Chinese companies continue to “overpay wildly” for foreign energy investments but still can’t keep pace with growing consumption in China’s subsidized domestic market, Derek Scissors of the Heritage Foundation told the China Environment Forum in Washington last week.
Fuel prices are controlled and kept well below market in China, he said, so Chinese companies end up selling oil and gas into international markets whenever possible rather than sending the resources home. The government is promising reform but has set no schedule.
Meanwhile, Scissors said, the artificially low prices drive up domestic consumption, exacerbating China’s energy insecurities.
Erica Downs of the Brookings Institution said a debate has begun recently in China about why a decade of accelerating overseas investing has left the country still resource insecure and why some companies backed by the state aren’t profitable.
Forum speakers rejected the idea of “China Inc.” – the stereotype of government and companies acting in sync to tie down resources for China worldwide.
Downs said it’s important to understand that, while government and businesses do coordinate, each side has its own distinct interests for doing so, and “coordination does not mean top-down decision-making.” That’s even true, she said, for the China Development Bank, a state entity which finances billions in foreign investment.
The CDB has supported energy firms in their search for new resources outside China, in part because of government concern over China’s import dependence in oil, natural gas, coal, iron ore and other basic materials.
CDB financing can give an advantage to Chinese companies competing against multinational oil majors, she said, citing loans to Turkmenistan that have made China National Petroleum Corp. the only foreign company allowed into that country’s huge natural gas fields.
But Chinese energy firms have their own drivers, she said. “To survive they have to continue to replace their reserves,” like all upstream producers, and it’s often cheaper to buy into reserves overseas. Management of state-owned companies can get more investment latitude, she said, by playing on government energy insecurities.
That means Chinese firms are often able to outbid rivals, and Scissors said in some cases they’ve become “the New York Yankees” of international energy, referring to professional baseball’s wealthiest team. He said, “There’s no else (bidding) in the room, and they’ll say, ‘OK, I’ll give you another $100 million.’”
Coal Investment to ‘Explode’
Scissors predicted Chinese investment in coal worldwide will “explode” in the next few years since China now uses half the coal consumed globally.
China’s coal reserves are in remote western and northwestern regions. With its rail and road transport systems strained, China imports some coal to meet demand on its populous east coast.
Scissors said Chinese companies very much want to invest in US coal mines. But he said American government policy is unclear on whether Chinese investment will be allowed, and political suspicion of companies owned or backed by the Chinese state is high. So he expects Chinese firms to focus more on investing in Central Asia and South Africa.
Adina Matisoff of Friends of the Earth said Chinese firms working overseas vary significantly in how environmentally and socially responsible they are. Larger firms with investments in multiple countries tend to be more responsible. And since China requires all firms to follow local laws, all firms have better records in countries with developed regulatory frameworks.
From that viewpoint, Scissors said, environmentalists should prefer seeing Chinese coal activity expand in the US. But environmental opposition to all coal burning and suspicion of Chinese firms are “actually pushing them into areas that are less regulated,” with higher potential environmental impacts, he said.
Photo Caption: Chinese Prime Minister Wen Jiabao addresses the opening session of the World Future Summit in Abu Dhabi on January 16, 2012.