Contemporary Government-Business Relations via China’s Energy Sector
Xiaofei Li, Ph.D.
Asst. Prof., Dept. of History & Political Science
York College of Pennsylvania (York, PA)
China presents a most intriguing case since it has a market economy running atop a stagnant communist regime. Various models have been proposed to explain such government-business relationships, among which the “merchant-state dualism” best explains the complex situation in China. “Merchant-state dualism” is a hybrid relationship between the state and society that maintains state control over merchants, while giving them some autonomy. This article explores the interactions between the Chinese national oil companies and China’s government with regards to selecting certain oil investments in light of external effects of investing in politically sensitive countries. It thus highlights the political underpinnings and calculations behind China’s oil decisions, which sheds light on the merchant-state dualism in contemporary China. The interactions between government and business elites as China’s merchant-state dualism manifests itself in China’s energy sector either helps or hinders Chinese national oil companies in competition for international project with non-Chinese companies.
From the perspective of political economy, China itself presents a most intriguing case since it has a market economy running atop a stagnant communist regime. Various models have been proposed to explain government-business relationships, among which the “merchant-state dualism” best explains the complex situation in China. The model of “merchant-state dualism” is a hybrid relationship between the state and society that maintains state control over merchants, while giving them some autonomy. This article, by exploring the interactions between the Chinese national oil companies and China’s government, addresses how China’s merchant-state dualism as it manifests itself in China’s energy sector either helps or hinders Chinese national oil companies in competition for international project with non-Chinese companies.
The Government Supports the National Oil Companies (NOCs)
China’s government and its NOCs have a relationship of friction at home and more close cooperation abroad. Inside China’s borders, the NOCs keep seeking an increasing degree of autonomy from the government. Outside China’s borders, there continues to be cooperation between the Chinese government and the NOCs. Government support for state-owned oil companies has been positive in the past few years in countries such as in Angola, Kazakhstan, and Nigeria.
The Chinese government and the NOCs both believe that the government must take a role in helping companies obtain overseas oil assets. The general opinion in China is that government support is not only necessary, but desirable as well. The reason for this is that most people think that since other national and international oil companies receive the support of their home governments in acquiring oil assets, the Chinese companies should – in all fairness – receive the same type of support from the Chinese government. The Chinese government has been using many tools, both financial and political, to help secure investment opportunities for China’s oil companies. The Chinese government uses such tools not only to give oil companies financial assistance but also to help improve relations with states which produce oil. The Chinese government often plays a key role in the acquisition of oil assets and lobbies for specific projects on behalf of China’s oil companies.
As it is, the Chinese government supports the NOCs through direct and indirect financial support to China’s NOCs. China offers such support by mean of loans – often at below-market rates – and by making investments in the infrastructure of oil-producing states, as well as in the states themselves. China’s use of these financial instruments involves the “policy banks,” such as the Export-Import Bank of China (China Eximbank) and the China Development Bank (which manage state directed lending). It has been charged with the task of “[implementing] state policies in industry, foreign trade and economy, finance and foreign affairs.” Such use of these banks helps to further the government’s interest in obtaining oil assets abroad.
Indirect financial support by the Chinese government has taken the form of construction of basic infrastructure in the host country by Chinese firms and the awarding of foreign aid. Chinese foreign aid and investment help to assure the local governments that China can help their country’s economic development. The Chinese oil companies are often the beneficiaries of the ensuing good will. Infrastructure investments by Chinese firms not involved in oil are often linked to acquisitions made by China’s NOCs. This is quite certainly the case in Africa where even basic infrastructure is greatly needed. Nigeria and Angola, among other African oil producers, have demonstrated that they prefer foreign oil companies that will also provide them with beneficial economic packages.
In the political realm, the Chinese government supports China’s oil companies through the involvement of China’s leaders in some project negotiations and summit meetings between Chinese leaders and their counterparts in oil producing states. In countries with large oil reserves that China believes to be strategically important, such as Kazakhstan, Russia, and Iran, it is not uncommon for Chinese leaders to participate in negotiations for specific mergers and acquisitions. The Chinese government has also employed its membership in several international organizations to help China’s oil companies acquire and secure access to foreign oil assets. For example, Beijing has used its seat on the United Nations Security Council (UNSC) to shield Sudan from economic sanctions for the atrocities in Darfur. The Sudan is home to one of the NOCs’ two largest overseas oil projects.
Increased Autonomy of NOCs and their “Going Global” Strategy
Chinese NOCs’ increased autonomy resulted in their “Going Global” strategy. The decision to invest in oil exploration and production abroad originated with the companies themselves. The CNPC, the first Chinese oil company to venture overseas, began to set its sights beyond China’s borders in the late 1980s in search of reserves and profits. The CNPC’s decision to invest abroad was initially not supported by Chinese leadership. However, increasing oil imports and the increasing profitability of the CNPC abroad gradually changed the government’s position. By 1997, the Chinese oil companies’ strategy of “Go Global” had the support of mainstream industrial, academic, and government circles.
This “Go Global” strategy reflects a shift of power and resources away from the central government toward the state-owned energy companies, a shift which results from the liberalization and decentralization of China’s energy sector, in other words, from the enhanced corporate interest of the NOCs over the past three decades. As a consequence, the internationalization of Chinese oil companies’ operations intensifies the contests between the international oil companies (IOCs) and NOCs.
The Government Pulls in the Reins of the NOCs
Although the Chinese national oil companies are becoming increasingly autonomous, the Chinese leadership has been attempting to rein them in so that, domestically, it can curb the power of the heads of the oil giants, level the playing field between the three NOCs, and improve corporate governance at these companies.
In April 2011, the Chinese Communist Party (CCP) reshuffled the top executives of China’s three major national oil companies. Specifically, the former party secretary and general manager of Sinopec, Su Shulin, became the party secretary and governor of Fujian Province. The former party secretary and general manager of CNOOC, Fu Chengyu, became chairman and party secretary of Sinopec. Wang Yilin, deputy general manager of CNPC, became chairman and party secretary of CNOOC. The oil executive reshuffle was a blatant reminder of the CCP’s continued control over China’s flagship firms. Candidates are nominated by the Organization Department, which is a secretive human resources division of the CCP, ultimately approved by the Politburo.
The state control over the NOCs is fundamentally established by the ownership between the State-owned Assets Supervision and Administration Commission (SASAC) and large SOEs. The SASAC represents the Chinese government and owns China’s 121 increasingly wealthy and powerful firms. The SASAC has issued regulations on outbound investments by its firms, aimed at strengthening the security of state-owned assets abroad. Although influential, the SASAC’s authority over the NOCs is overshadowed by the CCP, which retains the power to appoint the top executives at CNOOC, CNPC and Sinopec.
Internationally, the Chinese government also maintains its control over the national oil majors in order to balance its relations with Iran - a major power in a troubled region, to sustain its relations with the Western world, and to address its concerns about its own energy security. Despite the fact that China previously had tried to protect Iran from the UN sanctions, it eventually went along with Britain, France, Germany, Russia, and the United States to pressure Iran to halt its enrichment of uranium. This reality indicates that China would not go so far as to jeopardize its interests with the West, especially with the United States, just because of Iran.
China Weighs Oil Interests on a Case-by-Case Basis
Thus far, China has tried to secure its oil interests among the overall interests of the international community on a case-by-case basis. In the case of Sudan, China chose to favor its oil interests rather than relations with the international community. Beijing undermined at least one Security Council resolution, which was to punish the Sudanese government for the violence it had committed in Darfur. In a reversal, later on China indicated that if the African Union supported the use of U.N. forces in Sudan, China would go along with that. In the case of Iran, China realized that the issue involves diverse interests, including the Sino-US relationship, oil, and regional stability. Hence, it has taken the side with the international community. With pressure from the U.S., China voted to report the Iran nuclear issue to the U.N. It further supported the July 31 Security Council resolution, which threatened sanctions if Iran did not stop the progress of its nuclear program. Nevertheless, China might feel tempted to go in the other direction by Iran’s potential for long-term energy supplies.
On the theoretical level, China’s different reactions toward Sudan and Iran indicate that although the government might give business some autonomy, it still maintains control over the business. An analysis of the interactions between business and government elites in determining Chinese oil investment decisions illustrates that the current government recognizes the functional importance of merchant groups. When government interests do not coincide with the corporate interests of enterprises, a calculation of benefits versus costs, and a political give and take between state leaders and industrial leaders transpires. In turn, this give and take highlights the dualistic role of businesses, as well as the hybrid relations between the two, that is, merchant-state dualism.
Merchant-State Dualism Helps Chinese NOCs to Compete
The government promotion of the Chinese NOCs’ interest is also illustrated by NOCs’ overseas acquisitions through the use of export credits, investment credits, and aid. In addition to providing China’s NOCs with cheap capital, the Chinese government also invests in infrastructure such as the construction of power plants, dams, and government buildings in developing countries. These direct and indirect financial supports as well as the political supports rendered from the Chinese government as indicated in the previous text are fundamentally driven by pursuing the corporate interests of the China’s NOCs. In turn, these very supports serve the corporate interests of Chinese NOCs and thus increase their abilities to compete for the international projects against IOCs and NOCs elsewhere.
The Chinese government-backed financial interventions in the investment deals, although unfair, somewhat compensate its NOCs as a relatively latecomer to the international oil business. Moreover, these financial practices may migrate into the international arena by encouraging other governments to employ state finance as a tool to benefit their oil companies. For example, in order to seek oil assets, India each year scheduled $1 billion for the particular purpose of funding infrastructure projects in Africa. South Korea also relied upon non-oil related deals to increase its competitiveness in the bidding war. Moreover, the Korea Export-Import Bank offered generous trading terms to help finance its oil companies in its overseas investments. In this way, Beijing’s behavior of subsidizing its NOCs distorts the market-based competition and further complicates the world oil market. Consequently, the leading oil companies of the world should work with either US companies or multinational companies to tackle China’s counterproductive behavior of state intervention in the global oil and gas markets, and in this way bring China within the current framework of international rules.
Merchant-State Dualism Undermines NOCs Competitiveness
Although energy diplomacy is generally regarded as one of the features of Chinese President Hu Jintao’s foreign policy, it did not alter China’s foreign policy. By retaining control over the energy sector, the Chinese government ensures that competition over hydrocarbon resources will not turn into geostrategic rivalry in coming years. In other words, the mounting oil demand of the Chinese national oil companies does not necessarily clash with the global energy needs. Chinese government manages this goal by balancing its economic and energy interests with its overall geo-strategic interests. In doing so, the China’s national oil companies serve as instruments of government control in fulfilling its geopolitical objectives in that developing energy resource is not the sole motivation that explains China’s presence in resource-rich regions. The broader strategic and political considerations as well as security concerns also play roles in this.
Specifically, China’s relations with Central Asia still center upon oil. However, because Kazakhstan is strategically located at China’s border and its population shares the same ethnic background with Chinese Uighurs in Xinjiang province, the political and security concerns are also of interest to Beijing.
A similar situation can apply to Africa. Although China remains a presence in Africa primarily because of its energy resources, the trade relations between China and Africa involve more than oil. There are other broader strategic and political considerations as well for China’s presence in Africa. Such considerations include China’s relations with the developing world and its contention regarding Taiwan.
As with the situation in Africa, energy is only one of the factors that explain China’s presence in Latin America; it is an important factor though. Among Chinese relationships with the countries in the region, Sino-Brazilian relations in trade are much more important than its ties with Venezuela despite the latter’s large oil reserve. Similarly, the impetus for China to establish its relations with Latin America is beyond the economic concerns. There are other important motivations as well, such as the development of support for China in the developing world and China’s conflict with Taiwan. This point has been illustrated by the fact that a majority of countries that still maintain diplomatic relations with Taiwan instead of with China are nations from Central and South America.
Since the late 1990’s the focus of China’s relations with the Middle East has transformed from discouraging the Middle Eastern countries to continue their diplomatic relations with Taiwan to ensuring a steady supply of oil from the area – a shift from “Taiwan first” to “energy first.” Among the suppliers in the region, Saudi Arabia and Iran are particularly important to China because during the 2000s those two countries comprised nearly two-thirds of China’s total imports from the region. With this in mind, the fact that China sometimes willingly goes along with the international community indicates that China could react in a sophisticated and pragmatic way.
If the above non-energy considerations undermine the ability of Chinese NOCs to compete in the international oil market, a comprehensive Chinese energy strategy mandated by the Chinese government has the similar effects. It requires the NOCs to follow its lead, to forbid the bidding wars between the domestic oil companies themselves, and to coordinate their economic goals with Beijing’s diplomatic objectives. From this perspective, such regulation hinders the NOC’s competitiveness. Nonetheless, the government directives following its energy policy generate several fields of common interest in which the NOCs and IOCs can cooperate.
First, the NOCs and IOCs should proceed with advancing energy cooperation. Both the Chinese government and international governments should convince their oil companies to cooperate in jointly expanding the international oil supply. They should also encourage their oil companies to share energy technologies with each other. After all, China’s involvement in the upstream oil exploration can enable the expansion of the global oil supplies and thus lower the prices. This will benefit all consumers. In particular, both governments could encourage their energy companies to enter joint ventures for oil extraction. In this way, they could increase the energy supply for both international and domestic markets. Another crucial subject for cooperation is on the demand side. Beijing, contemplating a fourfold growth in its economy by 2020, has put conservation among its top priorities and is trying to shift to less energy-intensive expansion. The leading energy companies, as holders of the world’s most advanced technology regarding oil extraction and conservation, in this case, play an important role in assisting China to develop energy efficiency and green-energy technology. On a global basis, climate change is another common driving force for energy efficiency. For China, the all-too-evident local and regional air pollution with direct impacts on health makes energy efficiency an immediate imperative.
It becomes apparent that although China has more and more followed its corporate interests in the developing world, and thus becomes more and more active in the Middle East, Latin America, and Africa, Chinese leaders still have to think about China’s general economic interests as well as its broader political relationships with the Western countries. Indeed, China’s economic interests still focus upon Asia and the industrialized countries. The case of Iran indicates that as China exhibits more presence in various parts of the world, the international community has imposed stronger pressure on China to behave as a responsible player. China has to maneuver cautiously to balance its economic and energy interests, in opposition to its general strategic interests as well as the importance of behaving responsibly as a major power.
China’s fragmented energy policy-making structure allows its state-owned oil and gas companies to wield significant power upon the energy policy. Despite this imbalance, the government’s reshuffling of China’s oil executives effectively curbs the power of the chief executives by preventing them from staying in one company for too long and breaking up their fiefdoms. It also regulates and reins in excessive competition between the firms and protects their profitability. Hence, from a larger picture, China’s national oil companies serve as instruments of government control and also promote their corporate interests at the same time. The state, in this sense, deploys a corporatist strategy to control these business groups. The interactions between government and business elites, with regards to selecting certain oil investments in light of external effects of investing in politically sensitive countries, highlights the political underpinnings and calculations behind China’s oil decisions. Thus, this sheds light on the current merchant-state dualism in contemporary China.
The aforementioned merchant-state dualism both helps and hinders the Chinese NOCs in competition for international projects with non-Chinese companies. On one hand, the Chinese government, through financial subsidies and political supports as well as through its “Go Global” initiative, increases its NOCs’ competitiveness, while at the same time distorting an open and fair international energy market. On the other hand, the strong pressure on China by the international community mandates its behavior as a responsible player. Thus, China has to carefully balance its economic and energy interests and its broad strategic interests. Its all-encompassing energy policy through administrative nonmarket-based government guidance to a large extent undermines the NOCs’ capability to compete in the international oil market. Obviously, such a dualistic relationship as it manifests itself in China’s energy sector impacts the NOCs in both positive and negative ways, a situation which inevitably creates some areas for potential cooperation between the Chinese NOCs and the international oil companies.
Dr. Xiaofei Li is Assistant Professor in the Department of History and Political Science at the York College of Pennsylvania (441 Country Cllub Road, York PA 17403). email@example.com
 Xiaofei Li, China’s Outward Foreign Investment: a Political Perspective, University Press of America, Inc., 2010, p. vii.
 Jing Huang, Factionalism in Chinese Communist Politics, Cambridge University Press, 2000, p. 414-417; and Kenneth Lieberthal and Michael Oksenberg, Policy Making in China: Leaders, Structures and Processes, Princeton University Press, 1988, p. 49.
 Ibid., p. 41.
 Xiaofei Li, China’s Outward Foreign Investment: a Political Perspective, University Press of America, Inc., 2010, p174.
 Peter C. Evans and Erica S. Downs, “Untangling China’s Quest for Oil through State-backed Financial Deals,” Policy Brief #154, The Brookings Institution, May 2006, p. 3, at http://www.brookings.edu/papers/2006/05china_downs.aspx.
 Yang Zilin, “Thoughts on accelerating the implementation of the ‘going abroad’ strategy,” (Guanyu jiakuai shishi ‘zou chu qu’ zhanlue de sikao), Seeking Truth (Qiushi), No. 7, 2005, p. 47–49; and “Going abroad concerns future generations,” (zou chu qu’ shiguan zisun houdai), International Herald Leader (Guoji xianqu daobao), October 14, 2004.
 Gao Shuqian, “The current state of the development of the Nigerian oil industry and prospects for Sino-Nigerian oil cooperation,” (Niriliya shiyou fazhan xianzhuang ji ZhongNi shiyou hezuo qianjing), March 23, 2005.
 Erica Downs, “The Brookings Foreign Policy Studies Energy Security Series: China,” The Brookings Institution, December 2006, p. 41-42.
 Downs, December 2006, p. 42.
. Tong Xiaoguang, “Implement the ‘going out’ strategy to fully utilize oil and gas resources abroad,” (Shishi ‘zou chu qu’ zhanlue chongfen liyong guowai youqi ziyuan), Land & Resources (Guotu ziyuan), No. 2, 2004, p. 6-9.
 Xiaofei Li, China’s Outward Foreign Investment: a Political Perspective, University Press of America, Inc., 2010, p171.
 Erica Downs & Michal Meidan, “The oil Executive Reshuffle of 2011,” China Security, issue 19, 2011, p. 3.
 Barry Naughton, “SASAC Rising,” China Leadership Monitor, No. 14, 2005.
 Barry Naughton, “Profiting the SASAC Way,” China Economic Quarterly, No. 2, p. 19-26.
 Erica S. Downs, “How Oil Fuels Sino-U.S. Fires,” Business Week, John L. Thornton China Center, The Brookings Institution, September 2, 2009, at http://www.brookings.edu/opinions/2006/0904china_downs.aspx.
 Xiaofei Li, China’s Outward Foreign Investment: a Political Perspective, University Press of America, Inc., 2010, p. viii.
 Erica Downs, “Untangling China’s Quest for Oil through State-backed Financial Deals,” Brookings Policy Brief Series #154, The Brookings Institution, May 2006.
 James Tang, “With the Grain or Against the Grain? Energy Security and Chinese Foreign Policy in the Hu Jintao Era,” Center for Northeast Asian Policy Studies, The Brookings Institution, Oct. 2006, p. 8, 31.
 Jeffrey A. Bader, “Managing the China-U.S. Energy Competition in the Middle East,” The Washington Quarterly, Winter 2005/2006.
 James Tang, “With the Grain or Against the Grain? Energy Security and Chinese Foreign Policy in the Hu Jintao Era,” Center for Northeast Asian Policy Studies, The Brookings Institution, Oct. 2006, p. 9.
 Ibid., p. 13-16.
 Ibid., p. 18-19.
 Jin Liangxiang, “Energy First: China and the Middle East,” Middle East Quarterly, Spring, 2005.
 James Tang, “With the Grain or Against the Grain? Energy Security and Chinese Foreign Policy in the Hu Jintao Era,” Center for Northeast Asian Policy Studies, The Brookings Institution, Oct. 2006, p. 20.
 Richard Weixing Hu, “Advancing Sino-U.S. Energy Cooperation Amid Oil Price Hikes,” Brooking Northeast Asia Commentary, Number 17, Center for Northeast Asian Policy Studies, The Brookings Institution, March, 2008.
 Daniel Yergin, “China and America Need Not Be Energy Rivals,” Financial Times, May 20, 2007.
 Sergei Troush, “China’s Changing Oil Strategy and its Foreign Policy Implications,” Center for Northeast Asian Policy Studies, The Brookings Institution, Fall 1999.
 Daniel Yergin, “China and America Need Not Be Energy Rivals,” Financial Times, May 20, 2007.
 James Tang, “With the Grain or Against the Grain? Energy Security and Chinese Foreign Policy in the Hu Jintao Era,” Center for Northeast Asian Policy Studies, The Brookings Institution, Oct. 2006, p. 24-25.
 Erica Downs & Michal Meidan, “The oil Executive Reshuffle of 2011,” China Security, issue 19, 2011, p. 12.
 Xiaofei Li, China’s Outward Foreign Investment: a Political Perspective, University Press of America, Inc., 2010.
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