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Blessing or Curse?

Natural Resources in West China

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Paradox of Being Rich in Natural Resources

Thesis of “Natural Resource” Curse By Joseph Sitglitz, Richard Auty, Jeffrey Sachs, Andrew Warner Disconnect between abundance in natural resources and domestic

economic growth and development Example: Latin America (before rise of leftists), Africa, Myanmar

Why so ironic? Provoking both internal and external strife Rent seeking: Tendency towards poor governance and corruption Dutch disease: Less incentive to develop industry (實業) Fiscal fortuity: Soft budget constraint, price fluctuation,

extravagance, impulsive investment, excessive borrowing

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Sensitivity of Resource

Abundance in West China

85% of state-level natural reserves in minority areas (2009 White Paper)

“Top secret 絕密: Statistics regarding land and resourcesthat would, if made public or disclosed, seriously harm (嚴重損害) the nation's image and social stability.”

Article 2, Regulations of National Administrationfor the Protection of Secrets, May 2003

Who own the resources?

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UN Declaration onPermanent Sovereignty over Natural Resources

General Assembly resolution 1803 (XVII), 14 December 1962 Article 1

“The right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national 民族* development and the well-being of the people 人民* of the state concerned.”

* “A people” (as singular noun) or “peoples” means about the same as “ethnic groups” 民族

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International Convention onEconomic, Social and Cultural Rights

經濟、社會及文化權利國際公約

Article 1 (paragraph 2)

“All peoples may, for their own ends, freely dispose of their natural wealth and resources without prejudice to any obligations arising out of international economic co-operation, based upon the principle of mutual benefit, and international law. In no case may a people be deprived of its own means of subsistence.”

「所有民族得為本身之目的，自由處置其天然財富及資源，但不得妨害因基於互惠原則之國際經濟合作及因國際法而生之任何義務。無論在何種情形下，民族之生計不容剝奪。」

PRC as ratified state party

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International Experience United States: Tribal sovereignty of American Indians

(guaranteed by both constitution and federal law)

Canada: First Nations reserve(guaranteed by the constitution and the Indian Act 1876)

Russia’s constitution (Article 69)“The Russian Federation shall guarantee the rights of the indigenous small peoples according to the universally recognized principles and norms of international law and international treaties and agreements of the Russian Federation.” (broad legal principles, no supporting legislation)

What about China? Socialist emphasis on collective (state) ownership Traditional Chinese thinking「普天之下，莫非王土，率土之濱，莫非王臣。」《詩經·小雅·北山》

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Discontent of Tibetans both inside and outside PRC over extraction of resources and destruction of the environment in TAR and surrounding Tibetan regions by the party-state

Xizang (“West Treasure”)under Extraction

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Xiyu (“West Land”) also Inescapable

對不起，謝謝你新疆的石油運走了，新疆的天然氣運走了，新疆的棉花運走了，新疆的鉀鹽運走了，

新疆的黃金運走了，

新疆的和田玉運走了原子彈卻降臨在新疆了

I’m sorry, thank youXinjiang’s oil has been transported away,Xinjiang’s natural gas has been transported away,Xinjiang’s cotton has been transported away,Xinjiang’s potassium chloride has been transported away,Xinjiang’s gold has been transported away,Xinjiang’s Khotan jade has been transported awayBut the atomic bomb was indeed tested in Xinjiang

Attributed to a resident of Bayingolin Mongol

Autonomous Prefecture,in southeast Xinjiang

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Minority Regions:China’s “Gold Mountains”?

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2012: Discovery of huge deposit of nickle 鎳 (>1m tonnes), copper 銅and cobalt 鈷 in Ruojiang 若羌

Panzhihua攀枝花

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Cai Jiming 蔡繼明Tsing Hua University

In many western provinces, especially ethnic minority-concentrated areas, the compensation to local governmentshas been too low, which in fact has made it a predatory exploitation of the natural resources those areas own.

“All important natural resources in the west have been transferred to the east ... but the beneficiaries of most from such businesses have been developers and end users, not the ones who actually ‘own’ those resources.”

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Western PLJs as the Sufferers “Earn less”

Xinjiang retains only 1% of resources extracted Other countries: 10-16% to similar regions Cai Jiming’s recommendation: 3% Tax issue: Resource development enterprises only pay tax to

PLJs/cities where their headquarters are based

“Pay more” Export resources and energy to the East at low prices Import expensive goods from the East

“Suffer much” Locals bear the environmental costs The underprivileged especially minorities victimized by excessive

exploitation of local resources, leading to social tensions Example: Costs of clear-cutting of forests > Part of the reason for

2010 Gansu mud-slide (1 463 died)

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Xilinhot 錫林浩特Inner Mongolia

(2011)

15New York Times 30 May ‘2011

2011 Xilinhot Protest Incident: An ethnic Mongol herdsman

killed by a coal truck driver Background: Local discontent with coal

mining in the region Destroy the environment and indigenous

way of living

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The Caseof Rare Earths

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For wide range of electronic goods, e.g. lasers, computer screens, fiber-optics, mobile phones, low-energy light bulbs

Deng Xiaoping:

“The Middle East has oil; China has rare earths”

Rare Earths 稀土

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Over 90% of China's production comes from west China, in particular Inner Mongolia

Reserves said to have fallen from 85% (in 1990) to less than half (48% in 2011) of the world's total Excessive exploitation Discoveries in other countries to lessen reliance on China

China’s competitive advantage Loose environmental enforcement Little regard to safety issue in extraction Lack of effective resistance from locality Largely absence of free trade/market

17 Types of “Rare Earths” elements / minerals

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Global Rare Earths Trade

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The Case of Baotou

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Bayan OboMining District

District has 90+%* of China's rare earths reserves, and in 2005 may have accounted for 45%* of the world's production:

*Probably quantity, not value. Government insists that rare earths represent only a tiny portion of the IMAR's economy

Baotou

Hohhot

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Supply Chain:From Extractionto Processing

One of the hundreds of rare earths processing factories in Baotou

26NYTimes 24 Aug 2011

Foreign companies are beginning to set up processing plants in China: phosphors are roasted for 20+ hours at this Intematix plant.

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“Thirty-year-old Jia Yunxia says through crumbling, yellow teeth: ‘We know the lake is killing us. We are sick all the time and my daughter is always ill because of the pollution. The government told us we would get compensation to help us move but we have not seen a single yuan. We think local officials may have taken it.’...“[Perry:] For hours after our visit, my stomach will lurch and my head will throb. We are here for only an hour; those living in ... Dalahai, and surrounding hamlets breathe in the poison all day, every day.”

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-- Simon Perry SCMP, 13 Mar 2011

Disposal of effluent into “tailing 尾礦 lake” --formerly a productive corn/maize area

Radioactive (thorium) gets into Yellow River Locals have serious health problems, with

richer people choosing to leave Heavily guarded: Almost impossible to visit

SCMP 13 Mar 2011

10 KM

“Tailing Lake”: Evidence ofEnvironmental Destruction

Even Beijing acknowledged its seriousness (See People’s Daily Online, August 29, 2012 http://english.peopledaily.com.cn/90778/7927574.html)

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Baotou Iron and Steel (Group) Co. Ltd. Baogang Group 包鋼集團 Inner Mongolia Largest export quota – 3 220 tonnes

China Minmetals Corp 中國五礦集團

Qinghai and elsewhere 2nd largest quota – 1 327 tonnes

20+ smaller players in west China

Other larger companies in east China

Rare Earths: The Big Players

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60% stake in Shanghai WangchaoInvestment Co. (上海王朝投資) (bought in 2008)

30% stake in Jiangxi Rare Earths江西稀源礦業 for RMB450m

That means Xi family holds 18% indirect stake therein, allegedly paidRMB450m for it

No info on current value(not publicly traded)

Xi JinpingFamily’s

Involvement

(Bloomberg, June 29, 2012)

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Japan, US and EU jointly constitute

nearly 90% of China’s rare earths

export (2011)

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Uses of particular rare earths Yttrium 釔 used to strengthen steel Terbium 鋱 for mobile phones “Green” technologies

Decline in PRC Rare Earths Production (in thousand tonnes)

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More than doubled in less thana month (May 25-June 18) for most types

Reasons China cut exports China stock-piling (began in 2010,

storing up to 200,000 tonnes -- nearly twice the country’s annual production)

Companies hoarding Illegal mines closed for environmental

reasons Possible speculations

Price Surge (2011)

Financial Times, 19 June '11, based on Shanghai Metals

Market; Antake.

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Restricting exports for political reasons?

Restricting exports to control international markets?

Restricting exports to force foreign companies to invest in West China and move production there?

Benefits of Cornering Market

“To use moderation in the control of the production of rare earth resources and reduce exports to an acceptable level is to attract more Chinese and foreign investors into the region.”

-- Zhao Shuanglian 趙雙連Vice-Chairman of Inner Mongolia (2003-2012)

Report: Since 2009, Beijing began arranging for SOE's to take over thesebusinesses to maintain control (the two biggies are already SOEs)

-- Jamestown’s China Brief, 8 October 2010

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WTO rules forbid trade restrictions, with exceptions

Article 20 Allow members to impose export restrictions for certain reasons

Conservation of exhaustible natural resources if such a restriction also applies domestically

PRC benefits from WTO regime more than anyone indeed

Rare Earths and International Trade

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2012: Japan, US and EU jointly filed a complaint with WTO against China imposing export duties / control

China: Export duties and volume quotas are reasonable for the sake of environmental protection and sustainable development of rare earth industry

Japan 1st direct complaint against China at WTO

Consider China’s export control as counter-measure of bilateral controversy over East China Sea and Diaoyutai/Senkaku Islands

Develop alternative materials and diversify sources of supplies

Japan-US-EU Joint WTO Complaint

against China

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WTO Dispute Settlement Panel(2013.10.25) Upheld the joint claim that China’s export

duties on rare earths violate WTO rules

China’s export duties on rare earths run counter to an agreement on abolition in principle of export duties that China adopted in 2001 when joining WTO

Parties concerned are allowed to file an appeal with Appellate Body (WTO top court)

Japan-US-EU Joint WTO Complaint against China

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Opaque pricing: Difficult to obtain costing information

2012: Baotou Steel Rare-Earth Company announced plan to establish a physical* trading platform

2013.11.8: Baotou Rare Earth Products Exchange (first national trading platform of its kind)

More transparent pricing? Tighter control? (Prices have been dropping, sometimes in half

due to increasing global demand) Price manipulation? (More centralized, probably more) Hidden agenda: Avoid companies trying to “undercut” each other

* “Physical” means actual goods, no futures

Rare Earths Trading Platform

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What factors have contributed (or otherwise) to the marginalization and social exclusion of ethnic minorities in their homeland?

The infrastructure projects (say railways) seem principally serving strategic objectives having less value for local society and economy. Who are the main beneficiary indeed? How can interests of different stakeholders be served?

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Discussion:Is common prosperity mission

impossible?

The whole idea of the officially announced GOW strategy is to “create a favourable environment for the area’s development” by attracting inflow of

capital, technology and personnel to western PLJs (Chen, p.42). Throughout the process of GOW in the past decade, however, economic

expansion and marketization have “destabilized the demographic and employment situations” of ethnic minority areas (Zhu and Blachford, p.715)