Why are foreign mining companies retreating from China?

In the 1990s, China opened up the country’s vast mineral resources to international investment.

Over the past decade, it has reformulated its mining legislation to attract foreign companies into the Chinese mining sector with the hope of speeding up its modernization.

Between 2001 and 2004 the number of foreign mining projects quickly increased from 150 to 279.

But by 2010, this number had declined to 92. International firms continue to feel stymied by an inconsistent and convoluted mining policy and their inability to create relationships of trust with local mining stakeholders.

Foreign investors’ hopes of being successful in the Chinese land of opportunity have not faded entirely.

However, China no longer courts foreign mining companies because it has already benefited from the desired influx of foreign capital, technology and management techniques.

For example, it has adopted environmentally friendly technologies that improve coal liquefaction and coal bed methane production, and management techniques such as the reorganization of firms via mergers and acquisitions.

These factors have contributed to the establishment of a competitive yet fragmented domestic mining industry with state-owned, collectively-owned, and privately-owned mining enterprises in addition to an indeterminate number of illegal mines.

The proliferation of domestic mining companies concerns the Chinese government for two main reasons: the lack of environmental and safety regulations in small private companies; and the growth of disputes among land and resources administrative agencies (provincial, municipal and county level) due to officials seeking to protect local interests obstructing non-local mining operations.

Gold mine in China, Fall 2011

The Chinese government is now pushing state-owned mining companies towards restructuring and consolidation to exploit domestic deposits more efficiently and make the sector more competitive internationally.

At the same time, it is encouraging national mining companies to seek resources abroad to satisfy the increasing domestic demand for mineral resources.

Risk-adverse Chinese companies seem to be satisfied with the technology and management techniques they have already acquired and are not actively seeking joint ventures with foreign partners.

These reactions express a form of Chinese protectionism that frustrates the aspirations of foreign investors attracted by China’s abundant mineral deposits.

Elena Caprioni is currently an affiliate at the Asian Institute, Munk School of Global Affairs, University of Toronto.

Originally published by Asia Pacific Memo