Chinese characteristics of the world’s factory


#14 in a series on THE FUTURE OF TIBET

For Many Tibetans, all that is needful is to know that “China does this or that.” Sometimes this is stated even more sweepingly as: “the Chinese are doing such-and-such.” This blames all Chinese for the actions of the party-state elite, which is not helpful. But is the elite of big business, the ruling party and its state apparatus a single entity? This series continues to explore the extraordinary fusion of business and politics that defines today’s China. Specifically, this blog post looks at the ways the state subsidises and supports the biggest state owned industries, even to the point of gross overconsumption of raw materials, and over capacity, due to excessive investment in more factories than are needed. Later posts in this series will look at how this military-industrial-party-state complex impacts on Tibetan resources and communities.

It is not unusual  for developmental states to undertake massive infrastructure construction in remote areas, at  public expense, enabling enterprises to come in, and focus on profitable extraction. The Soviet Union adopted a similar strategy, more recently Japan and South Korea, Taiwan and others. Few took the strategy as far as China, especially in its far west.

The subsidies to industry by the developmental state are many, starting with emplacing infrastructure before mining begins, and includes financing of the capital costs of setting up a mine, through concessional loans from state banks, concessional freight rates for bulk haulage of unprocessed or semi-processed ores, and many other incentives. These have the cumulative effect of reducing costs, encouraging a fast expansion of production, high profits, and a capacity to export finished goods at prices that undercut competitors around the world. As manufacturing shrinks in most developed countries, due to Chinese competition, regulatory authorities increasingly question the legitimacy –under World Trade Organisation rules which bind China- of these many subsidies.

“The country’s 70 financial institutions, all state controlled, have been lending heavily to state-owned enterprises. In anti-subsidy trade cases the U.S. Commerce Department typically regards loans from state-owned banks as carrying subsidized interest rates. Loans are widely issued at fairly low interest rates through a system that allocates credit partly on the basis of the Five-Year Plan and other national policies, as opposed to who can pay the highest risk-adjusted interest rate.” [1]

When the US and other governments, facing protests from a shrinking manufacturing sector, make their own calculations of the hidden subsidies inbuilt into Chinese goods, they will need to include massive subsidies such as building a rail line to Lhasa, then on to Shigatse and Nyingtri, giving rail access to major copper mines supplying copper to computer and car makers, such as Ford, which are setting up plants far inland, much closer to Tibet than to coastal ports and imported copper.

While the US Commerce Department increasingly finds evidence of subsidies to Chinese metals manufacturers, mainstream economists, deeply wedded to trade as the tide that lifts all boats, seldom find much wrong with China’s state capitalism. Although  there has been much alarm at Chinese miners and other investors taking over the mineral wealth of Africa, Latin America and elsewhere, few economists see anything of concern. As of 2012, they say, China still owns only a small proportion of mineral deposits, is still only a modest investor globally compared to western investment in Africa, or in China.[2] When China takes ownership of mines around the world, it adds to global supply rather than locking away minerals for itself, to the detriment of others. So no problem.[3] China has been able to buy only scattered oil fields and mineral deposits, often in the riskiest places, and usually has to pay a premium price.[4]

This is all true, but may not be so much longer, as China’s “go out” policy gears up, gains scale, and depth of managerial experience in negotiating different geographies, dealing with different cultures and regulatory regimes.

The underlying dynamic is that Chinese demand for resources –animal, vegetable and mineral- set off sharp price increases in 2003, and, with fluctuations, they have remained high ever since. That demand is so strong that even a full exploitation of the known resources of Tibet would make little difference. The prices of grains, meat, timber, coal, oil and nearly all minerals rose sharply, and have stayed high, hence the talk of a supercycle that defies the boom and bust overshoots inherent in capitalist market economies.

The concept of a supercycle is deeply attractive to mining companies, and those who invest in them; and this includes the Chinese state owned miners, which have also profited strongly from the price surge. When the fast inflating price of staple foods caused riots in many poor countries, many economists were concerned, but the mineral supercycle, and China’s role as mine owner, supplier, processor and user of the world’s minerals is nothing to worry about. So say the conventional neoliberal economists. It’s all a question of efficiency and price. Since China is more efficient, it is logical that it become the world’s factory, consumer so much of the world’s resources, and as a result we all, as consumers, get what matters most, lower  prices. Protectionist responses are thus irrational overreactions, driven by populist xenophobia.

And, the economists add, the world can never run out of minerals; it is all simply a question of price. Minerals are everywhere underneath us, so there is no problem. “The natural resources that are used in the production of the energy and metals that are essential to economic development are not scarce in any absolute sense. All of the industrial metals are abundant in nature, to an extent that is unlikely to be challenged by human demands.”[5] It used to be that mining was economic only in deposits where minerals are richly concentrated, but, Professor Garnaut assures us, we now have technology to economically mine low grade deposits, so we can never run out.

But “China’s multinationals are still taking baby steps in global business.”[6] Their confidence in dealing with the world as a range of “geographies” will grow, and their demand for minerals will intensify further. China has set itself a goal of becoming rich, or at least a middle income country, with all the intensive resource consumption that requires. For all the talk, in the current 12th Five-Year Plan for example, of energy efficiency, reduced energy per renminbi of output, and massive investment in green technologies, the central planners nonetheless expect that in the 2011-2015 12th Plan period China’s annual coal consumption will rise from three thousand million tonnes to 3.8 bn.

As China invests in efficiency and new technologies, its population ages and it has in place all necessary infrastructure for a well-off population, fulfilling the core promise of the ruling party, so resource demand will peak and then ease off. So the economists tell us. But according to their calculations, peak intensity for steel and other minerals will at the earliest be 2024, and that forecast depends on China maintaining a growth rate as fast as in the 28 boom years after 1980. At that point, steel consumption will peak at 700 to 800 kilograms per Chinese per year, and then gradually taper. “This peak level of demand for steel in China will be higher than the one reached by the United States in the 1950s or Europe, Canada and the CIS in the 1970s. The implication that China will remain around its peak levels for a considerable period (at least 590 kg per capita from 2020 to 2040) seems reasonable.”[7] If such predictions are valid, it would take until the end of this century before steel consumption in China returns to the 2010 level of 410 kg per person per year, and a return to the 2000 level of 270 kg per person per year, will never happen.

Can the planet handle each Chinese citizen consuming 700 to 800 kg of steel each year, for many years on end? To economists and investors this prospect is good news. To China’s party-state this is just the process of rightfully catching up with the rich countries. But to the planet, it may be more than Earth can bear.

[1] KEITH BRADSHER, Exports soar in China as factory floor gets retooled: Taking the long view, manufacturers automate to keep their global lead, New York Times 11 June 2012

[2] Peter Nolan, Is China buying the world?, Polity Press 2012

[3] Theodore H Moran, Resource procurement: not just a zero-sum game, East Asia Forum Quarterly April 2012

[4] Ilan Alon, The globalization of Chinese capital, East Asia Forum Quarterly April 2012

[5] Ross Garnaut, The contemporary China resources boom, The Australian Journal of Agricultural and Resource Economics, 56, pp. 222–243

6] David Shambaugh, Are China’s multinational corporations really multinational? East Asia Forum Quarterly April 2012

[7] Huw McKay, Yu Sheng and Ligang Song, China’s metal intensity in comparative perspective, ch 5 in China: The next twenty years of reform and development, ANU e-press, 2010,

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