China: Domestic vs International Mining Operations

In yesterday’s Financial Times, journalist Leslie Cook reported on China’s recent efforts to enforce stricter regulations on the mining of rare earths.

 

China produces the vast majority (approximately ninety percent) of rare earths globally, with mining taking place primarily in Inner Mongolia, Jiangxi, Guangxi, and Guangdong provinces. This month’s and previous attempts to regulate rare earths mining in China have generated tremendous concern among global consumers who fear shortages and price fluctuations.

 

 

Mining of rare earths has become a cottage industry in certain provinces, according to Cook. Farmers in China’s countryside build makeshift mines by mixing chemicals with the clay in their backyards. They are able to extract rare earths from the mix, but the remaining sludge contains radioactive tailings and toxic acids that are seriously harmful to the environment.

 

According to the article, China is planning to consolidate rare earths mining under three big state-owned companies – Baogang, Chinalco, and Minmetals – which also are responsible for many of China’s mining projects in Latin America and elsewhere in the world.  Consolidation would presumably help to regulate the industry and to enforce environmental standards.

 

This most recent crackdown is thought to be the strictest of a series of efforts over the past two years to limit environmental damage and resource depletion in the abovementioned provinces. But many feel that the crackdown on small producers is simply a calculated effort to provide China’s powerful, state-owned companies with a much larger share of the profitable rare earths sector.

 

Others applaud Beijing’s environmental stance, but fear that recent regulations aren’t enough or won’t be enforceable. Most students of China and Chinese know the saying: 上有政策, 下有对策, shangyouzhengce, xiayouduice. It means local governments often find ways to either circumvent or apply central government policies according to their own interests.Local governments and residents certainly seem to be circumventing Beijing’s rare earths clean-up efforts. According to the FT article, it is still fairly easy to find illegal rare earths mines operating in Jiangxi province, for example, even though provincial officials have imposed strict regulations. Some of the largest mines are owned by the same local government officials responsible for the recent crackdown.

 

 

What is striking about China’s many domestic mining woes is not that they exist, but that they aren’t necessarily evident in China’s mining operations abroad.

 

As Universidad del Pacífico scholar Cynthia Sanborn explains in her book La economía China y las industrias extractivas: desafíos para el Perú, mining operations in China – whether of rare earths, coal, or other minerals – are well known for their negative environmental impact, low levels of transparency, high rates of on-the-job accidents, and insufficient workers’ rights. On top of this, China’s nascent civil society is generally unable to demand greater social and environmental responsibility from the State or Chinese companies.

 

Some measures — like the rare earths controls mentioned above — are being taken to address environmental and safety concerns in China’s mining sector. But corruption, illicit operations, and enforcement challenges continue to impede effective implementation.

 

When China’s firms go abroad, however, they are often held to higher standards – both by Beijing and the country in which they are operating. China engages in complex, long-term negotiations with host countries and communities before securing access to mining rights. Illicit backyard mining operations are definitely not the norm.

 

The firms that lead China’s international mining operations (Chinalco, Zijin, Minmetals, etc) receive substantial direction from Beijing regarding environmental, labor-related, and social impact while abroad. These firms are playing an increasingly significant role in China’s broader efforts to build a positive global image.

 

According to Sanborn, Chinese companies in Peru, Chile, and Brazil have made great efforts in recent years to address the social and environmental concerns of workers, local leaders, and local communities. Moody’s analysts even believe that Chinese and Western extractive firms generally display similar levels of corporate responsibility when working abroad.

 

China’s performance is less admirable, of course, in places like Sudan or the DRC, where rule of law and civil liberties are lacking, and where extractive sector profits serve to support corrupt governments. In these countries, Sanborn argues, China is less likely to take the initiative to design socially and environmentally responsible projects. China’s operations could also have negative consequences in countries like Venezuela and Ecuador, which lack strong institutions to control mining-related corruption or monitor China’s environmental impact.

 

Nor has China’s impact been entirely positive in South America’s other resource-rich countries. Many have experienced negative consquences associated with China’s insatiable demand for commodities. But China’s mining record abroad is nonetheless significantly better than its domestic one.

 

The saying in Chinese, 山高皇帝远 (shangaohuangdiyuan), suggests that mountains are high and the emperor is far away, or that connections between the central government and Chinese citizens living far from Beijing are weak, and that law enforcement in remote areas is lax. But despite their distance, China’s mining giants are generally adhering to not only to Beijing’s, but also to host government directives.

 

In countries like Peru, Chile, and Brazil, China’s SOEs remain under the watchful eye of rights-sensitive governments and fairly well-organized civil societies. The same, unfortunately, cannot be said for China’s domestic mining operations.