China is investing in mining and energy projects around the world in order to feed its massive industrial machine and reduce its dependence on Western powers for resources. As the Wall Street Journal reports, however, many of its biggest, most important investments fail to bear fruit:
China’s overseas investments in resources soared to $53.3 billion last year, from $8.2 billion in 2005, according to an investment database compiled by the American Enterprise Institute and the Heritage Foundation.Now it is becoming clear that China’s shopping spree yielded numerous bad investments. Many big-ticket deals are losing money, running into unexpected costs or generating significantly less output than expected. Some Chinese investors are moving away from resources—a shift that could mean less Chinese money for countries in places like Africa, Latin America and the Middle East.The reasons for China’s struggles vary. China came late to the global resources boom and often overpaid for assets Western companies had passed over or wanted to sell. China typically paid one-fifth more for oil-and-gas assets than the industry average, estimates Scott Darling, Asian regional head of oil-and-gas research at J.P. Morgan Chase & Co.
The Journal lists some major investment blunders, including an Australian iron mine that is enormously over budget and not producing much ore, a financially unsound Canadian oil sands project, and an abortive oil deal with Iran, to name just a few. China almost always pays above market price for natural resources, as the article notes, and often for second-rate projects. Beijing is aware of the problem and wants to do better going forward:
Chinese officials acknowledge difficulties. Last year, the head of China’s mining association estimated that 80% of all overseas mining deals had failed, though he didn’t elaborate, according to state media. […]CIC has begun shifting away from energy investments and into other sectors, according to people familiar with the fund. Energy and metals deals fell to two-thirds of China’s offshore investments in 2013, from 80% in 2005, according to the American Enterprise Institute and Heritage Foundation data, and China’s $53.3 billion in resource investments last year was below the record $57.5 billion in 2011.China’s Ministry of Commerce said it had stepped up efforts to vet overseas investments and make companies more aware of the risks and responsibilities they face abroad.
The Chinese economy is quickly becoming the world’s largest (in fact, by some metrics, it is set to outpace the U.S. within 10 years), and its manufacturing sector has been the main engine of growth. Its investments abroad are intended to support that engine, and Beijing’s losses on that front must alarm leaders who already fear that China’s economic progress is not sustainable at its current pace.As we’ve written, China’s President is acting like a man who sees danger ahead—both economic hazards and geopolitical ones. He’s taking extraordinary measures to gather the reins of power in his own hands, in part through an aggressive anti-corruption campaign. These investment failures, which will impede China’s quest for independence from Western suppliers and entail significant losses of money and resources, can’t come as welcome news to Beijing’s powerful President.