China clearly has a strategy in the form of its 5-Year plans to ensure that economic development is met. In the 11th 5-Year Plan there were clear guidelines in respect to implementing a mutually beneficial and win-win opening up strategy, building a resource-efficient and environment-friendly society, raising the level of opening to the outside world and ensuring harmonious social development.

In each of these guidelines, the CIMG is of the opinion that foreign invested firms in China can play a role and ensure that on every level that China becomes a global player in the world community. On observation however, many of the ideals as stated in the 11th 5-Year Plan may be at risk of being achieved slower or not at all.

Post WTO the international community has witnessed numerous Chinese projects abroad meeting resistance or failing, increasing levels of pollution and environmental degradation in China and an increase in macro economic issues such as resource and energy sufficiency rise in China. At the same time a number of barriers have been implemented slowing the flow of FDI into China’s mining sector leaving foreign investors wary of China’s investment climate.  The CIMG believes this is slowing the flow of best business practice into China’s mining sector, not enabling domestic enterprises to engage abroad at a competitive international level and slowing the pace for China to reach a goal of resource security. The CIMG asks, “Is this a win-win outcome as outlined in the 11th 5-Year Plan?” and “Will this be conducive to sustainable harmonious growth in China?”

The grand process of China "going global" has been underway for over a decade. China has become a dominant international source of capital and is investing overseas at a rising pace. Since China's entry to the World Trade Organisation in 2001, foreign investors have salivated at the prospect of investing into one of the great markets of the world. During this time the world has seen China’s economy grow at breakneck speed and its needs for resources, energy and management grow to meet the demands of this growth.

The economic story about China told abroad over the past decade and more has been about the phenomenal amount of foreign direct investment (FDI) flowing into the country. As of 2007, this stands at over $700 billion in stockholdings. True, about 40% of that derives from the Hong Kong special administration region (SAR) or the British Virgin Islands, and therefore is very likely to originate in China. Yet even with this qualification, China's ability to attract FDI has been impressive; since 1992 it has regularly featured as one of the top three FDI destinations. FDI in mining however has been historically small. 

It has been argued that maybe FDI in mining may not have served its main purpose. For a couple of years, the Chinese government has been signaling that all the money coming into China has not brought the resources, technical partnerships and know-how that were originally expected. Given the scope and breadth of China’s huge mining industry it is possible that the benefits could not be clearly seen or realised.

A new trend is has emerged to gain these benefits through Chinese overseas direct investment (ODI). To secure resources China’s acquisition of overseas assets is providing the channel not only for much needed commodities but also for technical partnerships and know-how that were thought to have been missed through FDI. Even though this may be the case, the CIMG is of the opinion that Chinese ODI in resources is a challenge for Chinese firms.

Chinese mining enterprises contain few global leaders, perform questionably in innovation, and many projects have slowed or stopped altogether. Chinese mining enterprises are experiencing what many foreign mining firms experience in China. The challenges of working in a foreign country are immense. Apart from cultural differences Chinese enterprises face issues with standards, labour, management integration, best business practice and community engagement.

One possible solution to mitigate these issues and to increase the chance of sustainable Chinese ODI and a greater number of “champion” Chinese mining enterprises is to further open the door to foreign mining enterprises in China. Doing so would allow the flow of international standards to be integrated into China’s mining industry, encourage the adoption of best business practice amongst the domestic enterprises and more. This would provide China a higher success long term of its domestic enterprises and ODI and ensure that it secures FDI in China and ODI abroad. This will lead to an overall increase in available resources for China and its ever growing economy.

It is no surprise that China is still experiencing a period of intense economic growth. Since the start of reforms, China's economy has surged, growing at an average rate of almost ten percent a year. Some coastal areas have grown at nearly 20 percent a year. In that period, China's GDP, in real terms, increased nearly five times. At this moment China is one of the fastest growing economies in the world and the growing prosperity has improved quality of life in multi-faceted ways - reducing infant mortality, improving child and maternal health, and lengthening life expectancy, for example.

This growing prosperity is leading China's huge growth in its domestic demand for goods and services, infrastructure, human capital and of course resources. If one were to look at scale and pace of China's urbanization it is clear that China's infrastructure needs will continue at an unprecedented rate. If current trends hold, China's urban population will expand from 572 million in 2005 to 926 million in 2025 and hit the one billion mark by 2030. In 20 years, China's cities will have added 350 million people—more than the entire population of the United States today. By 2025, China will have 219 cities with more than one million inhabitants—compared with 35 in Europe today—and 24 cities with more than five million people. Apart from this here are other projected infrastructure needs of China (source: World Bank):

• 17,000km of expressways by 2020 – annual average = 1400km
• 300,000km of rural roads between 2006-2010 (50% growth) – annual average = 25,000km
• $42bn of investment in railways in 2008 and $200bn by 2010 - annual average = 17,000km

It is clear to see that China's commodity consumption will not abate and will remain driven by industrialisation, infrastructure investment, urbanisation and rapidly growing domestic demand and not by exports. To a large extent, China’s commodity consumption is continuing to drive world commodity prices in bulks (coking coal, thermal coal and ferrochrome), base metals and precious metals especially. It quite well known that the global reserves for most commodities are low, creating a supply constraint and higher prices. At the same time it is well known that in most cases Chinese mine production cannot meet domestic demand.

This upward trend in prices shows the rising need for commodities and low supply that could place China in a precarious position in terms of is future resource security. Increase in commodity prices will need to be passed on to the end user.

This is happening at a time while there is a period of marked structural change in China’s mining industry.  The process of streamlining mining operations from 200,000 mines in 1996 down to today's 100,000 or thereabouts will present additional challenges for China to meet its commodity needs. 

The question the CIMG asks is, “What else can be done to allow China to meet its future resource needs?”  It is clear to the CIMG that foreign and domestic investment in China’s mining industry is only a fraction of its potential.  For example, there has been insufficient investment in the exploration of base metals for a number of years.  China’s geology and size suggest great potential for the discovery of world class mineral deposits. 

Further investment in exploration and creating regulatory frameworks for efficient and transparent investment, could assist China to become more self sufficient in many of the metals currently being imported in ever increasing volumes.  However, this move to self-sufficiency can only take place if exploration and development are encouraged in a coherent and holistic fashion.

What is at stake for Chinese ODI?
Slow Business Practice Transfer: Just as anywhere, investors need to be confident that the current regulatory and policy regime will be enforced consistently. A lack of enforcement suggests that domestic enterprises may not be aware of best business practices and implies use of uneven playing fields. If there is in an increase in confidence and “true” development of “national treatment” within China with this will no doubt reflect positively on Chinese ODI. 

Increasingly there is a sentiment that Chinese ODI is risky and may not address issues related to operating to best business practice methodology. This causes governments, investors and communities to be wary of Chinese ODI and leads to a less than positive sentiment towards Chinese investment.

Best business transfer for Chinese mining companies could take place within China and prepare Chinese enterprises for their “go-abroad” investment strategies. Allowing foreign companies to participate with reduced barriers in China may allow foreign companies to demonstrate best business practice in action and not only theory. At the same time on a general scale domestic enterprises would benefit by becoming more competitive on a global scale and allow them to acquire better projects and potentially meet and deal with better quality partners in the ODI process.

Challenge to meet International Standards: There is a concern that China has pursued the development of unique national standards as the basis for its technical requirements, despite the existence of well-established international standards. Reliance on national standards could serve as a means of protecting domestic companies from competing foreign standards and technologies in China.

However, these China-specific standards could create significant barriers for Chinese firms abroad as these domestic standards may not be accepted internationally. This leaves many domestic enterprises abroad to increase their costs to adopt international standards reducing the return on their projects.

The majority of Chinese standards-setting bodies are not fully open to foreign participation, which will only lead to the lack of development for Chinese standards to develop in line with international standards.

Lack of Exploration and Less Overall Resources: China has not developed a program to ensure a pipeline of world class mines to come on stream over the next few years to feed increasing domestic demand. The geology of China suggests that world class deposits could exist especially in the West. Exploitation of these deposits when added to the China's acquisition of resources through ODI would meet domestic demand.

The long time periods required for exploration and development suggest that currently China must purchase mineral commodities from abroad and/or invest in overseas mines to ensure supply security over the next few years.

This however, will only be a short term solution that will primarily benefit nations with vast natural resources. Over the long term, increased exploration in China will benefit China and add the resources needed to meet domestic demand.

Benefits of FDI for the Domestic Mining Sector
The international mining community can play an important role in working with Chinese mining enterprise and government to meet the future resource needs of China. As China’s mining industry develops it must be noted that most other mining nations have gone through similar development cycles and foreign companies have much to offer during these times. Apart from providing capital the international community could provide technology, management expertise and sustainable mining practices.

The reality is China is a resource rich country and foreign participation can help China bring online a pipeline of world class mines to meet the long term resource needs of China.  Over the long term foreign participation in China’s mining industry will benefit China. Some of the benefits include:  

Higher standards and best business practice that will create world leading Chinese mining enterprises

• More efficient exploration, discovery and development of resources using the world's best technologies and experience
• Efficient and effective management techniques that can help make the industry more cost effective, assist consolidation, and improve resource utilization rates
  Better environmental protection using the world's best technologies and practices
• Implementation of advanced social practices to protect local communities
• Reduction of China's dependence on overseas supply
• Economic and social benefits at the national, provincial and local levels
• Enhanced access and reputation of Chinese enterprise at international capital markets to provide substantial long term investment
• Improved identification and assessment of overseas projects for acquisition.

Increasing FDI in China to assist Chinese ODI     
Within the mining sector there are a number of instances that appear to breach China's GATS commitments on national treatment and market access, which require that foreign companies can operate in China and are not treated less favorably than local ones. The key message is that the CIMG feel that the restriction on FDI in China’s mining sector is increasing and in the long term will greatly affect the Chinese people, economy and enterprises. As mentioned earlier FDI in mining may not have served its main purpose in the past, but now there is a window of opportunity for FDI to show its true value. This will come in the form of assisting and working with Chinese enterprise and ODI.

China clearly has a strategy in the form of its 5-Year plans to ensure that economic development is met. In the 11th 5-Year Plan there were clear guidelines in respect to implementing a mutually beneficial and win-win opening up strategy, building a resource-efficient and environment-friendly society, raising the level of opening to the outside world and ensuring harmonious social development. In each of these guidelines, the CIMG is of the opinion that foreign invested firms in China can play a role and ensure that on every level that China becomes a global player in the world community. On observation however, many of the ideals as stated in the 11th 5-Year Plan may be at risk of being achieved slower or not at all, given what appears to be the introduction of barriers for foreign firms to operate in China. This is leading to feeling of uncertainly to invest further in China amongst members of the international mining community. This could cascade to less opportunity for Chinese enterprises that are seeking the partnerships, projects and know-how to capitalize on domestic and international opportunities. 

As a case in point, Chinese ODI is realising that local communities also require confidence that jobs will be created and the environment will be protected. Working with communities is where Foreign companies excel. Such knowledge could be transferred into Chinese enterprises through increased foreign participation in China’s mining industry.  At a time when there is much competition for deposits, there is a need to look at the environmental aspects of how land is developed and then rehabilitated in a sustainable manner.  Community participation in all these aspects will ensure the right balance is struck between the creation of local jobs and the protection of the environment.  This will make local communities more confident in the viability of a project and Chinese ODI.

China's future is dependent upon the ability of government to confidently provide the primary resources that will fuel China's remarkable development. With appropriate developments, CIMG anticipates great improvements in China's mining sector.  Given China's natural wealth, there is potential for China to become a leading player in many commodities and to secure its needs for a prosperous future.