Winner Take All

China's commodity campaign is breathtaking. In just over a decade China has risen from relative insignificance to pole position in underwriting numerous resource-related transactions across the globe. China's Chinalco, the company that bought the rights to exploit the Peruvian mountain, also spent nearly US$13 billion in 2008 for a stake in Australia's aluminum sector.¹ In June 2009 Sinopec—a leading Chinese petrochemical company—purchased Addax Petroleum, which has sizeable assets in Iraq and Nigeria, for US$7.2 billion. Sinopec also bought a 40 percent stake in the Brazilian arm of Rep-sol, a Spanish energy company, for US$7 billion in October 2010 and part ownership in a joint-venture oil company with Russia's Rosneft (a leading oil and gas company) for US$3.5 billion in June 2006.

Collectively, these inputs used to produce goods and services are known as commodities, and commodities permeate every aspect of modern daily living: the energy that powers cars, trucks, and electricity grids; water for the sustenance of all life forms; arable land that yields grains and other foodstuffs; and a long list of minerals used in everything from mobile telephony to television screens and as inputs to all sorts of machinery.

Little wonder that headline writers and media commentators telegraph warnings of impending doom in the commodity space—conflicts spurred by shortages of arable land, clashes over water, and the risks of political Armageddon as global demand for energy outstrips supply. Yet for all the importance of commodities and the markets in which they trade, our knowledge of this essential component of the global economy—the largest asset class in the world—remains blurry at best.

Winner Take All explores the commodity dynamics that the world will face over the next several decades that almost certainly will be characterized by global tensions arising from greater resource scarcity. More specifically, it is about the mechanics and implications of China's rush for resources across all regions of the world. Of all the world's great powers, only one, China, has focused its economic and political strategy on anticipating the considerable challenges presented by a resource-scarce future. But more than this, Winner Take All is a clarion call to the rest of the world, which remains largely ill prepared for the challenges of resource scarcity and the evolving dynamics around China's central role. This despite the well-reasoned arguments laid out by one of the world's foremost and renowned commodities experts, Jim Rogers, on the importance of resources in his book, Hot Commodities, nearly a decade ago.

What is at stake? At a minimum, acute resource scarcity will lead the world into a period when the average prices for commodities—arable land, water, minerals, and oil—will skyrocket to permanently higher levels. Food at supermarkets (bread from wheat and grains as well as sugar, meat, milk, etc.), water from taps, mobile phones and cars, gasoline at the pumps, and many of the other daily costs of life will be substantially higher. And higher prices will, inevitably, lead to worsening living standards across the world.

In the extreme case, as resource scarcity becomes more biting, commodity shortages could lead to outright war. As we discuss later, since 1990 at least eighteen violent conflicts around the world—many of them ongoing—have had their origins in resource shortages and access. Beyond this, numerous other countries in commodity-scarce regions, such as the water-scarce Middle East or parts of Asia with relatively little arable land per person, are vulnerable to violence and clashes. Here and elsewhere populations inhabit a delicate balance between substantial demand and supply shortages. The looming risk, of course, is that many more countries—and thus many more people—will be drawn into the fray.

This is the context in which China's resource campaign is taking place. China's global charge for hard commodities (metals and minerals that are mined or extracted), soft ones (typically grown goods, such as timber, grains, and other foodstuffs), and the infrastructure (roads, ports, and railways) that support and facilitate their extraction and delivery, is meant to guarantee the continuation of its already remarkable story of economic development. To that end, the Chinese appear determined to pull all available levers, and because China's resource undertaking is global and among the most aggressive in history, it has economic consequences for us all.

First, it examines the economic implications of China's ascendancy as the lead buyer of the world's resources, set in the context of global commodity supply and demand. China is now the main trading partner of many of the most influential economies in both the developed and the developing world. In just a few short decades it has become the most sought-after source of capital infusions. Indeed, rich countries and poor alike do not just wait for China to come calling; they actively court and seek out Chinese investments.

China now funds foreign governments (providing loans and buying their bonds), underwrites schools and hospitals, and pays for infrastructure projects such as roads and railways (particularly across the poorest parts of the world), catering to the needs of the host nations and making China an altogether more attractive investor than international bodies such as the World Bank, which often tie loans to harsh policy restrictions. China's economic influence on places as far-flung as the United States, Africa, Eastern Europe, Australia, and South America is incalculable. China's increasing global influence has mirrored its economic rise and, invariably, a concomitant rise in its demand for resources.

Second, this book is about China's growing financial reach and its implications for the workings of the global commodity markets. Over time and across the gamut of commodities (minerals and oil markets and even non–publicly traded assets such as land), China has become the marginal buyer, purchasing global resources in such disproportionate volume that it increasingly has price-setting power, which automatically influences how markets trade as well as helping determine the value of assets in host countries. Thus, gleaning the ramifications of China's involvement in setting resource prices and influencing whether market prices move up or down is crucial.

Finally, this book is about the social and political implications of China's quest for resources. China's role in the world cannot be viewed solely through the narrow prism of economics and finance. Its global campaign not only has serious consequences on geopolitics but also determines how people across the globe live and interact with their governments. China's investments can have a largely positive impact when they help raise per capita incomes and reduce poverty in the host nation, but this newfound wealth can also accrue to despotic governments who use the cash for self-aggrandizement or subjugating the local citizenry. Although the Chinese may not explicitly aim to undermine a host country's political environment, they (as other foreign investors) must carefully balance the benefits of resource investment—creating jobs and laying down infrastructure in countries where such investments are desperately needed—against such political costs.

In a world where cash is king, China's much-noted cash stockpile—over US$3 trillion in foreign currency reserves in 2012—affords it the ability to do what other countries can't do and go where other countries can't go. Simply put, the Chinese are on a global shopping spree. And its voracious commodity appetite is unlikely to abate significantly even if China's economic growth rates were to cool.

Poor countries such as Peru think nothing of mortgaging and selling off their assets, even when those assets come in the form of a fifteen thousand–foot mountain of copper, as they badly need the money to finance economic growth and development. Meanwhile, heavily indebted industrialized countries that need to raise revenues also capitulate, borrowing significant sums from China. In 2011, for example, China was the largest single holder of US government debt, with 26 percent of all foreign-held US Treasury securities (around 8 percent of total US public debt). Increasingly, countries like Japan, South Korea, and others across the Middle East have embarked on their own commodity campaigns—particularly with regard to Africa's arable land—but China's size, cash (i.e., its ability to outbid the competition), and unyielding determination mean, for now, it's mostly all about China.

But who is China? Is it right to combine all of China's parts into one monolithic entity? And is the sum always greater than the constituent parts? China's success relies on many different agents— individuals, corporations, and the Communist Party state. But ultimately they all pull together—public or private—under one unifying force with a single agenda: the betterment of China.

This philosophy is perhaps best encapsulated in China's "peaceful rise" policy line, popularized in numerous speeches between 1997 and 2004 by Zheng Bijian, a foreign policy spokesman.² These speeches, along with the Government Work Report (similar to the US president's State of the Union address) delivered annually by the Chinese premier, have laid out the leadership's strategic aims for the country. From economic growth targets to technology strategy to foreign policy and statements about China's role in the world, these articulations do a good job of stressing the aspirations of China's political class and the important factors integral to development, mainly public goods such as education, health care, and domestic infrastructure.

In principle there is little to distinguish many of these goals from those of other governments. In China's case, however, it's less about these relatively uncontroversial proclamations and more about how China's political infrastructure goes about executing China's agenda. Through a centrally planned command-and-control system of the economy, China's Communist Party sponsors and influences the behavior of mammoth state-owned enterprises such as banks, energy firms, transport and logistic businesses, and resource companies. More generally, the Chinese state's subscription to state-led capitalism (where the government takes a central role in driving profit-making, commercial activities) means that all actors are primarily focused on meeting the goals of the Communist Party, so that even the blind profit-making motives of Chinese businessmen fall behind the Politburo's political desires.

So how does the Chinese government ensure that its philosophy of national purpose prevails? It uses regulation, money, and personnel.

The regulatory process is pretty straightforward. Like other governments around the world, the Chinese government provides the strictures to set up businesses in the form of investment codes, licensing rules, and business-operating guidelines under which individuals and corporations must operate. The business environment is monitored through a web of regulatory bodies such as its central bank and agencies that grant consents or permissions for businesses to operate, among them the State Administration for Industry and Commerce and the Quality and Technology Supervision Bureau.³ But more than this, the important issue is the reach of the government—how long, exactly, the long arm of the law is. In China's case it's pretty clear that "regulation" goes much further than simply issuing permits and authorizing licenses for businesses to operate.

The Chinese party state also enforces its philosophy of national purpose through money—by controlling the allocation of its vast public funds, including China's foreign reserves. The allocation of China's public purse is guided by at least two factors. First, public proclamations on economic policy imperatives such as those contained in the Government Work Report discussed above as well as statements aimed at those sectors and industries (e.g., food production and energy) feed into China's overarching plans to continue to drive economic growth and reduce poverty. It is high and sustainable growth rates, as well as a continual reduction in poverty, that, above all else, drive the Chinese state actions. Second, China's cash disbursements are influenced by broader market conditions that may warrant that the state step in to boost lackluster economic growth or intervene in times of economic crisis. In November 2008, for example, the government implemented a US$586 billion (around 4 trillion renminbi) stimulus package to combat the ill effects of the financial crisis (rising unemployment led by the shrinking export industry and, thus, a slowdown in economic growth) in a matter of days. China's stimulus package amounted to nearly 15 percent of annual economic output spread over two years.⁴

The government makes its financial muscle felt, so the line between public and private can appear deliberately obfuscated: for example, the Chinese state retains sizeable equity stakes in many publicly traded companies (in some cases upward of 70 percent of these companies are government owned) and virtually all of the top thirty Chinese multinational enterprises are state owned. Often Chinese enterprises investing in strategic sectors such as oil, minerals, or infrastructure are state owned, and thus, in a sense, they act as extensions of the party state. This structure has been central to China's global resource drive. For instance, the three leading investors in Africa are state-owned oil companies: China Petrochemical Corporation, China National Petroleum Corporation, and China National Offshore Oil Corporation.

China's so-called going-out strategy uses state-controlled tools to encourage overseas expansion and acquisitions by even privately held companies. Many Chinese enterprises receive government grants or (low-interest) loans from state-owned banks, placing them at a distinct advantage compared with foreign companies that have to source funds with more expensive borrowing from the financial markets. Numerous Chinese companies benefit not only from concessional credit lines (i.e., credit lines that provide flexible or lenient terms for repayment, generally with extended repayment periods and at lower interest rates than market rates) but also from tax breaks and priority allocation of key contracts. In 2009, for example, Wuhan Iron and Steel, China's third-largest steelmaker, was extended a nearly US$12 billion line of credit by the state-owned China Development Bank. A primary goal of the loan was to finance its "overseas resource base construction," including the roll-out of large iron mines and steel plants that would produce these commodities. Such loans became common as the Chinese government encouraged state-owned banks to lend in order to stimulate the economy in the wake of the 2008 financial crisis.

Finally, China's control is about people and personnel. Roughly 10 percent—nearly eighty million people, and growing—of China's workforce are card-carrying Communist Party members. It's not just the number of party cadres that matters but that party members are almost always strategically placed to ensure that all sectors are infused with the Communist Party's overarching national purpose. It's not unusual for publicly traded enterprises to "employ" party cadres to such an extent that these party representatives are seen as more important, more powerful, and more influential than the CEOs of those nominally independent entities.

In extreme cases companies'senior staff is appointed by the Chinese government and chief executives hold ministerial level rank. And despite being operationally independent, companies are regularly seen to conform and adhere to the Communist Party policy. From the vantage point of the companies, their relationship with the government is a balancing act between the benefits they get, such as concessional funding and international contacts brokered by the Chinese state (e.g., contacts with senior public officials and foreign governments established by the Chinese government) and the costs of government interference and pressures of compliance with the Communist Party's worldview.

The strategy of providing China's network of companies access to (cheap) money and Chinese state endorsements as well as preferential access to foreign government contacts (who themselves are central players in the resource sector in their respective countries) seems to help steer China's developmental agenda. And because this approach works well for the Chinese government and the command-and-control approach of the Communist Party, it is unlikely to change any time soon. If anything, Chinese state interventions would likely increase were the economy to face a "hard landing" that would see a considerable contraction in China's economic growth, as some economists were predicting in 2012.

To many Sinophiles the Chinese government is omnipresent and omnipotent. However, the degree of government influence, one Chinese businessperson quipped, depends on the extent to which you are licensed, take public money, and who you have as (and, relatedly, who selects) your key personnel—such as the CEO, board members, or the chief financial officer. It's the difference between being told explicitly what you should do, where to invest, who to hire, and so on (if you take the license, the money, and the people) versus being told what you should not do—for example, barring a company from investing outside an explicitly stated sector (if you only seek a license). The emergent patterns around deal financing and transactions struck in all areas of natural resources fit snugly into China's imperative for its vast domestic infrastructure build-out and plan for longer-term economic growth. This is China, Inc.—all for one, and one for all.⁵