Thursday, March 6, 2014

China's Resource Pursuit Is Inseparable From Its Security Pursuit

Two distinguished geopolitical scholars presented their analysis of "China's Rise and the Global Resource Game" at the World Affairs Council of Northern California tonight.  I have not yet read their companion book By All Means Necessary but now it's on my list.  I have read the China National Development and Reform Commission (NDRC) mission statements.  Read them yourselves to see the Politburo's strategic intent.  China's leadership absolutely believes the quest for resources bolsters its security, and that it must pursue a stronger security posture to obtain the commodities it needs.  The two are so intertwined that any outside attempt to interfere with one pursuit will imperil the other.  This is the fundamental fact that the West and China's Asian neighbors must understand when dealing with China.

I am inclined to agree with the authors that China's state-sponsored strategy of resource acquisition is tailored to microeconomic circumstances.  Coal is a terrific example.  China has almost as much coal as the United States but most of it is not nearly as high in quality.  That is why China still seeks to expand its coal capacity . . . by all means necessary.  One factor driving China's coal quest is a resurgence of resource nationalism in Mongolia, where some major Chinese coal producers had lost major investments when Mongolia recently decided to restrict foreign ownership of its resource projects.  I wonder if a PRC representative will address this at the next China Coal and Mining Expo.

China's energy quest does not stop with coal, and China analysts could do more to explain the country's challenges developing hydropower, natural gas, and solar technology.  China is determined to dam the Mekong and other major rivers, with little regard for the water needs of its downstream neighbors.  Refer to my previous Third Eye OSINT analysis of water security, and note my discovery that China does not participate in transboundary water management (TWM) mechanisms.  I will restate my belief that the US can play the role of honest broker in Asia.  It may have already begun to play this role.  Witness this agreement between China's NDRC and the US EPA.  The US is trying to align China with international norms mitigating climate change.  The next logical step is to help China build the capacity for settling disputes peacefully with its neighbors in ways that do not disrupt Asia's water-energy-food security nexus.

I sometimes chuckle to myself when analysts outside the mining sector try to describe China's rare earth element (REE) mining policies.  I gave an interview to the Gold Report in December 2011 on rare earth metals, and I predicted that China's ability to produce REEs would have more to do with global demand than with its export quotas.  The markets proved me to be correct in 2012.  The world prices of rare earth metals plummeted that year and have remained low.  Investors who went all-in on REE stocks at the top of that bubble have been hurting ever since.  China keeps its export quotas just high enough to exceed expected global demand, while it uses environmental laws as a stalking horse to consolidate domestic production and shut down underperforming mines.

I blogged about my experience on the TREM12 panel in March 2012, where I further elaborated on my REE market analysis in front of Washington DC policymakers and mining industry big shots.  I will continue to toot my own horn on this subject because the halls of power can benefit from my genius.  I'll boil down China's basic REE strategy in a nutshell.  The fact that China mines over 95% of the world's REE product is less important than the fact that it owns 100% of the world's oxide and concentrate refining capacity.  Even REE ore mined outside China must still be shipped to China for the final metallurgy that turns it into specialty alloys for industrial use.  Digging new REE mines in Canada and elsewhere gives the West little strategic leverage without a multi-year investment in the processing capacity and engineering knowledge that breaks China's real monopoly.  Full disclosure:  I have a small equity investment in a privately held company that is attempting to break this monopoly by establishing a world-class REE processing facility in North America.  I put my money where my mouth is because I am all about solutions.

I find the two authors' approach to "state capacity" intriguing.  The Wilson Center has a program for building state capacity that could have been a usable framework for the US military's advise and assist missions in Iraq and Afghanistan.  The NBER thinks state capacity germinates in common interest public goods.  Another NBER study traces the relationship between state capacity, taxation, and conflict.  Nation-building is a big topic for another article, but there are simple metrics for assessing state capacity.  The two authors' example of China's desire to import timber from Russia left me wondering which state they consider to be stronger.  It may be a question of which state is less dysfunctional, or which is less captive to an oligarchical elite.  Consider some comparative metrics for these two countries.

Transparency International's Corruption Perceptions Index ranks China 80th and Russia 127th.
The Heritage Foundation's Index of Economic Freedom ranks China 137th and Russia 140th.
The World Bank Logistics Performance Index ranks China 26th and Russia 95th.
Standard and Poor's rates sovereign credit as AA- for China and as BBB to BBB+ for Russia.
Freedom House's Freedom In The World Index rates China as 6.5 and Russia as 5.5 (on a scale where 1 is best and 7 is worst).

It looks to me like the People's Republic of China is a stronger state than the Russian Federation almost across the board.  Russia is slightly higher on Freedom House's scale but both countries are pretty much in the basement on that metric.  Adding more metrics can provide a fuller illustration.

I like hearing from the World Affairs Council's guests, especially when they come all the way out to San Francisco from the Council on Foreign Relations.  Now it's their turn to hear from me.  I would be overjoyed to add my own perspectives to the CFR's deliberations if someone would be generous enough to sponsor me for membership.  The CFR needs market expertise that bolsters its geopolitical bench strength.  Come and get it from Yours Truly, Anthony J. Alfidi, aka "Greatest Man Who Ever Lived."