By Elizabeth Economy and Michael Levi
As Chinese economy experiences a slow down and commodities prices are falling, this article explores how Chinese demand and imports drive global commodity prices, the broader implications of the Chinese slowdown for the global economy and security, and the consequences for the world’s resource producing states and industries.
Like all major powers before it, China’s economic rise has been fueled by ever-rising consumption of natural resources, ultimately leading to large-scale imports. China now ranks as the world’s largest consumer of many essential commodities: in 2014, China consumed slightly more than half of the world’s coal, aluminum, and nickel, more than 40 percent of global copper and zinc, and roughly 30 percent of the world’s soybeans.1 While leaders of many resource-rich countries have heralded Beijing’s growing interest in trade and investment in commodities, many consuming countries have worried about their ability to compete over seemingly ever-scarce resources.
Now China’s GDP growth has experienced a marked decline from a five-year high of 10.6 percent in 2010 to what the Chinese leadership terms the “new normal” — a projected 7 percent growth in GDP in 2015 — with many analysts skeptical that even that will be delivered. While seven percent growth would still mark China as the world’s first or second fastest growing major economy, alarm bells are sounding. The current slowdown raises questions about China’s future role as a dominant actor in global commodity markets and source of new investment in natural resource extraction. As prices for any number of commodities fall, it is essential to understand how Chinese demand and imports drive global commodity prices, the broader implications of the Chinese slowdown for the global economy and security, and the consequences for the world’s resource producing states and industries.
It is easy to assume that China’s economic slowdown is responsible for much of the weakening of commodity prices, just as it was easy to blame China for the skyrocketing prices of the 2000s. But China is far from the only factor. China was never fully responsible for the rising commodity prices of the past decade2, and it is far from entirely to blame for the current market weakness. In 2014, China imported more crude oil, iron ore, copper, and soybeans than it did in 2013, even as prices for all those commodities fell.3 According to one report, only coal experienced both lower prices and a lower level of Chinese imports.4 In some cases, more supply has simply come on line. For example, the United States experienced a record grain harvest; and bumper crops in soybeans, corn, and wheat have led to a more than 30 percent, 22 percent and 16 percent drop in prices.5 In other cases, a combination of factors has contributed to strong supply and falling prices. The U.S. tight oil boom and decision of Saudi Arabia not to cut oil supplies have combined with weak global demand – not only in China – to drive oil prices down.
Yet Chinese demand does play a major role in driving the price of commodities such as oil, soybeans, and iron ore – and the economic planning decisions Chinese leaders make will be an important factor in global demand, new investment in natural resource extraction, and commodity prices. Traditionally, Chinese demand for many commodities has been generated by its drive to develop its domestic infrastructure — roads, railroads, ports, airports, housing, and large-scale energy projects among them. Now, however, China’s leaders are attempting to move away from investment-led growth to a consumption-based economy, meaning that the pace of growth in demand for some critical commodities (such as iron ore) will diminish. An ongoing slump in China’s housing market and slowdown in new housing starts are also likely to dampen demand. Efforts to deal with pollution and to meet climate change pledges to reduce carbon dioxide emissions may well contribute to continued declining levels of coal consumption (although China imports only 10 percent of what it consumes – and the same environmental policies will boost demand for natural gas). Beijing-based economic analyst Michael Pettis, for one, suggests that the impact of China’s economic restructuring on commodities markets will be significant: the “price of hard commodities will drop sharply… industries that profit from building infrastructure or manufacturing capacity will suffer…and companies that produce consumer goods will be marginally affected.”6
Yet a closer look at Beijing’s current policies suggests that a structural shift in the Chinese economy will be evolutionary rather than revolutionary, and that some commodities will remain in high and growing demand from China. The Chinese leadership continues to place a priority on new infrastructure development, including new airports, railroads, nuclear, and hydropower plants, and wastewater treatment plants. Indeed, Premier Li Keqiang has criticized local officials for moving too slowly on large investment projects, arguing that some of them are turning risk assessments for big development projects into a “joke” by claiming that they need at least one to two years to complete the requisite environmental and water resources assessments, as well as assessments on energy, work safety, traffic, geology, earthquakes, heritage, thunder, weather.7 (Many Chinese and outside observers, however, blame the Chinese leadership itself for the slow-down in approval process, citing the ongoing anti-corruption campaign which has made local officials averse to risk taking.) The massive expansion in China’s electrical grid will contribute to continued demand for copper, and demand for metals such as nickel found in many higher end consumer goods such as automobiles will also remain strong as China’s middle class continues to expand.
In addition, China’s plans to stockpile resources will likely help keep the market for some commodities stronger than they otherwise would be, at least in the near term. China’s Ministry of Finance announced it would spend $24.7 billion in 2015 to increase its stockpiles of grains, edible oil, and other materials. This represents a 33% jump from 2014 levels. Moreover, problems in China’s agricultural sector persist, suggesting that both imports of some grains and Chinese purchases of land overseas will continue largely unabated. Chinese soybean production, for example, is forecasted to fall to a 23 year low of 11.7 million metric tons,8 and imports are expected to rise yet again in 2015-2016 by more than 6 percent.9 According to the USDA bureau in Beijing, China’s production of soybeans is hampered by “low profits, stagnating yields, lucrative alternatives and recently, subsidy reductions.”10
China’s role as a source of significant new investment in natural resource extraction is also evolving. Chinese companies — both state-owned and private — have been among the world’s most active new investors in resource extraction over the past decade. In many instances, they have undertaken investments that others felt were too risky. Yet there is evidence that Chinese companies and state investment funds are becoming more cautious about investing in the natural resource sector. Chinese officials have acknowledged that their overseas investments in natural resources have often encountered economic and political difficulties. A senior mining official admitted in 2013 that 80 percent of China’s overseas mining deals were money losers. And according to the head of Asian oil and gas research at JP Morgan, China typically has paid 20 percent more for oil and gas assets than the industry average.11 Any hesitance is now compounded by the anti-corruption campaign, in which energy sector officials and oil executives have featured prominently.
A lack of well-developed corporate social responsibility has also contributed to political problems for Chinese firms in host countries. Both state owned and private companies have faced significant popular discontent in countries as disparate as Ghana, Peru, Zambia, and Australia as a result of their poor environmental, labor and corporate governance practices. As a result of these economic and political challenges, as well as in recognition of other priorities and opportunities, Chinese state-backed investment overseas is evolving from a singular focus on commodity-related industries to one that highlights technology companies and real estate holdings. Even as overall Chinese annual foreign direct investment increased from $68.58 billion in 201112 to over $100 billion in 201413, the Wall Street Journal reported that China’s overseas investments in metals and energy in 2014 dropped to $35.20 billion from over $50 billion each of the previous three years. Real estate has more than doubled and technology investments have grown tenfold.14 If such a strategy continues, many resource rich countries will find themselves seeking other partners for the relatively high risk low return investments that the Chinese have undertaken over the past decade and more. Ironically, after worrying about China’s resource appetite for the last decade, consumers could find themselves in a world with less supply and higher prices as a result.
Yet even as China’s changing resource needs and investment strategy may contribute to economic stress in some resource rich countries, Beijing is putting forth a vision and developing the financing for a network of regional, and even global, infrastructure projects. Beijing’s “one belt, one road” plan, for example, includes a vast array of infrastructure projects — roads, pipelines, railroads, ports, and energy projects — throughout south, central, and southeast Asia, extending through to the Middle East, Africa and Europe. Additionally, it has established an Asian Infrastructure Investment Bank (AIIB) to support the financing of regional infrastructure and has committed to ensuring that it will embrace strong governance norms in its project finance. If successful, Beijing’s regional infrastructure plan and AIIB will support economic growth and rising demand for many commodities, even if the end consumer is not China.
Chinese security interests are yet another, albeit generally subordinate, element of its natural resource strategy. In some instances, such as in maritime disputes between China and its neighbors in the South and East China Seas, the resource component is secondary to a political security issue, in this case sovereignty and access to critical shipping lanes. At other times, China’s sense of its resource needs – and, even more important, its desire for resource-related investment opportunities – have led it to place obstacles in the way of efforts by other actors to place economic sanctions on states such as Iran and Sudan.
At the same time, China also views overseas infrastructure development and resource extraction as a potential mechanism for enhancing its own security. It is pushing forward with $28 billion investment in the China-Pakistan Economic Corridor, including cooperation in the development of natural gas and coal projects as well as the development of roads, railroads, and pipelines. While China and Pakistan have strong political and economic ties that make such an investment unsurprising, China also hopes its investment will prevent the spread of Islamic militant groups from Pakistan into China’s Xinjiang Autonomous Region by helping develop the economy.15
China’s economy is slowing; the leadership is pursuing a structural readjustment of its economy; and Beijing is shifting its investment strategy to move away from its traditional focus on resource extraction. All of these measures suggest that Beijing will not be as singularly significant in shaping global commodities markets as it was during the 2000s. Yet as Beijing continues to advance its economic interests at home and abroad, whether through stockpiling resources or designing regional infrastructure plans, it will continue to shape commodity markets, the political economies of resource rich countries, and issues of regional and global security in critical ways.
About the Authors
Elizabeth Economy is the C.V. Starr Senior Fellow and Director, Asia Studies at the Council on Foreign Relations. She is the author of the award-winning The River Runs Black: The Environmental Challenge to China’s Future (2004, 2010) and along with Michael Levi, co-author of By All Means Necessary: How China’s Resource Quest is Changing the World (2014).
Michael Levi is the David M. Rubenstein senior fellow for energy and the environment at the Council on Foreign Relations (CFR) and director of CFR’s Maurice R. Greenberg Center for Geoeconomic Studies. He is the author of The Power Surge: Energy, Opportunity, and the Battle for America’s Future (2013).
1. Henry Sanderson, “Commodities explained: China’s new normal,” Financial Times, February 23, 2015.
2. Elizabeth C. Economy and Michael Levi, By All Means Necessary: How China’s Resource Quest is Changing the World (New York: Oxford University Press, 2014), 21-45
3. Clyde Russell, “COLUMN-China commodity trade data show winners are scarce: Russell,” Reuters, January 27, 2015.
5. Sanderson, “Commodities explained.”
6. Michael Pettis, “Winners and Losers in China’s Next Decade,” Insights & Publications, (June 2013) www.mckinsey.com/insights/asia-pacific/winners_and_losers_in_chinas_next_decade
7. Nectar Gan, “China’s premier blasts delays created by big projects ‘risk assessments,’” South China Morning Post, April 22, 2015.
8. Foreign Agriculture Service, “Oilseeds: World Markets and Trade,” United States Department of Agriculture, April 2015.
9. “Chinese soy imports to fall short of forecasts in 2014-15,” agrimoney.com, March 9, 2015.
11. Wayne Arnold, “China’s Global Mining Play Is Failing to Pan Out,” Wall Street Journal, September 15, 2015.
12. Wang Yuanyuan, ed., “China’s outbound direct investment slows in 2011,” Xinhuanet, August 30, 2012.
13. Xiang Bo, ed., “China 2014 outbound investment tops 100 bln USD,” Xinhuanet, January 16, 2015.
14. Rhiannon Hoyle, “Chinese Firms Shift Investment From Mines to Trophy Assets,” Wall Street Journal, March 19, 2015.
15. Salman Masood and Declan Walsh, “Xi Jinping Plans to Fund Pakistan,” New York Times, April 21, 2015.