Fueling the Chinese Economy

LINDSAY: Welcome, everyone, to tonight’s on the record Council on Foreign Relations meeting I am Jim Lindsay, the director of studies here at the Council on Foreign Relations and it is my great pleasure to introduce tonight’s guests of honor, Elizabeth Economy and Michael Levi Liz Economy is C.V. Starr senior fellow and director of Asia Studies here at the Council Liz has published widely on China and U.S.-China relations during her time here at CFR She is the author of “The River Runs Black: The Environmental Challenge to China’s Futureā€, which is a classic in the field and I highly recommend it to those of you who have not yet read it Besides writing books, Liz is a master of the short form publication, contributing regularly blog posts at the awarding-winning CFR blog Asia Unbound, which I’m required by contract to tell you this (LAUGHTER) You can find at CFR.org Liz is also vice chair of the World Economic Forum’s Global Agenda Council on the Future of China. And she serves on the board of the China-U.S. Center for Sustainable Development To Liz’s right is Michael Levi. Michael is a David M. Rubenstein Senior Fellow for Energy and the Environment and he’s also director of the program on Energy Security and Climate Change here at CFR Michael’s many publications have covered topics such as arms control, energy security, nuclear terrorism and climate change His book “The Power Surge: Energy, Opportunity, and the Battle for America’s Future,” which was published last year is a path-breaking analysis of the energy revolution that’s currently undergoing — we’re undergoing here in the United States Like Liz, Michael is also a master of the short form publication format with his blog at CFR Energy, Security and Climate, which provides cutting-edge analysis, not surprisingly, on energy, security and climate change matters; and you can find it, too, on CFR.org But we’re not here to talk about their success in blogging (LAUGHTER) Or about their previous books. We are here to talk about their new book that they’ve written jointly, which I could hold up here, called “By All Means Necessary: How China’s Resource Quest is Changing the World.” So, please join me in welcoming Liz and Michael (APPLAUSE) First off, congratulations on completing the book. Since I got to see it at various stages during manuscript form, I know how much time and effort went into producing it And I note that they say you cannot judge a book by its cover, but I think the cover of the book is quite attractive. But presumably, the title says something about the book’s contents So, at the risk of violating the moderator’s protocol, which is never to ask two questions at once, I’m going to ask two questions at once First, Liz, why by all means necessary? And Michael, how exactly is China’s resource quest changing the world? Liz, you go first ECONOMY: Thank you. And thanks very much, Jim, for hosting this event. It’s a real pleasure for us to be here So, by all means necessary really refers to all the tools that China brings to the table when it goes out to secure resources from abroad. These are tools that in many cases other countries and multinationals either can’t or simply don’t utilize Let me just talk about three. So, first, right, when China goes out to get iron ore from Gabon, from example, it may not simply have one state-owned enterprise go out to — to access that resource; but rather, Xi Jinping, the president of the country, will lead a delegation made up of ministers and state-owned enterprises and sort of lay out these vast trade, aid, and investment deals A second way is that, in fact, you can see that China is much more comfortable in striking backroom deals, right? So, you can find Xi Jinping or other members of his government coordinating with other leaders of countries to strike deals that will bring benefits to either side So, I think that if you look at the way in which China approaches its deal — deal-making, you see that it’s a sort of different scenario in many respects from the way that the United States of our multinationals are able to go out doing — doing things

The third one I’ll just — I’ll just mention briefly is sort of the ability of China to bring low-cost financing to the table — low-cost labor. Here, too, this is something that makes it very difficult, on occasion, for our multinationals to compete LEVI: So, China’s resource quest is changing the world in a host of different ways. And we talk about a lot those in the book. It’s changing the world through the impact on the ground of its investments, in labor, in the environment It’s changing the world through the way it — its military increasingly thinks about security for sea lanes and bringing the resources home. And it’s — it’s changing the world through the impact that its resource relationships have on how it behaves in the security council and bilateral relationships But what surprised us as we worked on the book and as we worked through this is that for most of the time, all of those are overshadowed by something much simpler — the impact of China’s resource quest through trade China is an enormous country. And regardless of what its strategy is, its sheer size, its sheer demand for imports — it’s going to have wide spread consequences for global markets and for societies and for security as a result China’s demand for resources ranging from oil to iron ore has sent prices up. That has consequences for the economies of countries that consume these resources, that produce them — regardless of whether China actually has any direct relationship with those; those high prices have security spillovers, they have governance spillovers So, when you come back to it, there are all these things happening. We have to pay attention; we have to deal with them But this one dominant piece may not be so sexy — may not have all the great stories with it. But it really is at least one of the central ways that China is changing the world LINDSAY: Fair enough. Thank you for painting the big picture. We can now — sort of want to drill down I suspect everybody in the room here has a sense that China is emerging as a global powerhouse — that it’s going abroad in search of commodities and what have you But I’m not sure, Liz, that we have a really good sense of where China is sort of focusing its attentions and — and sort of what commodities it’s going after So, perhaps you could just sort of paint for us a picture of where China’s — Chinese firms are operating, where they’re particularly concentrating in, what kind of commodities they deal with; that would really help ECONOMY: Well, when you have the second largest economy in the world that’s been growing at a rate of, you know, roughly, you know, 10 percent per year for almost 20 years until recently, they’re going after everything everywhere So, you know, we look in the book at minerals; we look at oil and gas; we look at water and we look at — minerals, oil and gas, water and LEVI: Land or food ECONOMY: Land, thank you — and land or food And here, we see that China is everywhere It’s in Africa, it’s in Southeast Asia, it’s in Latin America and it’s, you know, also in advanced industrialized countries like the United States, Canada and Australia; and we look at those separately from sort of the developing world So, it’s not particularly focused, you know, in one region. I mean, I think there’s been an enormous amount of attention paid to China’s engagement in Africa, for example. But we’ve found that China’s very deeply engaged, for example, in Latin America, as well — and certainly in its own backyard in Southeast Asia LINDSAY: Obviously Michael, you know, one of the consequences of China going abroad in search of commodities is that it’s given a boost to commodity prices And I think, you know, when — when sort of the Chinese economy really began to rev up, you began to hear a lot of stories about how in essence the Chinese are going to remake these markets — we’re going to move away from a market-based approach to the distribution of commodities to its variously called state capitalism where they would lock up commodities under long-term contracts and it would really fundamentally change the game. Is that what you see happening? LEVI: It’s not what I see happening in most cases. And more than that — and I think this struck us both as surprising when we’re working on the book — there are occasions where China not intentionally is actually leading the world to a more market-based approach So, the piece you hear a lot is that China is locking up oil and is going to move us away from a global market that sort of separates economics and politics to one where they’re much more intimately tied But what you find is even as China acquires more resources — gets more equity oil investment, it’s still trading most of the product on the world market. It’s still trying to get a high price or as high a price as it can for it And so, it turns out that the — you know, the world economy — China may be big, but the world economy is pretty big, too. It’s a powerful system. It’s pretty resilient The — the surprising case — and I never expected to find iron ore interesting — but

this is the surprising case, is iron ore Iron ore markets are not like the markets we think of where everyone goes and says and sort of yells their buy and sell prices and you come efficiently to a nice in-between It used to be one dominated by three big players, by a handful of big sellers, a handful of big consumers; they would get together and do very structured negotiations every year, come out with a price, everyone would pay it. And then you’d come back the next year and you’d do it again And when China entered this as a big buyer, it didn’t seek to upend it. But you had a host of small Chinese steel mills, and they all went out and they all wanted to get their own deal; they didn’t want to play that game And the Chinese government, for all its power, wasn’t able to get them to do what it wanted All those small players doing their own deals created an opportunity for a real market to emerge. And then a few other pieces catalyzed action and over the course of a couple years, the world iron ore market was transformed from this structure — a pretty political one — to a much more market-based one So, a surprising outcome; but again, I think a sort of example where whatever impact China has — even if it’s not the one you expect — because it’s so big, it’s going to have consequences LINDSAY: OK. You know, the — the notion of Chinese companies going abroad probably shouldn’t have been surprising to people After all, U.S. companies, when the United States became economically powerful, went abroad as well. But typically, when U.S. companies go abroad, they’re not doing the bidding of Washington D.C And one of the sort of flip concerns of the whole China is going to recreate a mercantilist economy is that Chinese firms being state-owned enterprises — SOEs is the in-house acronym we use for them — go abroad that they will be doing the bidding of Beijing; that the idea isn’t necessarily to advance economic, per se, but broader political interest Is this what you’ve found in the book, Liz? ECONOMY: It’s a — it’s a mix, really. And here, too, as Mike said, it was a little bit of a surprise, I think First off, yes, the Chinese government does want to direct companies to certain resources and the National Development and Reform Commission sort of lays out what resources it needs and it does put together these big plans for individual countries But then it’s up to the companies to decide to participate in those plans. And in many instances, we’ve found, you know, that investment would be announced by the Chinese government — for example, in Brazil, there’s been something like $70 billion worth of investment announced since 2007, but the realized investment is about a third of that Now, part of that has to do with, you know, challenges that any company would face doing business in Brazil. But another part of it has to do with the fact that, you know, Chinese companies sometimes simply don’t want to play the way that the Chinese state is telling them to The second thing that, you know, sort of is a little bit different than what we had anticipated in terms of the sort of overall control of the Chinese government in the sort of resource quest is that there are many more small actors So, it does vary by sector and — you know, oil and gas, they tend to be, you know, fewer and — and major players. But in the mining sector, for example, you know, only a third of the companies are state-owned enterprises and, you know, the rest two-thirds are — are sort of smaller scale firms And you see them going out, right, without any sort of permission or direction of Beijing And in many cases, they cause a lot of problems for the Chinese government For example, in Ghana we saw last July that, you know, the Ghanaian government kicked out, you know, 4,500, 5,000 Chinese miners. They were illegal miners; they were, you know, their environmental practices were poor And yes, the Chinese government was upset and there’s a little bit of retaliation going on. But in point of fact, it certainly wasn’t the Chinese government telling those miners to go out and secure gold from Ghana. Thanks LINDSAY: Let’s talk a little bit about impact, OK? Because obviously, with Chinese companies going out, they were a big factor behind boom in commodities — we saw over the last decade But now, when I open the pages of the Wall Street Journal, what I keep reading about is that commodity boom is coming to an end The great growth that Brazil received, for example, because of a very sort of vibrant Chinese market seems to have cooled down Is — is something fundamentally changing in — in China’s quest for commodities, Michael? Is this a leveling out? Is it cyclical? (Inaudible) LEVI: I think the world is catching up LINDSAY: OK LEVI: And look, you have to look at individual commodities one by one. But when we were writing the book, we decided to start, instead of with predicting the future, by looking at the past — and asked why is it that rapidly growing Chinese demand for commodities drove up prices so much in so many commodities over the last decade?

Because the reality is, there are a lot of things in the world where demand increases rapidly and the price stays roughly the same My iPad doesn’t cost more than it would have a few years ago, but demand has gone up And — and what you find in so many of these sectors is that the lead time for development is enormous. And to compound that, a lot of them were expecting very limited growth and so, they have to — their sectors really had to shift gears quickly in the places where either the sector was more responsive or able to be more responsive or they were already expecting growth for a lot of other reasons — aluminum is an example; you didn’t see the same kinds of price run-ups But now we are seeing these areas catching up. There has been a lot more exploration; there is money put in, mines that take time to develop and technological progress And we’re seeing this in the United States right now. We would not be having an American oil and gas boom, ironically, if it were not for China’s global resource quest. The prices would not have been there to prompt that response that’s happening here that’s moderating prices in turn, had we not had that initial spark LINDSAY: So, higher prices encourage producers to invest to bring more production online, which drives prices back down ECONOMY: Yes LEVI: Which stops them from rising too much more LINDSAY: Much more LEVI: Further. Look, we’re not going to — to sit here and predict exactly how the future will turn out and you can out-surprise us But if I had to pick a surprise now, it would be on the downside, because when — you know, the thing that can have the biggest impact on prices is when the world turns out in a way differently from what you expect We now expect continued massive growth in commodities demand. So, if you want a surprise, you should look for a surprise on the downside LINDSAY: OK. I — let — question on another aspect of impact, Liz, which is the impact of China’s resource quest abroad on environmental practices in other countries Obviously, you turn the TV on and you — and you have written quite extensively before it was a lead story in the news about what Chinese growth is doing to the Chinese economy Is China doing abroad the things we sort of see happening in places like Shanghai and Beijing? ECONOMY: Yes. And so, even I think more broadly than simply on the environment, when you look at any issue of sort of governance, whether it’s the environment or whether it’s sort of corruption issues or whether it’s labor issues, we found that China at home is really China abroad. So, if you want understand China’s impact abroad, you just look at whatever it is that they’re doing at home So, the fact that a lot of Chinese companies, for example, don’t undertake environmental impact assessments at home means that when they’re in Zambia, they’re pretty much also not undertaking environmental impact assessments — if they can get away with it And different states have different capacities So, I think one of the other findings we had was that the international systems can be a constraining factor — so that the way that, you know, China can operate in, you know, Zambia is quite different from the way it, you know, can operate in Brazil — even though it may try to do the exact same thing But — but certainly, there has been enormous environmental impact from Chinese companies going abroad. And it’s a source of significant tension in communities wherever you look — whether it’s Latin America, Africa or Southeast Asia; there’s a lot of concern about what China is doing — what its enterprises are doing, in terms of the environment LINDSAY: At this point, I’d like to bring audience members into our conversation. I have to ask people — if you would like to be called on, raise your hand — I ask that you wait a moment ’til we bring the microphone over. Please speak directly into the microphone and stand, state your name and affiliation I’m going to go all the way in the back — we’re — start in the back and bounce around Oh, OK — I see (LAUGHTER) ECONOMY: She was just waving at us up here Hi LINDSAY: Oh, OK. Well, do you want to wave back and then move on? I’ll start at the front then, sir — Dexter (ph), if you could QUESTION: Real alarm — no. Liz, I wanted to ask you on the financing side rather than the resourcing side, how much of this would or could happen without China’s sovereign wealth funds? I mean, is all of this supported by CIC and sovereign wealth funds or none of it? I don’t — I have no idea ECONOMY: No, I think — Jim Mann (ph), by the way, since you didn’t identify yourself (LAUGHTER) But no, in fact, China’s sovereign — CIC didn’t really get into the natural resource business until maybe five or six years ago; and then it was directed by the Chinese — by Beijing to do so And so, a lot of what we’ve seen taking place over the past 10 to 15 years is not related to CIC investment. You know, the majority of the finances come through X China, Exim Bank or the China Development Bank — those are really the powerhouse players when it comes to the Chinese investment in the resources LINDSAY: Fair enough. Right here

QUESTION: Priscilla Clapp. I’m retired from the State Department In the areas in which I’m concerned, China is having to change its ways on environment and social policies, importing labor, training local labor. Do you see that happening across the board, or is it just special for their neighbors? ECONOMY: So, Burma Myanmar, for example, I think there is a process of learning going on. And in terms of China’s general corporate social responsibility practices, there is pressure coming from the bottom up, from the outside in and from the top down And so, certainly there are NGOs, for example, as you know, going into Burma Myanmar from China and talking to local communities and going back and saying to the Chinese companies and to Beijing, you know, “We really messed up here,” right? QUESTION: (OFF-MIKE) Chinese NGOs? ECONOMY: Chinese NGOs, like Green Watershed, for example. You know, sort of undertaking studies and saying, you know, “You need to consult with local communities,” right? You can’t simply deal with the officials, right? You need to engage the local population So, there are — there are people within China, you know, at the grassroots level, who are — I think are bringing news back about what needs to be done You know, we found that places like Peru, for example, that in the first Chinese investment back in the mid-1990s and the Shougang Mining Company — you know, terrible, terrible practices, terrible reputation But over time, you know, as six, seven, you know, eight more mining companies have come from China, they’re learning from Shougang’s negative experience. And they’re taking advantage of an infrastructure in Peru that’s been developed by western companies, right, and hiring western consultants or even taking on a local, you know, CEO to manage things — to deal with community relations and again, to try to do things differently And finally, I would say — and I mentioned the top down. That really is Beijing recognizing, I think, that its companies are causing a lot of problems for their reputation — and the Foreign Ministry certainly feels under enormous stress because of what the Chinese companies have been doing, especially in places like Africa And so, they’re putting in place a lot of regulations. I mean, the — you know, the Shenzhen Stock Exchange has a set of regulations dealing with companies who want to go public You know, you can’t have some sort of environmental black mark against you, right? Exim Bank — we’re not going to loan you money unless you’ve done an environmental impact assessment But as, you know, we mentioned earlier, China at home is China abroad. And to the extent that any environmental regulation or — or, you know, stricture is somehow not being enforced on the home front — it’s still not being enforced necessarily abroad. I would say that enforcement is spotty So, corporate social responsibility — those things are developing in China and they’re developing in terms of Chinese practices abroad But I would say we’re still at a kind of nascent stage LINDSAY: We’re going to go over here. Sir? QUESTION: I’m James Turner from the Daniel Alexander Payne CDC You mentioned that water and food were two of the other things that you were looking at. Can you speak a little bit more about those, particularly the impact on the countries exporting to China and the human impact in the potential for conflict? ECONOMY: Sure. So, in terms of water, it was a different kind of investigation that we did, because we were looking at China’s control of water within its — within its boundaries and how it affects other countries So, you know, looking at the impact of what China does with the Ili River, you know, within China going up into Kazakhstan or, you know, the Yarlung Tsangpo and how it flows into the Bramahputra But just — so, it’s a little bit different and we can talk about that. But the land issue is one that sort of mirrors the other ones a little more closely And here, too, one of the surprising things we found was that China’s actually not the largest sort of overseas investor, right, in land — because what you read, of course, is that, you know, China’s some kind of, you know, cookie monster, right? Just out there gobbling up (LAUGHTER) All the different land. But in point of fact, the largest overseas investors are first Canada, then the United States and then China. So, I think that helps give it a little bit of perspective But I think there is a different kind of concern when the Chinese companies go out and invest in land, and we saw it — we’ve seen it in Brazil and we’ve seen it in Kazakhstan. There is this sense that these state-owned enterprises are coming to steal the land somehow, right? And there’s just a — a different nationalism that arises that’s a little bit stronger than you see when it’s a U.S. company or some other kinds of companies going out And so, a number of countries like Brazil, like Argentina put in place laws, right at the time when the Chinese were really going out, that they said were not in fact directed against the Chinese, but pretty clearly had a significant China component to them to limit

the amount of outside investment in their land So, there’s a lot of concern out there about the nature of Chinese investment that perhaps didn’t exist quite as much for the earlier entrants like the United States and Canada LINDSAY: Sir? QUESTION: Thank you. My name is Roland Amore I’m with Oppenheimer I have an observation and a question. As you know, the world commodities are transacted in dollars — U.S. dollars. And I think if you look back over the last seven years or eight years with the increased demand, it wasn’t as great, I think, as the prices suggest; you had Europe faltering, you had the U.S And I think there’s a good argument that could be made that all the loose monetary policy has actually exported a little inflation around the world in the form of commodities. And but that brings me to my question — and that’s the one of currency As the official reserve currency of the world, all the commodities are certainly traded in — in dollars. As China gets bigger — and they’re making noises now about a change of currency. They — they can’t be number one unless they’re the official world reserve currency, or there’s third party currency — a basket of commodities So, how does currency play into your observations and your research? LEVI: So, it’s a LINDSAY: Want to take a crack at that, Mike? LEVI: Yeah. So, it’s a great question. Over and over, throughout the research, whether it’s in this particular question or elsewhere, what you find is the resource demand has a very big impact. But for it to have these wider consequences, a whole bunch of other pieces have to come into place And because the resource part is sort of out ahead, you don’t see some of those following consequences. And I think when you look at the sort of — the shift in the use of the Chinese currency, this is one of those So, could China insist on its resource trade being transacted and you want — well, it’s tough. If it has nicely balanced bilateral trade with a country and a lot of leverage over it, then maybe it can and they’ll be confident that they can, you know, buy various Chinese products and exchange But if it isn’t, then you need things like fundamentally different access to Chinese markets, different regulation, different legal approach so that people feel like they can actually use Chinese currency as a store value, not just as a technical way of going back right away and buying the thing you were — you were planning to buy essentially as a — sort of a — a very thin mask for a barter system So, while the resource piece I think drives one part of it, you have to be looking for the other pieces to come into place. And — and those are going to move much more slowly Those require decisions by China It’s not just a matter of Chinese growth creating demand — it’s a matter of very deliberate transformation LINDSAY: Yes, ma’am? QUESTION: Paula Stern (ph) You talked about iron ore and I’d like to talk about oil. And particular, in this world where we’ve had OPEC as a cartel — how China plays in that world, both — you know, more importantly to me, going forward Demand is obviously there. But it seems to me that unlike — well, it’s similar from your iron ore situation in the sense that you really do have a — not a market operating that China is trying to participate in. Can you talk a little bit about that? LEVI: So, I — I’ve never been sure whether OPEC is hugely influential or mostly paper tiger But the — but several individual members of OPEC are clearly influential, whether collectively or not, by restraining production and driving up prices. And China’s demand for oil has been critical over the last decade in allowing them to do that If you have several countries that want to restrain their production in order to send up prices, it is much easier to do that when world demand for oil is rising rapidly. It is much easier to divide a growing or even stagnant pie than to divide a shrinking pie And what China provided over the last decade or so was a growing pie. And that allowed countries to restrain their production, make more money producing less than they otherwise would have Had Chinese demand not been growing, we would’ve had a repeat, essentially, of the 1980s where OPEC countries were not able to be restrained So — so, China is really a critical catalyst

there I’ll give you just one — one quick historical point. If you look back at the projections made by various companies or by international organizations circa 2000 for the world oil market, the thing you expect based on the sort of popular discussions is to see them massively lowballing Chinese demand In truth, though, they don’t. They greatly overestimate how much the big old producers will be providing. And because they overestimate it, they get prices wrong. That I think is at the core here — is those two pieces working together to drive up prices Now, you ask about the future. We now have supply coming from all sorts of other places, so it’s not just countries that strategically restrain it. And you have economic weakness around the world and perhaps not as much oil demand from China as people expected That starts to change the equation, and it’s why I’m skeptical that you’ll see a repeat of the last decade’s run-up over the next decade LINDSAY: OK. Sir? QUESTION: Hi. I’m Sean Barnett from the Institute for Defense Analyses And I had a question about what impact do you see China having with all that they’re doing around the world on the ability of other nations to obtain scarce resources — scare commodities? ECONOMY: So, your question is basically is China in some way limiting the ability of others to — to access resources? QUESTION: (OFF-MIKE) Right, right. Or perhaps to drive price up to the point where it’s — it’s (inaudible) ECONOMY: Well, I think, you know, it — within our book, what we’ve seen is really that, you know, Chinese are enormously competitive And to the extent that, you know, their practices as I mentioned as sort of backroom practices can kind of shut out companies. I think that’s problematic, right? They don’t really have the same kind of Foreign Corrupt Practices Act that we do. They have something that’s along those lines, but there’s actually no monitoring or enforcement capacity associated with it So, I think they do provide a number of challenges You know, again, those sort of — those tools that I mentioned at the beginning — the low-cost financing, the low-cost labor — you know, being able to, you know, export, you know, a hundred thousand or more, really — a hundred thousand to a million Chinese workers, you know, to undertake these infrastructure projects that go along with the mining projects I mean, I think that makes it challenging for companies to compete. But I think as Mike was describing, and in terms of the price rises — you know, the rise in commodity prices, you know, it really depends on the market; really depends on which commodity you’re looking at And in some, such as, you know, food stuffs — grain, other developing countries are contributing to price rises. And so, there tends — there tends to be this, you know, desire somehow or because China occupies so much space in the media, you know, not to recognize that there are other actors out there You know, India, for example, where we look and see China in Africa and — and other places sometimes maybe not doing exactly what I think — India’s often right side-by-side. So, I think our book does focus on China, but it’s important to understand there are other actors out there, as well LINDSAY: Julia? Yep QUESTION: Congratulations LINDSAY: Introduce yourself QUESTION: Oh, Julia Sweig with the Council on Foreign Relations And I think about Brazil a lot. Both of you have been there as part of researching this book, but I’m not going to ask a Brazil question I want to ask a broader question, which is you mentioned the downside for Chinese foreign policy of having companies playing a little bit too ugly in fields of afar in Africa and that having consequences that are now being felt back in Beijing So, a downside on the environmental practices — but what about the upside? Could you give a couple of examples where China as a state and Chinese foreign policy experiences the upside of having such market power in different regions of the world? And you can include Latin America or Brazil, if you’d like. Thank you (LAUGHTER) LINDSAY: Any upside, Michael? QUESTION (?): OK (LAUGHTER) LEVI: Upside for China? QUESTION: Yeah LEVI: Sure. Look, plenty of American companies would love the support — at least in some ways — that Chinese companies get from their government when they’re trying to secure investments And when you have a company that has the capacity to develop a resource, getting access to the actual resource is an opportunity for you to profit So, when it goes well, you can make money It contributes to the — it contributes to the state. That’s — that’s the kind of way that China benefits

I think there’s a more diffuse way that China benefits, as well. China, as a big consumer of resources, benefits when resource supplies are more abundant And to the extent that Chinese companies can play a little bit differently — can take a little bit more patience out there; can take the support of banks that give them low-priced capital — they can actually increase the world’s resource supply Now, that doesn’t give China and advantage over others because that leads to low prices or lower prices for everyone. But it does benefit China as a major consumer And in some cases, the benefit is outsized in — if — in — in areas where China is the dominant consumer of a particular resource, adding to the supply is primarily a benefit for — for China So, there isn’t necessarily a pipeline where it goes piece by piece right back into China and, you know, everything is nicely sewed up. But China can create conditions where — Chinese producers can create conditions where Chinese consumers thrive LINDSAY: Sir? QUESTION: Eric Stein from Eaton Vance My question is you hear all these horror stories about when China goes into different countries, particularly Africa, that the countries feel used and abused at the end Are there any countries in your research that you thought kind of had the best experience with China and where other countries could learn lessons from how best to — if you’re a country coming in to deal with China? LINDSAY (?): Any — any upside for the recipients ECONOMY: Sure. I think you can — you can find at various points in time, especially when the Chinese companies first go in and when the Chinese are — are coming in with their largesse, right, those trade, aid, investment deals. There’s a lot of excitement about what China is going to — to bring to the table And in — in some cases, you know, the Chinese are going in and, you know, going in to invest in mines that others have left behind, right? And so, they’re simply not profitable, you know, from the perspective of a — of an American or an Australian company And — and so, the Chinese are willing to go in there — again, and sometimes, you know, with great patience and — and losing money; I mean, another thing that we discovered in our research is that, you know, something like 67 percent of — of Chinese overseas investment, not just in natural resources but across the board, are — are money losing enterprises, which I think is pretty striking; beats the world average by, you know, 17 percent (LAUGHTER) So, that’s — that’s pretty significant. So, I — I think in terms of one country that’s benefited — I mean, look, Mongolia, you know, certainly has benefited, you know, 90 percent of Mongolia’s exports — most of which are natural resources — go to China. Fifty percent of Chinese — of foreign direct investment in Mongolia is from China But does Mongolia feel thankful and grateful to China? Not so much (LAUGHTER) So, I think, you know, there’s — there’s a mix, right? And then some parts of one country may feel benefit while other parts certainly don’t LINDSAY: Fair enough. Sir? QUESTION: Thank you. Mark Finley with BP You know, the premise of your — of your book is kind of go abroad. And you mentioned the example of U.S. and other western companies going abroad early in their histories But the recent history is actually to come home. And so, you know, the U.S. last year had one of the biggest increases in oil production in the history of the world And my question for both the panelists is what lessons are Chinese government officials and companies taking from the U.S. experience in that regard, and are they the right lessons? LEVI: I don’t know that Chinese officials have taken a macro lesson from the U.S. — because you’re talking in particular about what’s happening in — happening in American oil and gas I doubt that there are a lot of Chinese officials saying, “OK, we need private land rights, open financial markets, so on and so forth and then we’ll have our own boom.” But at a tactical level, there is plenty of learning going on. And you see this as a pattern around the world. Chinese companies go abroad — not only to get access to the resource, but to partner with others so they can learn how to develop it — to get access to technology But in particular, and — and the U.S. seem to get access to management expertise to learn how you actually plan and develop these sorts of projects And these aren’t the kinds of things where you can go license a piece of intellectual property. You actually have to work alongside And so, you see Chinese companies, you know, putting up the money for a particular piece of acreage along this or that U.S. company — so, Sinochem taking a piece of Pioneer’s Resources in Texas, for example They’re not doing that because they’ve got an export terminal lined up and it’s all going to be shipped back to China. It’s the expertise and the understanding of technology that they hope to ship back to China so that they can develop their own resources. I think that’s the most consequential way that learning is going on LINDSAY: You want to jump in here, Liz? ECONOMY: No, that’s fine LINDSAY: I’m going to go — finally got somebody in the back. I’m going to go in the back now

QUESTION: Thank you. My name Genie Nguyen from Voice of Vietnamese Americans I have one observation and a question. First, I congratulate the book. I think the cover is very nice. And I particularly like this picture — I think it does mean something, doesn’t it? What (ph) make (ph) from the Southeast Asia and from where all the conflict’s happening — this little rock with the flag on it does (LAUGHTER) Mean a lot And then the other observation is thank you, Dr. Levi and Dr. Economy and I — happens to make me think of leverage and economy And my question is how do — how does all this — what is the implications to our U.S economy? How do we leverage it? And if I’m not mistaken, the U.S. has a lot to do with China’s rise recently, thanks to Dr. Kissinger and President Nixon and all the changes. And I believe that is a — Dr Kissinger has in a way given out a guiding hand to help China to move to this stage Now we have all the challenges and we’re talking more about how to embrace China and to better, neutral, profitable for everyone globally, especially from my country, Vietnam So, I’m asking you from your point of view, what recommendations do you have for the U.S., for ASEAN and for Japan, South Korea (LAUGHTER) LEVI: OK, why don’t — why don’t we do one QUESTION: And me LINDSAY: Why don’t we do one at a time before we (CROSSTALK) QUESTION: Let me just make one — one — one quick (inaudible) (CROSSTALK) LEVI: We’ve got a lot of — we’ve got a lot of recommendations QUESTION: No, no — the Asia-Pacific rebalancing LINDSAY: OK, OK QUESTION: That’s my LINDSAY: You’ve put an awful lot on the table Thank you. But LEVI: We have a lot of recommendations. I suspect we can each offer up one LINDSAY: OK LEVI: And — and let me offer up one that comes from an observation that — that you — made you ask what you ask, “What impact does this have for the U.S. economy?” The U.S. economy has been hurt by higher resource prices that have followed it — not for all resources. There are places where the United States is also a resource exporter But let’s say for oil. What can the United States do? The first thing the United States can do is become more efficient in its own use of resources The most straightforward way, both to remove pressure on prices but also to protect the US. economy, is to be more efficient in our own use of resources through policy and through technology development, which can then be applied by others LINDSAY: Liz? ECONOMY: I guess staying on the economic front, you know, we are trying to push forward on a bilateral investment treaty with China And I think we already have Chinese coming to look at our land now — you know, interest in from Chinese agricultural firms coming to buy up or invest in U.S. land. As Mike mentioned, we have them, you know, taking stakes in sort of oil and gas exploration So, I think — you know, one thing that we can do is to push forward on this bilateral investment treaty while at the same time sort of ensuring that strategic assets that we have, for example, such as rare earths, maintained within our own purview So I think, you know, we need to learn from the experience of others. We need to look at how China has behaved in terms of its resource quest — sort of protect our assets. But at the same time, as you say, take advantage of China’s economic rise, its growth and its very strong interest in investing in our assets here LINDSAY: But you have plenty more recommendations but you have to read the book (LAUGHTER) ECONOMY: Yeah LINDSAY: OK, we — we have time for one last question. I have to remind everybody before I ask — recognize a questioner that this meeting has been on the record, OK? I’m going to go to the gentleman in the back — you get the final question QUESTION: Thank you. My name’s Jamey Foger (ph). I’m in the Navy And I talked to the Chinese navy for our chief of naval operations. I saw in your book you make many references to the South China Sea — that’s of interest to us And the Chinese navy that we deal with in the Gulf of Aden is a completely different Chinese navy than we deal with in the South China Sea We try to correct bad behavior in the South China Sea by being there and being present They don’t like it. But we also look for other ways and we look at other institutions The Chinese have kind of pushed the Philippines out of the Scarborough Shoal and the Philippines has very courageously decided to take that to the International Tribunal of the Law of the Sea. I think they have a pretty good case In fact, they’ve got some very good American lawyers working on this If that case goes in favor of the Philippines, what’s your assessment on the — the change or the potential moderation or modulation of the Chinese and their behavior? Will it

have any impact or no? ECONOMY: I — I think it’ll be interesting to see what happens. I mean, the Chinese have not recognized the Philippines, really — their right to go to the Tribunal. So, as near as I can tell, they’re simply not dealing with this particular effort on the part of the Philippines My guess is it won’t have very much effect, in terms of, you know, moderating Chinese behavior. I think the Chinese are continuing to push — push out the nine, you know, dash line, right? Their claims on the South China Sea — they’re talking about setting up, you know, an air defense identification LINDSAY (?): Identification zone ECONOMY: Thank you. An ADIZ similar to the one that they just, you know, established in the East China Sea I think the Chinese view this as an issue of sovereignty even more than they do of resources So, I don’t anticipate much modulation or moderation when it comes to the sort of sea claims on the — regional sea claims on the part of the Chinese LINDSAY: So, you see the Chinese dismissing them? ECONOMY: I see them dismissing them LINDSAY: You want to jump in here, Michael? LEVI: I think that builds pretty clearly on the analysis that we did in the book. I think you identify a nice dichotomy And we look at the Gulf of Aden deployment and that’s where China’s learning. But we also look at the South and East China Seas And Liz emphasized this core point — this is not just about resources. And it’s not even just about freedom of navigation in the sea lanes, which has a strong connection to resources. It’s about nationalism and sovereignty and that’s an extraordinarily powerful driver LINDSAY: I think you can see from the very sophisticated and nuanced explanations that Liz and Michael have offered up tonight why “By All Means Necessary” is a terrific book and why we are very, very proud to have them as members of the studies program So, please join me in thanking Liz and Michael (APPLAUSE) END