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Prising China
Most Major Chinese Mining and Energy Investments Fail

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.

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  • Jacksonian_Libertarian

    “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.”

    I remember similar things being said about Japan. It too was making large numbers of unwise investments, over paying for buildings and golf courses, and these were private companies not state owned monopolies. Tokyo became more valuable than the entire continental US, and everyone feared America’s time was over. We all know how that turned out, Japan has now spent 25 years in a deflationary depression, and all talk of them becoming the largest economy stopped long ago.

    It was foreign businesses that built brand new state of the art factories in China to take advantage of the cheap labor, it was called outsourcing. These factories which are now aging, built products for export. Now things have changed, Chinese labor isn’t the cheapest anymore, factories are old and inefficient, and better less risky places to invest and build are now closer to the consumer. The US, arguably the least risky place to invest in the world, is experiencing a glut of cheap energy due to fracking, that is likely to last for a long time. At the same time America has a mature infrastructure with roads, railroads, telecommunications, pipelines, as well as an educated workforce, who’s wages have stagnated for 40 years making them cheap all things considered.

    So, I think the prediction of the Chinese economy becoming the world’s largest in ten years is a huge guess with little historical evidence to support it. I think it more likely China’s belligerence will start a war with all its Pacific Neighbors, who sit on all of China’s shipping routes, and who will cut off and irreversibly destroy China’s trade. China already imports more of their energy than anyone else, when this gets cut off, their economy will grind to a halt, like the battle of the bulge writ large. War in this age is all about logistics and China has no logistics outside of its own borders, to add insult to injury they also have second and third rate military equipment designed by the extinct Soviet Union and not battle tested as the American and western built equipment supplied to their Pacific Neighbors.

    • Dracovert

      Excellent analysis. Every time there is a new or unexpected trend, little minds expect the trend to continue forever. No trend continues forever, it continues until it reaches an unsustainable point, at which time it ceases. I recall in the late 1980s, Japan was growing like crazy. There were serious projections that Japan would grow and overtake the USA, the world, the galaxy, the universe!

      China has much more severe social, demographic, environmental, and economic problems than Japan ever had, and China has one of the most corrupt psychopathic dictatorships ever.

      China will self terminate.

  • lukelea

    Reminds me of a lot of Japanese investments in the West before The Fall.

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