Friday, July 20, 2007

China's global economic reach and backlashes against it - Some updates

In my post yesterday discussing Suicide bombings in Pakistan ... and what they might mean, I ended by wondering about one aspect of these attacks that might (or might not) deserve more attention:
Third, on a somewhat different note, I find it interesting that at least one of these recent suicide-bombing attacks was aimed at Chinese working in Pakistan. Some of the attacks carried out earlier by the fanatics based in the Red Mosque were also aimed at Chinese citizens, and analysts have suggested that the abduction of some Chinese citizens may have been the straw that broke the back of the government's patience. For a half-century, China has been one of Pakistan's closest and most important allies, so attacking Chinese nationals is really playing with fire.

Given that background, I can't help wondering whether something more than coincidence is at work here. Are there really that many Chinese in Pakistan (which would be news to me), and might these attacks reflect some degree of hostility against their presence--on the part of Islamists and/or of the general population? Perhaps not, but I can't help being intrigued.
=> There does indeed seem to be something more behind this. Today's London Times has an article discussing these and other attacks on Chinese nationals that puts them into a broader context ("Suicide bomb attack jolts China into realising the risks of global ambition") . Some highlights:
China was reminded of the harsh realities of its newly acquired status as a global power yesterday when a suicide bomber attacked a convoy of its workers in Pakistan.

At least 30 people were killed when a vehicle laden with explosives was detonated as the convoy carrying 60 Chinese rumbled through a market town near Karachi. [....] Pakistani security forces said they were certain that the Chinese were the targets of the attack, and Chinese in Pakistan were urged to be on their guard against more violence. The suicide bombing was the second attack on Chinese nationals in Pakistan in less than a month. Suspected Islamic militants killed three Chinese engineers near the northwestern city of Peshawar earlier this month.

The attacks will come as a stark reminder to Beijing of the risks inherent in China’s bolder approach to the extension of its interests and influence beyond its borders, particularly in Asia and Africa. More than four million Chinese now work overseas.

Pakistani security forces have stepped up protection for the 3,000 Chinese working on development projects across the country since the siege and assault on Islamabad’s radical Red Mosque.

The violent end to the siege was triggered by the kidnapping of a group of Chinese women by women students from a seminary linked to the Red Mosque. Leaders of the mosque, who modelled themselves on the Taleban, accused the six Chinese of working as prostitutes in a massage parlour. [....]

The antagonism ranges from rage felt by Islamic radicals in Pakistan over China’s policies to suppress pro-independence Muslim movements, to resentment among small merchants and tribesmen in Kenya who see their jobs and businesses being taken over by Chinese contractors.

Ahmed Rashid, a political analyst in Pakistan, said that anger was simmering over perceptions that the Chinese were stealing their livelihoods. [....] Chinese contractors bring in many of their own engineers and labour.

They live in tight-knit communities that operate in a virtual vacuum inside whichever country they have been assigned. That breeds resentment among locals who fear for their livelihoods and are suspicious of outsiders.

In April nine Chinese workers and 65 Ethiopians were killed when guerrillas attacked an oil installation near the Somali border. Rebels abducted a Chinese mining executive searching for uranium in the Sahara, adding Niger to the list of states where China’s hunger for minerals has led its nationals into trouble. [Etc.]

=> I had heard about these kinds of anti-Chinese resentments in various African countries (where the culturally insensitive 'Ugly Chinese' is becoming a more viscerally disliked figure than the old 'Ugly American'), but I didn't realize that this sort of thing was happening in places like Pakistan, too.

Of course, there is a long, ugly, and often violent history of racist resentment against overseas ethnic Chinese immigrant communities in Southeast Asia and elsewhere--including, let us not forget, North America. That's an old story. But this seems to be a new and different phenomenon.

=> Update 7/23/2007: For a useful overview of China's economic activities in Africa--mostly aimed at access to oil and other natural resources--and some of their political repercussions, see the piece below.

--Jeff Weintraub
=========================
Power and Interest News Report (PINR)
July 23, 2007
China Invests in Somalia Despite Instability

he Financial Times reported on July 13 that the Chinese National Offshore Oil Corporation (C.N.O.O.C.) has signed a deal with Somali President Abdullahi Yusuf to explore the northern Puntland region for oil. The initial agreement was signed last May, and it was endorsed at the China-Africa summit held in Beijing last November. [See: "Upcoming Summit Highlights Africa's Importance to China"]

A meeting between C.N.O.O.C. and Somali officials was held on June 24 to finalize the deal. The terms indicate that the Somali government would retain 51 percent of the oil revenues under a production-sharing arrangement. Further reporting from the Financial Times, however, revealed that Somali Prime Minister Ali Mohamed Gedi was not aware of the contract, suggesting that the oil deal remains vulnerable to political infighting.

China's willingness to invest in Somalia -- before the Transitional Federal Government (T.F.G.) completes work on a national oil law and as the security situation continues to deteriorate -- shows that Beijing has not been deterred by the growing backlash across Africa at Chinese policies and remains willing to take on political risks that Western firms will not tolerate.

Threats to China in Africa

Chinese investments have come under attack in recent months, and a general wariness about closer ties with Beijing has become part of the political dialogue in most African countries where China does business. Days after the June meeting in Somalia, a Chinese mining executive was kidnapped in Niger. The incident followed the killing of nine Chinese workers in Ethiopia, near the border with Somalia, in April. Chinese workers have also come under attack in Nigeria in recent months.

Politically, Chinese investments have become a touchy subject. Michael Sata's opposition campaign in Zambia received strong backing after he attacked Chinese investments and threatened to renew ties with Taiwan. He ultimately failed in his bid for the presidency, however, after China threatened retaliatory measures if he was elected. Similar complaints have been raised in Nigeria and South Africa.

China began to address the growing unease in Africa toward its investments earlier this year. Chinese President Hu Jintao visited Zambia and South Africa in February where he pledged further investments and a greater focus on community development plans. China has also publicly used its leverage in Sudan to press Khartoum to accept the terms of last year's U.N. Security Council resolution on the Darfur crisis [JW: or, rather, it has publicly pretended to]. [See: "China Adjusts its Approach in Africa" and "China Claims Success on Darfur"]

Nevertheless, China's fundamental goals in Africa have not changed. In Africa, China is looking to secure access to the natural resources it needs to keep its economic expansion humming, as well as support for its policies at the United Nations. The C.N.O.O.C. deal in Somalia is evidence that China's risk appetite has not decreased as it pursues these goals in Africa.

Investing in Somalia

Somalia has no proven oil reserves, and only 200 billion cubic feet of proven natural gas reserves. Companies including Agip, Shell (Pecten), Conoco and Phillips (now merged), and Amoco (now part of BP) spent over US$150 million on onshore exploration in the 1980s and early 1990s, but no oil reserves were discovered. Still Range Resources, a small Australian-based oil firm with close contacts to the government in Puntland, estimates that the region could hold 5 to 10 billion barrels of oil based on an analysis of the previous exploration reports.

The Puntland province claims autonomy from the government in Mogadishu, but not independence like Somaliland. The region has been relatively calm compared to central and southern Somalia since 1991, but the political situation remains uncertain. President Yusuf was certainly involved in the negotiations with the Chinese firm, as he hails from the Puntland province and maintains close ties with the local leadership, but the prime minister of the T.F.G. was left out of the loop.

The fact that Prime Minister Ali Mohamed Gedi was kept out of the negotiations suggests that the terms of the deal are not beneficial to the T.F.G. or Somalia's other provinces. This could exacerbate already strained ties between the prime minister and the president. [See: "Somalia Continues its Political Collapse"]

The prime minister appears to have led an effort within the T.F.G. to pass a national oil law that would allow Western firms to return to Somalia under production-sharing agreements, which require oil firms to share their production with the government after initial costs are covered. He told the Dow Jones Newswire in April that a national oil law would be passed within two months, a deadline that has slipped. The oil law in question seems to be similar to the one pushed in Iraq by the United States, which has also not been passed. China may have wished to sign the deal for exploration rights in Puntland before the law was passed, in order to avoid competition with Western majors, but the emergence of a national oil law could threaten the investment. [See: "Sectarian Fighting Overshadows Oil Law Debate in Iraq"]

The fact that China would enter into an agreement in such an uncertain legal and political environment, to say nothing of the security concerns, shows that it is still willing to take on risks that the Western oil majors cannot tolerate. This remains the main competitive advantage for China in the race to secure natural resources around the world -- while Chinese firms do not have the technology to drill in some of the conditions that Western firms can, they do not have the same political and financial constraints that prevent them from investing in regions considered off limits to Western firms.

Last month, for example, China National Petroleum Corporation (C.N.P.C.) signed a deal to co-develop an offshore block in Sudan, where China has been the dominant player in the oil sector after sanctions caused Western firms to suspend their operations or pull out completely. Sudan now supplies up to ten percent of China's oil imports. In Angola, China provided $2 billion in soft loans to the government that allowed it to avoid implementing reforms requested by Western donors. In return, Angola ensured that it would provide continuous oil supplies to Beijing. [See: "China and Angola Strengthen Bilateral Relationship"]

C.N.O.O.C. said earlier this year that it would boost output to 78 million tons from 40.3 million tons last year. In order to maintain growth rates near this level, Beijing will need to continue to help its oil companies invest in regions where Western firms cannot. This means that China will fund infrastructure projects in countries under Western sanctions, such as Sudan, or where security concerns dissuade Western firms from investing more, such as Nigeria.

The decision to invest in Somalia's Puntland region is part of this strategy. Only a small firm, such as Range Resources, would be able to take on a similar risk level, and that firm has spent several years courting the local government officials there. With the financial and political backing of the Chinese government, C.N.O.O.C. and C.N.P.C. have a distinct advantage over the smaller Western firms.

Conclusion

China's move into Somalia's oil industry is a further example of its strategy for securing access to natural resources around the world. Rather than purchasing oil on the global markets, as the United States does for the most part, China prefers to secure control of the resources it needs at the source. However, because China's oil firms lack the technical capabilities and political clout of the Western majors, Beijing prefers to deal with regions that are out of reach to the competition.

This practice has sparked a growing backlash across Africa to China's policies. Many locals see Beijing's actions as protecting corrupt and often dictatorial leaders. Beijing has attempted to counter this perception recently by investing in infrastructure projects in regions where the backlash is strongest, leaking reports of its unhappiness with the most controversial leaders, and granting local businesses better access to China's markets in some industries.

The investment in Somalia's Puntland province still looks risky, even by Chinese standards. The deal appears to have been struck with the local officials in the province that claims autonomy from the transitional, central government. However, the president of the T.F.G., who is from the region, was involved in the deal. The prime minister of the T.F.G. appears to prefer another model to attract investments, passing a national oil law that will clarify the legal questions that prevent Western firms from returning to Somalia. The Chinese deal may well fall victim to the political infighting that is likely to follow.

Still, the T.F.G.'s claim to control Puntland appears to be weakening as the central government remains frozen in a state of political collapse. Two days after the Financial Times first reported about the Chinese oil deal, the much awaited national reconciliation conference had to be delayed because security for the meeting could not be guaranteed in Mogadishu. Given the T.F.G.'s uncertainty, Beijing's decision to work with the local representatives in Puntland may well prove to be enough, and China could soon be pumping Somali oil, if it even exists.

Report Drafted By: Adam Wolfe

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