's first point, one of the interesting things that we found was that China really—its resource quest primarily rooted in trade rather than investment. And actually when you look at Chinese investment in Africa compared to others, it actually ranks fourth in the world. It's not the largest investor in Africa, which you know everybody assumes.


When you look at sort of China's search for land, you know, it's third, right, after Canada and the United States, and quite a distant third. So it's important to keep everything, you know, relative and keep it in proportion to what actually is going on.


I think in terms of Africa, certainly it is exerting a profound impact, you know, in governance issues. And so whether you're looking at labor issues or environmental issues, really just have to look back at what China does on the home front to understand the impact that it's having in Africa, as well as other places.

"And we tend to take this integrated nature of the global economy for granted that something produced in one part of the world can be moved to another very quickly. I don't know that the Chinese do."
—Michael Levi

HAASS: But should...


ECONOMY: Should we be concerned?


HAASS: Should we be competing with them more? Should we basically be talking to African governments or others to block China to some extent? Is this something that we will strategically come to rue?


LEVI: I think it depends on the resource. And we have to look at the structure of different resource markets. And that's one of the reasons we went so broad in the book.


If you look at oil, for example, African oil is still a limited part of the global market. The Chinese right now sell most of the oil they produce in Africa onto the open market. Could they in a crisis direct that back to China? Sure. But there would be plenty of other resource from elsewhere to make up for the suppliers that tend to buy that.


Now, you can get into other markets where there's a lot more concentration. And you want to make sure there's diversity. So if China were to go and start to buy up a lot of rare earth deposits in Africa, a place where they have a lot of concentration and where there's been a trend toward diversification that we want to intensify, then that would be a place where we have a strong strategic interest and we would want to divert that.

"When you look at Chinese investment in Africa compared to others, it actually ranks fourth in the world. It's not the largest investor in Africa, which, you know, everybody assumes."
—Elizabeth Economy

And there's another place where it's important, and this is rooted in economics but gets into politics. The Chinese companies can sometimes make it easy for African governments, Latin American governments, other governments to set up regimes for investment that are not particularly strong.


So there're ones that are appealing to Chinese companies but don't bring all of the other capital and technology and capabilities in. In the long run that means that we have less resources in the world, higher prices for consumers, less security for all of us. So we should be careful to make sure that countries don't get suckered into doing the easy thing that hurts us in the long run.


HAASS: Liz, I often hear stories that the Chinese when they invest in Africa often bring a lot of their own workforce with them. And that just like 30, 40 years ago there used to be the phrase "the ugly American" for some of what we were doing in Asia and other parts of what used to be the Third World, I actually hear stories that now the idea of "the ugly Chinese" and that in Africa there's lots of resentment. How true?


ECONOMY: True. Although primarily in the infrastructure rather than in areas like mining and oil and gas. But still you do find it. And I think you find it in a couple of different ways.


So it can be—and frankly what we're talking about in terms of Africa applies as well to Southeast Asia and sometimes to Latin America. So this is not—you know Africa's received sort of the bulk of media attention. But really what Mike and I did was look across the entire landscape and find that all these practices are replicated from one region to the next.


But to your point, yes ugly Chinese. There's enormous sort of resentment about—both in terms of when you have Chinese managers of mines who believe in some ways as some foreign ministry officials would say to me that you know Africans don't work hard, that's why we need to bring our labor in.


They like to sing and dance. They want to go to church and have labor unions and all sorts of inconvenient things, and not work on the weekends. And so we need to bring in our own labor, right. They're willing to work longer hours and for cheaper rates.


There's also a problem when it comes to the individual Chinese going across. Not just companies bringing in their management and then exploiting their labor, but you also have, for example, in the case of Ghana you know several villages in Guangdong province simply up and move to Ghana and begin gold mining and cause a lot of environmental problems.


So this is not something that's state directed, and in fact caused enormous problems for the foreign ministry and the Chinese government. In the end, the Ghanaian government kicked them out last summer, kicked out 4,500 Chinese miners. And in retaliation apparently, the Chinese have slowed the visa process and are making it difficult for the Ghanaian government to access a $3 billion loan.


So there is a huge challenge. Issues of communication, issues of low pay, issues of no labor safety, these are all the things that you know mining workers who work for Chinese mines talk about, whether you're talking about Africa or Papua New Guinea or elsewhere.


HAASS: Given some of that, if when we're looking at this as a historical trajectory is it your sense that, if you will, the China moment in Africa has peaked?


ECONOMY: Well, I don't know whether it's peaked. I think one of the things that Mike and I try to do in the book is not just look at this very moment, but try to look a little bit at what the Chinese are doing to improve their situation. And so when you're looking at issues sort of that are tied into corporate social responsibility, you do find now that you have change being brought. You know in part by what's taking place at home, right.


So when you've got the Chinese themselves demanding better environmental standards from their companies that will then become what the Chinese companies export, or better labor standards. You also have pressure from the outside. States with stronger capacity demand that the Chinese do a better job.


And you have learning. I think in some cases, for example in Peru, we found you know early entrants in the mining sector had very poor practices across the board. Much later entrants, however, began to take advantage of infrastructure that had developed so that they hired you know Western consultants, maybe bring in a local you know mining head. And so you have a much better evaluation of Chinese practices now, pretty much 10 to 15 years down the line.


LEVI: Richard, to your question, I don't think it's peaked rather than the honeymoon is over. And people have had experience and they don't like a lot of that experience.


And I think it's intensified, and Liz pointed to that when she talked about Ghana. It's intensified as smaller players have been able to get out there and they're tougher to control.


When I was working on the book I went to Zambia. Zambia has this notorious mine, column mine. It's a private Chinese mine. Every few months someone seems to get shot at it, whether it's a worker or a Chinese manager.


And I went and visited with the Chinese ambassador in Lusaka. And I brought up—I brought up the mine. I was a bit nervous doing it. It's a very hot button issue. And he said, "If you want to buy this mine I will do everything I can do to have them sell it to you."




It gives you some sense of how uneven the Chinese government's control is over what's happening out there.



HAASS: I want to come back to that question. I just got a couple more and then we'll open it up to our members and our guests here tonight. Which is you know the old saw, whatever you want to call it, about trade following flag or flag following the trade.


What's the balance here? What's the engine? What's the caboose of this interaction with the world?


ECONOMY: I'm not quite sure. You mean the...


LEVI: So...


ECONOMY: I'm not sure...


LEVI: Is it the companies driving it or is it the policy driving it? And this is an endless question.


One thing that came up over and over as we were researching the book is that the Chinese government is less capable of directing companies to do specific things than a lot of people believe. They can try to put together packages, but the companies don't necessarily play ball.


The CEOs of the biggest companies have equal rank to the ministers that are supposed to govern them. So it makes it tough for one to win out over the other.


But what the government does do is create an environment in which it's attractive to a lot of these companies to go out and do investments in particular ways. They set up access to cheap capital. They have a promotion system, and these leaders are senior party members.


They are not just looking to make a lot of money, though that's part of it. They're looking to get promoted. And promotion means a political job, a senior political job. And so they're going to have the state's objectives in the back of their mind.


But it's a more nuanced interaction. It's really sort of setting the environment in the direction rather than dictating the terms most of the time.


ECONOMY: Let me just...


HAASS: Go ahead.


ECONOMY: Let me just add one thing to just flesh out what Mike was saying. Which is you know if you look, the National Development Reform Commission will list sort of the key resources that they want companies to go out and get.


And they will—the Chinese government will go out with various ministers, with the heads of state-owned enterprises to these countries, and as Mike said you know structure these big deals. And the NDRC will lay out an entire plan for a country. But companies don't necessarily want to participate in those deals.


So sometimes that's what—when you read, for example that you know there's $70 billion promised in resource and infrastructure deals for Brazil dating back since 2007 and only 30 percent of that has been realized. You begin to understand that difference between what the government is saying and what the firms are actually doing.

"The Chinese government is less capable of directing companies to do specific things than a lot of people believe. They can try to put together packages, but the companies don't necessarily play ball."
—Michael Levi

HAASS: Your subtitle is How China's Resource Quest is Changing the World. How is China's resource quest changing China? What's the blowback, if you will, from this experience?


ECONOMY: I think it's—frankly, I think it's just beginning. I think there are now a couple of different ways in which the Chinese public has become quite concerned. For example, the safety of Chinese citizens, that's something that the government typically has not paid much attention to.


And in fact, when about 27 I guess workers from Sinohydro were kidnapped in Sudan back in 2012 I want to say, the Chinese government—the response form the embassy in Sudan was well, you're just going to have to expect this because as we go out more of our workers are going to go out and this kind of thing is just going to happen.


And you know the Internet erupted like this is not acceptable for the Chinese government to be saying. And things like you know the U.S.—if this happened to the United States you know they would send in the Marines and all this kind of thing. So what is our government doing?


And so I think there's a big sort of upsurge from the general public concerning this issue of personal safety. And now you have Sinohydro, for example, developing a list of countries where they don't want to do business necessarily, places that they consider dangerous.


And this is something quite new because that really does fly in the face of we don't mix business with politics. We don't care what's going on in the internal situation of a country—we're just going there to do business. But yet the Chinese people and the Chinese companies are beginning to say well actually those situations we don't want to do business.


I think the other way in which you're starting to see things change is people are realizing. And when you have a change in government like you have in Burma Myanmar and all of the sudden the Chinese you know go from being ostensibly this trusted, most important partner, to the sort of scourge of the region. They're looking and saying you know obviously we did something wrong.


And so now you have Chinese NGOs traveling to Burma Myanmar and doing investigations and saying to the Chinese companies you've clearly mishandled this. You know you've—you know all you've done is operate at the top level. You haven't engaged with the people. You need to develop better practices.


So these are the kinds of changes that we see taking place. Nascent I would say, but this kind of blowback is beginning to affect.


LEVI: Maybe I'll add one small one onto that. A big consequence of China's resource quest is that the costs of all these resources have gone way up. And one of the main reactions in China is to try and improve efficiency in order to not have its economy be so exposed to this extraordinary cost that it, itself has helped create. And I think it's a huge piece of China's response.


It's also a big piece that will determine the future consequences of China's resource quest. If they succeed in insulating themselves from it a bit, they'll also help reduce the pressure on the rest of us. And if they fail to cut their consumption or curb their consumption for their own self-interests, we'll all suffer as a result.


HAASS: Last question for me then I'll open it up.


Do you get the sense with the new leadership in China there is any reconsideration of this policy, given some of the things you've just alluded to? Are there people now really saying are we sure we want to be doing this as much as we've been doing it, and much in the same way as we've been doing it? Is any of this being, if you will, revisited in a serious fashion?


ECONOMY: I think with—I haven't seen anything with just this new leadership. I think that there's been an effort, you know within the ministry of commerce, within some of the bureaucracies to start over the past few years beginning to develop better policies for companies you know saying you must undertake an environmental impact assessment or you're not going to get a loan.


I think that kind of thing has been taking place. Or you know stock exchanges trying to say you know you must report to us if you've been blacklisted by the Environmental Protection Agency.


I think at that level you do see some things. I think the foreign ministry's extremely concerned. I met with the No. 2 of both the Africa and the Latin America departments, and they both said they're spending an enormous amount of time setting up like mini consulates out in some of these mining areas to deal with all of the problems that these resource investments are causing for the Chinese image.


So I think that there's consideration at that level. But I haven't really seen a serious rethink yet emanating from the top about the overall approach to doing investment.


LEVI: So one place where there's some learning I think is, at least in some parts of the Chinese government there's increasing appreciation that owning the resources overseas doesn't necessarily give you a lot of additional security. I think there was a very strong belief in that direction 10, 15 years ago. There's more trust of the market, though it's not complete yet.


That said, because they institutionalized a lot of the incentives that grew out of that fear of the mark and the desire to control resources, the shift in opinions doesn't necessarily translate to a shift in how the government operates.


I think the other place where they probably leaned in more or are increasingly leaning in more is in the military side. I think this new leadership, Liz can talk about this more than I can, but has really focused on the military. And that's inevitably going to lead to more discussion about China providing its own security for the sea lanes over which its resources travel.


HAASS: Well, we're not seeing that yet in the Middle East or Persian Gulf, but I'm curious to see it.


LEVI: Closer to home.


HAASS: One last question. Sorry. Which is, did you ever come across anyone in the Chinese government who had studied the American or Japanese experience and said we're going to learn from this and do it differently?




HAASS: OK. Just curious.




HAASS: OK. A perfect place to open up—no more trick questions.




ECONOMY: I think...


HAASS: Sure? If people would just introduce themselves, wait for a microphone. We'll get as many...


QUESTION: Thank you.


HAASS: ... questions as we can.


QUESTION: Mahesh Kotacha (ph). Thank you very much, Elizabeth and your coauthor. Thank you for the great introduction to the book.


My question, Elizabeth, is to you on the issue of the institutional arrangements with respect to infrastructure which the Chinese embed or try to embed in the countries in which they invest into infrastructure. It is said that there is not as much stress on the rule of law and on institutional arrangements for markets to work to allow prices to work for the infrastructure created if it's public-private type partnerships.


Could you comment on is that what you meant? And are they then doing what Richard asked about learning from U.S. experience or Western experience on insisting on rule of law, proper contracts and the like in order to invest? I hear of some kind of efforts on the part of the Development Bank of China, China Development Bank, and the others to try to learn from this experience and co-invest in fact?


ECONOMY: In terms of the infrastructure I haven't seen much learning taking place. I'm trying to think of any cases. Mike I think probably has looked at the oil and gas sector and seen a fair amount of co-investing. But in terms of—I haven't seen—I have to say I haven't seen the rule of law become a particularly important element in the infrastructure sector when China's gone abroad to these particular countries. I haven't seen them pushing that issue.


I think we found more for it to be the case that states with stronger capacity would push the Chinese to do a better job.


LEVI: And then in oil and gas the Chines often co-invest out of necessity. They don't have the technological capability or the managerial capability to develop a lot of the big resources that are out there.


But I don't think you see an inclination where they don't have to work with others to go out of their way to do it.


HAASS: There's one on this side. Sure?


QUESTION: Greg Lindsay with the World Policy Institute. I was just curious if you came across in your reporting sort of instances of interesting sort of economic blowback in terms of how China is transforming economies in the sense of where they're locating headquarters, locating units, and also how they're using Africa as a bridgehead to export into it.


So for example I think one of the things that's underreported about Dubai is that something like 2,000 Chinese companies have set up headquarters there. There's 150,000 Chinese in Dubai because they use it as their North African headquarters, and because they're exporting so much into Africa.


Considering there's a whole narrative around the U.S., that we're going to export our way into emerging markets as a way to bring back the American economy, have the Chinese beaten us to it in Africa because of that?


ECONOMY: I think one of the complaints within Africa is in fact that the Chinese are extracting the resources and then exporting finished products. And one of the things that the Chinese have tried to do not only in Africa, but largely in Africa, is to develop these export zones, somewhat modeled on some of the Chinese—its own economic development history and trajectory.


They have not—although there's a debate over how effective or successful they've been I would say that the weight of evidence is that they are not particularly successful. And you know the idea is to set up manufacturing zones basically in these countries in order to encourage sort of the kinds of skills and training and development that the African countries and others are asking of the Chinese so that they're not just those neocolonialists.


And so far I would say we have not heard a lot of positive reporting about the—about what's been developed. I think maybe there's one case, Mauritius maybe. But by and large you find things like first of all, companies don't want to participate in them.


Or for example the—you know 17 Chinese companies will be there, but they're all sort of subsidiaries of the Chinese construction companies and they're just really feeding into that process and nothing really is developing that's going to assist in the development of the local population.


So, I think that is the Chinese effort. But I don't think it's really developed in a way that's made much of a difference.


LEVI: Your point about inward exports into these countries is interesting. A lot of these places when you go to them and you try to get people to talk to you about what they like and they don't like about Chinese activities and resources, all they want to talk to you about is the cheap Chinese goods of the market that are putting their people out of work.


And so it's really important when you look country by country and try to understand the impact of this resource quest that you make sure that the things that you're seeing happening are actually a result of that effort to secure resources. A lot of the times they're about these other things, like you point out, that are tenuously connected to what's happening in resources, but really a different phenomenon.


HAASS: Bob Hormetz (ph)? You need a microphone, sir.


QUESTION: Thanks very much. I have a question. But I just wanted to make one comment on from whom the Chinese have learned. The one thing, if they've learned anything from anyone about this, is the European experience, which is, don't become too dependent on any one supplier.


I think that's really one of the interesting things. They saw how the Europeans became very heavily dependent on particularly Gazprom. And they have made a major effort to diversify their sourcing, which is rather interesting.


The point I'm particularly interested in asking you to pursue a little bit further, there are a lot of negatives to the Chinese and their sort of gold rush to get mines and steel and all these other things. But you could make—and we've had a lot of issues with them.


The one point you could make, though, on the other side is to the extent their production is additive that they go into countries that no one else would go into either because their social policies are so abhorrent, their politics are so awful, Sudan and others. Or they simply are willing to take these risks that Liz talked about, which is plunk money down and then hope they can get results down the road.


How do you weigh that, because that really is an interesting positive-negative yin-yang for the markets there?


ECONOMY: And I'm the negative and Mike's the positive. So I'm going to let Mike talk about this.


QUESTION: There's obviously a debate and there's no real answer...


LEVI: Yes.




QUESTION: ... but it's an interesting debate.


ECONOMY: Right. Yes.


LEVI: So let me make a very quick observation on your Gazprom, lesson learned point, which is really important. The Chinese have discovered an alternative to imported natural gas. Unfortunately it's coal. It's domestic coal. And it has—it creates big problems for them domestically and for us internationally.


But that's one of those places where I'm skeptical that you'll see enormous Chinese demand for importing natural gas and develop—unless they can find ways to continually diversify. If they can't they'll just choose to use a different fuel source.


QUESTION: Or develop their own.


LEVI: Or develop their own if they can.


So, on this question of additive versus something else, yes. I think particularly when the Chinese are willing to take risks that others aren't, that when they are very patient, they don't need to report to their investors for the next quarter, they can have—they can add to the global supply of oil in particular. So a market that's genuinely global, benefiting consumers everywhere.


I think you have to be a bit careful though. Again, you can have a bit of a sugar high from some of these things with dangerous long-term consequences. If China's investing in places and creating the image of a lot of supply, that can deter investment in supply elsewhere.


And so if the Chinese supply ultimately doesn't materialize or if it's volatile because of bad security situations, then you can end up worse off than when you started. So it's a complicated mix. But certainly that force is there and you have to think about it when you're doing a net assessment of what's happening.


HAASS: Sure?


QUESTION: Richard Greco from Filangieri Capital Partners.


One resource that we can't live without is water. And my understanding is that China has a real shortage and a problem with clean water for environmental reasons just because of a lack of water sources to begin with.


What's China doing to secure its clean water sources? Is it succeeding? And if not, what are the consequences?


LEVI: Someone should write a book about that subject.


ECONOMY: I know, The River Runs Black.


OK. So, yes, the water issue. I mean China is—primarily China is doing things on the home front, right. So whether it's pushing forward on desalinization or experimenting with water pricing, they have a lot of the sort of traditional tools at their disposal that other countries use as well that are water short, conservation, you know pushing forward with a lot of different kinds of experiments.


In terms of our book, we looked at China's control of the headwaters of some of Asia's most important rivers. And in two cases in particular we look at the Mekong, we look at the Ili, which goes up into Kazakhstan, and we looked at the Yarlung Zangbo, which becomes the Brahmaputra.


And the Mekong is a different issue because it's an energy related one primarily, hydropower plants. But in both the case of India and Kazakhstan, there's talk of river diversion, right, to help China. And that is actually something that China does a lot of internally, its own river diversions, enormous river diversions.


And so what we found, and this was a case where I think the hype surrounding it turned out to be greater in the reality. You know in the case of Kazakhstan the Kazakhs have pushed the Chinese. They're worried that the Chinese have talked about diverting, in several places diverting water.


And the Kazakhs are worried. And they've gotten the Chinese to the point of talking about you know water quality and sort of preliminarily talking about resource allocation, but no formal agreement.


The Chinese are extremely reluctant to acknowledge that there are shared water rights in that respect. In no case do they recognize that, and they haven't signed onto the U.N. agreement that recognizes that. They're one of only three countries in the world in fact. And so they—the Kazakhs have made more progress in many respects than anybody else that we looked at.


In the Indian case certainly there's going to be damning, more damning of the Yarlung Zangbo. But it does not look as though there's going to be the river diversion aspect of it that has received enormous amount of tension India.


And some of you may have read Brahma Chellaney's book on this topic and he's quite concerned. He's probably the most vociferous and agitated person, you know expert scholar out there. But for reasons of actual technical feasibility it doesn't seem possible.


The Chinese have denied that they have any such plans on the books. That to me is not sufficient proof because lots of times the Chinese deny things and then quietly start doing them. But in this case it seems that technically it's not even feasible.


HAASS: Michael Pillsbury (ph)?


QUESTION: Thank you. I wanted to present you with a puzzle that I cannot solve. But it picks up on both something Michael said about not trusting the market that they trust the market more now but it was a pretty low level of trust 20 years ago, and something Elizabeth started out with about orders from on high, the National Development Commission and others.


And we just had about 216 military delegations come in the Pentagon. I had not been there for all 216, but I've been there for most of them. They often bring up resources and they're being slandered for raping Africa and this kind of thing. They think we do that, which we don't.


But the puzzle is when I've asked them for books, theories, who back in Beijing is advising your leaders about the quest for resources and all means necessary? Where is this coming from? And I thought there'd be no books. Instead they gave me 20 books over time.


They've got a formula, this comprehensive national power formula which everything's weighted. Military force is only 10 percent, resources is much more. They've got complicated lists of rich resources to get. As you say, it's sort of like assignments to the companies so that economists know this is stupid. It's inefficient. You waste money.


But if—does it make sense to you? This is the puzzle. Does it make sense to you that their system is still top-down driven enough that the petroleum university and the people who do the CNP scoring are somehow influencing decisionmakers at the Politbureau level. It's driving what Richard asked you, the title of your book. Go out and do this.


And when the economists object, Chinese economists, this is stupid, it's costing us 30 percent or 40 percent more than it should, the decision makers are so certain that we live in a resource, almost paranoid resource conflict world, almost a paranoid view, that these orders must be obeyed. And that's what your book essentially is showing is that the behavior that follows from these top-down formulas that are actually in their reading materials.


Sorry for the long question, but I wanted to get the puzzle out to you that I claim I can't solve.


ECONOMY: Do you want to start and then I'll go?


LEVI: Sure.


So, if you're a high-level policymaker, you're usually not optimizing, you're trying to manage risk. And so even if you start to believe in the market, if you're not totally there it might make sense for you to follow some of this and to still try and encourage your companies to invest and to secure resources in these different ways.


I think it's only when you start to see some of the strong countervailing risks on the other side, the down sides of doing these things wrong that you really revisit some of that. And so you don't need to only look to China to see this sort of sense of risk aversion among policymakers when it comes to this. There are plenty of economists in the United States who will tell policymakers that it doesn't matter whether it's a U.S. company producing oil abroad or a foreign company.


It matters for commercial success and it's important for American businesses to see it. But it doesn't matter for security of oil supply. But over and over our State Department can be persuaded, to different degrees at different times in our history, but can be persuaded to go out and help make sure American companies succeed in investing in oil, in part through an energy security argument.


So this is a powerful argument. And it turns out that even hundreds of economists often are unsuccessful in persuading policymakers to change their tactic.


ECONOMY: Let me just make one...


HAASS: Quickly.


ECONOMY: ... small addition.


HAASS: We got (inaudible) more questions in.


ECONOMY: OK. So I think one thing that you certainly appreciate, Mike, is that this has a long history within China itself, right.


And so the idea that the state will direct the resource quest and will determine even within China what resources should be developed or not developed is—dates back to the Ming, right, when they would say we're not going to grow tobacco, we're going to grow rice, right, or we're going to grow grain because tobacco is a waste for us. So I think that there are long roots to sort of the state-directed development and quest for resources and control over who profits and who participates.


I also think that the story is probably a little more complicated than the military side is making out because I certainly spoke to people in the Chinese Academy of Social Sciences who talked about how they were pushing their leaders to be more concerned with resources, right, especially when it comes to Southeast Asia and places like the Philippines and cobalt, for example. Please take a more—take a more positive approach to the Philippines or Vietnam than you're taking because we need those resources because we get a lot of resources from those countries and you're endangering that.


So I think that the—a lot of different interest groups playing into this at this point.


HAASS: Sergio Galvez (ph).


QUESTION: Thank you. This goes a little bit to one of Richard's questions about effects within China and within Chinese dynamics.


A stereotypical view of state-owned enterprises is that somebody is sitting there deciding who pursues what opportunities. And that stereotype might be right, might not be right, may have been right at some point, may not be right today. But there is anecdotal evidence that there's actually an enormous game going on internally on the pursuit of opportunities and competition for the opportunity to pursue opportunities.


Can you let us know sort of were you able to get into that some? And what did you find?


ECONOMY: Do you want to talk about...


LEVI: So I mean—I'm not recalling a specific instance right here. But there are cases where multiple Chinese companies bid against each other for overseas resources. That doesn't sound like a purely state-directed initiative.


And the reality is these guys are running big businesses and a lot of this is commercially driven. Again, the state creates a framework within which being commercially successful and commercially driven is going to also in a lot of cases deliver on national goals. But that's different from this being all orchestrated from the top.


So I think you see that competition. I'm sure you also see competition politically. Again, my guess is that the heads of various oil companies would all love to be the energy minister. Only one of them can be. And it might be someone else.


So there's competition to be—to have a successful company, to be able to invest, but also political competition.


HAASS: OK. We've got time for—yes, sir? Make that the last one. I apologize for the several of you we weren't able to get to. We'll blame it on the authors for the length of their answers.


QUESTION: Thank you. Dick Huber from Invina Wine Group.


We export a lot of agricultural products to China, I mean wine and blueberries and such things from Chile and soybeans from Brazil. And we've always expected to see greater investment in agriculture in—abroad. And we haven't seen it.


They—we love them dearly. They buy. They tend to pay on time and all those good things. But we—and we'd love to sell them a couple of vineyards, I mean...




But there's been very, very little investment in agriculture production, and certainly in the three countries I'm involved with, which are Brazil, Argentina and Chile. You see—is that a barrier? Or is that something just that will come later? How do you see that? Thank you.


ECONOMY: So I would guess that the wine is coming. And in fact in the Chinese media there was an article just maybe a week ago talking about the growing interests of Chinese agricultural sector in the United States in particular.


But when I—I did some work in Brazil for the book. And when I was there, again thinking back to the, you know $70 billion of planned investment, you know what I heard from Brazilian officials was the Chinese delegations would come one after another to talk about investment. But what would happen, a couple of things.


First, the Chinese expected that the Brazilian officials could simply you know sign a piece of paper and transfer the land to them. That's not how our land system works here. That may be what happens in China, right, officials and you know business people can collude and expropriate land, but that's not how we do it here. So that was one problem.


The second one was they said a lot of the times these Chinese delegations really didn't seem that serious about investing. That Brazil is a nice place to visit.


All of these you know officials and local governments have money for foreign trade delegations. And so they simply come over, you know spend a day doing business and then head off to Rio and have a good time. So they felt that there wasn't a lot of seriousness.


But I do think from talking to the Chinese side that part of the problem in Brazil in particular is a lack of infrastructure as well. And so there's—you know and the Chinese have tried to give—and the Brazilians have tried to give the Chinese interest in that part of it and have not been as successful.


And finally I'll say the Brazilians themselves were quite worried about potential flood of Chinese investment into the agricultural sector and buying Brazilian land. And so in 2010 they revised their laws, bringing parts of the old law back that made it much more difficult to own land. We could only do a minority stake in a joint venture. So in that particular case that was a big part of the problem as well.


HAASS: Let's just say two things.


This book on the back flap it says "This is a Council on Foreign Relations book." And it's one of the things we do because books are an important part of our culture and our mission here. And we encourage our fellows, indeed we expect our fellows to essentially make books. It's not the entire part of their portfolio, but it's a central part because in the process of writing a book you've got to do a depth and breadth of research that informs the rest of your work.


This is but the latest of a book-oriented culture that we, again, encourage and require here. And it's part of our larger commitment to doing serious policy-relevant scholarship, and that's just what this is. This is policy-relevant scholarship because it deals with this important aspect now of China's emergence on the world stage. And it has consequences for China and all the places they're emerging into.


You have an opportunity to buy the book as you leave. You will then have an opportunity to read the book. But again, the sequence is important. And at any point in that sequence you also have the opportunity to have some more to eat, to have something to drink, to privately ask Liz and Michael some questions, but most immediately to congratulate them on the book they have just published.




ECONOMY: Thanks, Richard. Thank you.

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