Tuesday, August 27, 2013

China's Foreign Investment Bonanza Goes Bust

The Wall Street Journal reported yesterday that many of China's overseas investments in mining assets have turned out to be expensive boondoggles. "China Rethinks Deals for Resources" uses the example of a huge $8-billion Australian mine that has never exported a single chunk of ore to illustrate a pattern of expensive, unproductive Chinese investments in mining assets around the world.

According to the article, "China has plowed $226.1 billion into outbound mergers and acquisitions to grab a slice of global resources since 1995." The article says about a quarter of that investment was in mining. Several multi-billion dollar projects have been shelved lately. These projects have been hit by everything from soaring labor costs to a giant grinding mill that doesn't work, discovery that ore is laced with asbestos, and mines in the middle of nowhere with no infrastructure.

According to a Chinese iron ore industry official quoted by WSJ, "The problems don't mean Beijing will stop China's overseas push for global ore assets, underlining the country's need to 'break a global monopoly.'"

The article does not mention agricultural projects. They are probably much smaller in dollar value in comparison with the mining projects, but very similar in principle. As the WSJ article notes, the mining investments by giant Chinese state-owned companies are designed to buy global market share in an industry dominated by multinational titans. The Chinese companies, bank officials who fund the projects, and government officials who give the orders to go ahead with them are operating under the mistaken assumption that "big" equals "profitable." They worry that big multinationals are going to take advantage of Chinese buyers by "monopolizing" commodities. Driven by their paranoia, Chinese companies and banks instead burn through billions of dollars in unproductive overseas investments in ill-considered projects.

According to WSJ, imports from China-controlled iron ore mines account for just 2.7 percent of China's iron ore imports, far below the 40-percent target set in 2011. Agricultural projects likewise account for a negligible share of Chinese food imports. Of course, it takes a while for farms to become productive, but there is no reason to think that Chinese companies investing in South America or Africa would be any better at growing soybeans and corn in an unfamiliar land than they are at mining.

Chinese state-owned companies are propped up in their domestic market by subsidies, sweetheart deals where they can buy low and sell high, free real estate, bottomless bank loans, and preferential access to IPOs. Why would anyone expect these companies accustomed to wasting resources at home to do anything besides waste money on massive ill-considered projects when they invest overseas?

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