“Walking Out” in Papua New Guinea – The Latest Outpost in the New Chinese Empire

Via Canada’s Globe & Mail newspaper, an interesting look at the boom in Chinese trade, aid and influence around the world, especially in places the West has neglected or rejected.   State-controlled Chinese companies obey a policy of “walking out” into the world and acquiring properties for the national interest — nickel and copper projects to feed China’s voracious manufacturing sector, oil fields to fuel its cars and industry, logging projects to supply its furniture factories and coal and natural-gas projects to satisfy its energy needs.  In this article, the writer visits a $1.4-billion nickel and cobalt mine that a Chinese company has made spring from the wilderness in the Pacific – but not without serious conflicts:

“…When Chinese engineers landed in Papua New Guinea in 2006 to inspect their latest mineral acquisition, they faced an arduous journey through the tropical wilderness. They drove over crumbling roads to the Ramu River, then found natives with dugout canoes to paddle them upstream. Next, they hired another team of locals with machetes to slash a rough trail for eight hours through the steamy jungle, dodging poisonous snakes and malaria-carrying mosquitoes.

“It was terrible,” recalls Wang Chun, the chief engineer. “You couldn’t breathe.”

Today, less than three years later, a series of small Chinatowns has emerged in the jungle — complete with Chinese food, Chinese satellite television channels and crews of Chinese migrant labourers living in cheap dormitory huts. Where once was wilderness, you find the workers of China Metallurgical Group Corp., toiling seven days a week and chattering about their families back home in Beijing and Sichuan.

It hasn’t been easy. The state-owned mining company has dealt with violent clashes with local landowners, striking workers, attacks from the media and unfriendly police who arrested more than 200 Chinese technicians on charges of illegally entering the country. But today it is transforming the economy of Papua New Guinea. Its $1.4-billion nickel and cobalt mine (all figures U.S.), the biggest construction project in the country, will employ 4,000 people at its peak, adding at least 10 per cent to the national economy every year.

Already, its workers have built the country’s longest bridge, eliminating the need for those canoes. They have built the country’s biggest wharf. They have carved out a 25-kilometre access road in the mountains. And now they are working on a 135-kilometre pipeline to the company’s new refinery on the coast.

This remote Pacific country is the latest outpost in the New Chinese Empire — a far-flung network of trade and investment that also generates political power.

In less than a decade, China has spun a web of strategic investments that stretches from Latin America to the former Soviet Union, from the remotest islands of the South Pacific to the huge oil fields of Angola and Sudan. In a range of resource-rich countries, China is diligently cultivating its interests.

It is winning political connections, gaining new markets and capturing vital resources. On some continents, China has matched — or even surpassed — the trading muscle of the traditional empire-builders of Europe and the United States.

China has become a presence in almost every country that has fallen off the mental maps of American and British geopolitical planners. This is how a superpower is born — one sphere of influence at a time.

It would be naive to see this as normal capitalism. State-controlled Chinese companies obey a policy of “walking out” into the world and acquiring properties for the national interest — nickel and copper projects to feed China’s voracious manufacturing sector, oil fields to fuel its cars and industry, logging projects to supply its furniture factories and coal and natural-gas projects to satisfy its energy needs.

It all has carefully calculated benefits to the Chinese state, which doesn’t require short-term profits from these projects. And it is scarcely affected by the Western financial meltdown. Recessions and stock-market crashes are minor speed bumps on China’s expressway to global power.

In my nearly seven years as The Globe and Mail’s Beijing correspondent, this is the most striking phenomenon that I have witnessed. I have seen China’s footprint in the oddest places around the world — a Russian border city that is now dominated by Chinese construction companies and market traders; entertainment palaces in Myanmar and Pyongyang built exclusively for the pleasure of Chinese visitors; a huge banner in the middle of Addis Ababa that proclaims: “Learn Chinese Now.”

Western fears have focused on Africa, where Beijing has swiftly become a key player in the oil industry, snagging valuable energy deals and strategic mining concessions. China’s trade with Africa has soared from a mere $2-billion in 1999 to an astonishing $74-billion in 2007, rivalling the United States for trade leadership in the continent. Chinese leaders have made dozens of trips there and have sent construction teams to build hospitals, clinics, highways, railways, universities, mines, hydro dams, housing compounds and presidential palaces.

Western diplomats in Ethiopia told me about the frustration of travelling to remote corners of the country, only to discover that a delegation from Beijing has just left a local official’s office. “The Chinese are everywhere,” one diplomat said.

The President of Senegal put it bluntly: “The Chinese are more competitive, less bureaucratic and more adept at business in Africa than their critics,” Abdoulaye Wade wrote. “China’s approach to our needs is simply better adapted than the slow and sometimes patronizing post-colonial approach of European investors.”

By 2010, China forecasts that its Africa trade will reach $100-billion, making it the continent’s most important trading partner. China is already the biggest trading partner of oil-rich but authoritarian countries such as Sudan and Angola.

Within the past few days, a Chinese conglomerate announced one of the biggest investments China has ever made in Africa, a $2.6-billion stake in Liberia’s main iron-ore mine.

China also has signed mining and energy deals reportedly worth $1.6-billion with Zimbabwe, undercutting the international sanctions against Robert Mugabe’s regime. China helps keep his government afloat by investing heavily in Zimbabwean farming, in coal, diamond and gold mines and in tobacco factories.

“We look again to the East, where the sun rises, and no longer to the West, where it sets,” Mr. Mugabe said recently.

In addition, China is competing openly with traditional Western donors by offering infrastructure and social services. In the Democratic Republic of the Congo, for example, China announced a $9-billion plan to build thousands of kilometres of railways and roads, 32 hospitals, 145 health centres, two hydro dams and two airports — all in exchange for access to lucrative copper and cobalt resources.

China has forgiven the debts of 32 African countries, and in 2006, it brought more than 40 African heads of state to a red-carpet summit in Beijing, the biggest such summit ever held outside Africa. Thousands of local motorists were ordered to stay home to keep the roads clear for the leaders. At the summit, China announced $5-billion in loans and credits for Africa, along with pledges to train 15,000 African professionals, to build dozens of hospitals and schools and to double development assistance by 2009.

“This 21st century is the century for China to lead the world,” Nigerian President Olusegun Obasanjo has said. “And when you are leading the world, we want to be close behind you. When you are going to the moon, we don’t want to be left behind.”

Support from African countries has paved the way for China to win key votes at the United Nations and other international bodies, which helped it to gain the hosting rights for the 2008 Beijing Olympics and to neutralize the powers of the UN Human Rights Council, among other victories.

Meanwhile, Chinese investors also have grabbed control of some of the most highly visible Western brands, including the Thinkpad personal-computer business of IBM, the MG Rover motor company in Britain (maker of iconic MG sports cars) and the French parent company of the RCA television brand. Chinese concerns have made audacious bids for the huge Unocal oil and Maytag appliance companies and Canada’s Noranda mining group.

As the global financial crisis deepens, Chinese state companies are increasingly seen as “white knights” — ready to step in to acquire companies that might otherwise fall into distress. When the Wall Street giant Morgan Stanley struggled this fall, China’s wealthy CITIC group reportedly was considering a takeover bid.

Less than five years after creating the concept, China now supports 249 Confucius Institutes in 78 countries around the world — the equivalent of the British Council or Germany’s Goethe Institute, to promote China’s language and culture — advancing the cause of the country’s “soft power” abroad. In the same time period, it has helped 60,000 teachers promote its language internationally: An estimated 40 million people are now studying Chinese as a second language around the world.

(China has been adept at using the education system to bolster its own political interests. During the wave of Tibetan protests in the country last spring, tens of thousands of Chinese students held demonstrations in support of the government in cities across Canada, Australia, the United States and elsewhere. Many were given transportation and logistical support from Chinese embassies.) China’s military, too, is following the soft-power strategy: After decades of isolation from UN peacekeeping operations, China is now a highly active participant, having sent more than 10,000 peacekeepers to 18 missions in recent years. This week, Beijing dispatched three naval ships to the coast of Somalia on an unprecedented mission to fight piracy, and confirmed for the first time that it is “seriously considering” building an aircraft carrier for its navy — a dramatic increase in its ability to project power on the world stage.

But it is China’s giant, state-owned multinational corporations that have been the most active in carving out new zones of influence.

In Latin America, Chinese trade has expanded from $13-billion in 2000 to more than $100-billion in 2007, and by a further 52 per cent in the first nine months of 2008. Venezuelan President Hugo Chavez has made five recent visits to China to negotiate oil and weapons deals.

In the Middle East, a Chinese state-owned company was the beneficiary of the Iraqi government’s first major oil-development deal since the fall of Saddam Hussein, which is worth $3.5-billion.

And China is discreetly expanding its presence in less-prominent regions, such as the Pacific nations, where its trade has been growing by an annual average of 27 per cent for the past five years. In Australia, for example, Aluminum Corp. of China (Chalco) has bought a minority stake in Rio Tinto, one of the world’s biggest mining companies, and is planning a $2.4-billion bauxite mine — even bigger than the Ramu mine in Papua New Guinea.

When a superpower lands

PNG is a typical outpost of the new Chinese empire in that it is neglected by the traditional powers in Washington and Europe. With its vast reserves of minerals and virgin timber as well as substantial oil and natural gas, it is an obvious target — if the Chinese can navigate the hazards of a country with few roads, little electricity, few telephones, complex clan loyalties, more than 800 languages and an often-chaotic democratic system.

The country’s forests are among the richest and most biodiverse in the world, but they are rapidly disappearing. Twelve years ago, China received only 0.5 per cent of its log exports. Today, more than 80 per cent of those logs — almost two million cubic metres annually — are shipped to China. Independent studies have concluded that most of this logging is illegal according to the country’s own rules.

Israel Bewang, a forestry activist, sketches a cargo ship on a piece of paper to explain one of the tactics used to smuggle logs to China, according to his inside sources. “They seal the logs into the bottom of the ship and weld it shut,” Mr. Bewang says. “The customs inspectors think it is just part of the ship. When it gets to China, they open it up and take out the logs.”

Until recently, Papua New Guinea’s mining sector was dominated by Australian, British and Canadian companies. But since the 1990s, China has been assiduously cultivating the PNG government, inviting its leaders on red-carpet trips to Beijing. When the Ramu nickel property came up for sale by its Australian owners in 2003, the government was happy to see China leap into the negotiations. And it rewarded the buyers with an unprecedented 10-year tax holiday.

In sleepy, seaside Madang, normally the haunt of German missionaries and Australian scuba divers, there is plenty of evidence that a superpower has arrived in town. A red Chinese banner flies on top of the tallest new building, its construction nearly completed. This is the headquarters of Ramu NiCo, the joint venture headed by China Metallurgical Group Corp., the majority owners of the nickel mine.

With a planned investment of $1.4-billion and an expected lifespan of 20 to 40 years, Ramu is one of the biggest mining projects China has ever attempted overseas. And China Metallurgical is determined to do it right.

“The significance of this project for Chinese companies is very huge,” says Mr. Wang, the mine engineer, who is also its technical director. “This project will be the bible for Chinese mining companies going overseas. If we can develop a mine here, we can do it anywhere.”

It got off to a clumsy start. PNG’s Labour Minister, David Tibu, flew to the Ramu mine site for a surprise inspection in early 2007, just months before a national election. His findings were front-page news: He declared that the local workers were being treated as slaves. They were paid less than $3 a day and given tins of fish as compensation for overtime work. Their canteen was “not fit for pigs” and their toilets were shockingly bad.

“The Chinese developer does not seem to have any standards, and I will not allow my countrymen and women to be used as slaves,” the minister said.

For the Chinese, it was a rough introduction to the intense scrutiny they would face in a democratic country, and they responded with the same savvy public-relations tactics that Western mining companies use: Ramu NiCo created a large community affairs department, staffed by Chinese officials and veteran local experts, and began spreading cash around liberally to local villages and landowners.

Invoking the Chinese concept of harmony (and the Beijing Olympics slogan), the company’s official motto is: “One Ramu NiCo, One Community.” In that spirit, it has given a 2.5-per-cent ownership stake in the mining venture to four landowner groups around the mine and refinery sites and has pledged millions of dollars to an astonishingly wide range of causes — health clinics, schools, churches, rugby and basketball teams, rice farmers, water pumps, new roads, job-training programs, local festivals and even a cocoa factory.

It has sent its locally hired engineers to language-and-culture training courses in China. It has handed out contracts to landowner groups. It is recruiting rice experts from China to help local farmers. It even has appointed a “Spiritual Awareness Officer” to talk to the churches.

“The Chinese are in a steep learning curve, and they’ve got quite a long way to go,” says Paul Barker, head of a research institute in Port Moresby, the national capital. “They’ve had to answer questions here. They’ve learned that they can’t just do it the way they did it in Africa or elsewhere.”

‘Kung-fu kicks’

But many villagers are still unhappy, and tensions have sometimes erupted into violence. In August, a Chinese security officer was badly injured in a struggle with protesting villagers near the nickel refinery site, about two hours by boat from Madang. Guards still roam around the site, protecting the workers from further attack by the landowners.

“The Chinese cut down our coconut trees and didn’t give us much compensation,” says Reuben Andonga, a village teacher and landowner who carries a slingshot to hunt birds in the surrounding jungle. “They removed our mountains and didn’t pay us.

“They were supposed to help us develop, but we are still living in a primitive way. We still live in houses of grass and coconut leaves. We still get our light from hurricane lamps. They haven’t given us any electricity or permanent houses.”

Smoking a homemade tobacco cheroot, Mr. Andonga chuckles as he remembers the battle in August with a Chinese security official who was taking photos of the protesting landowners: “We forced him to come out of the gate, and then the boys rushed him and beat him a little. He tried to fight us with kung-fu kicks, but then he fell down and the people rushed him.”

Police arrested 15 people and the villagers agreed to apologize to the Chinese company, handing over three chickens and a pile of vegetables in a tribal gesture of compensation.

The villagers admit that the refinery will actually provide some benefits, including the wharf and an improved access road, which will lower the cost of selling their dried coconut meat to city buyers. Yet they still distrust the Chinese.

“They are greedy, selfish people,” says Yambel Uddy, a village magistrate near the refinery. “They are very tricky people. We don’t need them.”

The Ramu project has been plagued by a series of strikes by hundreds of local workers who say they are paid less than $75 a month, even though they are expected to work seven days a week.

“They don’t let us go to church on Sunday,” says Tom Imai, a welder at the refinery site. “So we just decided to go to church anyway. They got angry and deducted it from our pay.”

Similar complaints are voiced by villagers near the newly constructed bridge over the Ramu River, who say they are denied the benefits that they were promised. “We go on strike, but they seem to hide away when we try to talk to them,” says Gabriel Aragaina, a former worker at the mining site. “They tell us to go and talk to the Prime Minister.”

Part of the problem is a language gap, since only a few of the Chinese miners can speak English or Pidgin, the two main languages here. But there is also a culture clash between two ways of life that seem alien to each other.

“The Chinese don’t understand the value of the land to the people,” says Ben Kedoga, a radio journalist in Madang.

“For us, the land is mother land, our life. We have a very close connection to the land. The Chinese have a system where everything is owned by the government, and the government tells you what to do. Their deal for the Ramu mine was done on a government-to-government basis.

“But, for us, 85 per cent of the country’s land is owned by traditional landowners. When you tell a simple villager to talk to the Prime Minister — this is impossible.”

24-hour clock

Surprisingly, the Chinese agree that they need a better understanding of the local way of life. “We’re trying to educate our Chinese about the culture,” says Mr. Wang, the engineer. “It’s a lesson we have to learn. Everyone has to understand the importance of the land to the people here. Our first two years here were very difficult, and we had many cultural misunderstandings. But I feel that the past year has been better.”

The disputes contributed to delays in Ramu’s construction, putting it a year behind schedule, which indicates another sharp contrast between Chinese and Pacific culture. “The Chinese always finish their projects very quickly,” Mr. Wang says. “We have a 12-hour shift in the daytime and a 12-hour shift at night. But we understand that that model won’t work here.”

Australian companies, he notes, owned the Ramu property for more than 40 years without any success in developing it. The Chinese have managed to build most of the mine in just three years, with completion scheduled for the end of next year — despite the abysmal state of the infrastructure, which has forced the Chinese to do many of the jobs that the government normally would handle.

“Compared to other mines in this country, it’s been very fast,” Mr. Wang says. “We don’t take many holidays. We work night and day. The Chinese are fast learners, and eventually we are easy to get along with. But the people here are not familiar with China. We need time to establish trust and communications with the landowners. It takes time to harmonize our relations with the people.”

Mr. Wang, 40, is the son of a geologist who volunteered to work in China’s harsh northwestern desert region of Xinjiang at the height of the Maoist fervour. Now, like his father, he sees himself as a pioneer for China. “We are the young generation and we understand the international rules. If we don’t follow the best world standards, China could suffer from the failure of this project. It would shut down opportunities for China in other parts of the world.”

He knows that China has a poor reputation for industrial accidents and pollution. One of his biggest challenges is to convince the local population that the Ramu mine will not contaminate the environment. There is widespread concern over the company’s plans for underwater disposal of the mine tailings in Astrolabe Bay, a gorgeous tropical sea with leaping dolphins and world-famous coral reefs.

The tailings will be dumped from a pipeline 150 metres below the surface of the sea, which the company says is deep enough to avoid damage to marine life. Many independent experts, such as the Australian non-governmental Mineral Policy Institute, are more skeptical, noting that this method of underwater disposal is essentially banned in Canada and the United States.

Another controversy is the Chinese company’s failure to obtain legal work permits for many of its technicians and engineers.

In November, police arrested 213 Chinese employees of the Ramu mine for entering the country on improper permits. The company was hit with a $720,000 fine for breaching labour laws and blasted in the national media, which accused it of importing Chinese workers for jobs that locals could do.

Mr. Wang admits the violations, but he says the company had no choice — the skills it needs simply don’t exist in Papua New Guinea, he says, and waiting for permits from the country’s legendarily slow bureaucracy would have killed the mine’s progress.

“To get a work permit can take six months to a year. We can’t wait. We’ve borrowed a lot of money from the bank and we’re paying interest on it every day. We need a fast track. If they don’t improve the efficiency of the visas, we’ll suffer again.”

This controversy was part of a wider reaction to a Chinese influx. According to one report, about 300 Chinese people are entering PNG every week without proper immigration checks. “There’s been a lot of illegal or semi-legal Chinese immigration,” says Mr. Barker from the Port Moresby research group. “There seems to be a back door.”

In cities such as Madang and Port Moresby, 20 to 50 per cent of the shops and fast-food outlets are owned by Chinese migrants. Behind the counter of Zhou Enterprises, a variety story in Madang, the owner is a migrant from China’s Fujian province who has been in the country for five years. He says he doesn’t like it here much, but he already owns five shops in the town, mostly selling cheap goods from China.

Another migrant from Fujian, 38-year-old David Lin, came to PNG five years ago. Now, he owns four fast-food restaurants and a supermarket in towns such as Mount Hagen and Kutubu in the Highlands region. “In China, you need a lot of money to start a business like a supermarket,” he says. “Here, it’s cheaper.”

Maggie Wilson, a hotelier who is a veteran of more than 30 years in business in Mount Hagen, says the Chinese migrants are more entrepreneurial and pragmatic than their rivals. “They came to the Highlands when nobody else wanted to come,” she says. “They’re bringing in cheap affordable items and they employ people. We don’t have the skills, or we’re too lazy, so they do it.”

She admits, however, that there is widespread resentment of the migrants because they are seen as taking away business opportunities from the locals.

A similar backlash has erupted in countries such as Zambia and South Africa, where unions and opposition leaders have accused Chinese investors of exploiting workers and forcing local producers out of business.

In the Pacific nations of Tonga and the Solomon Islands, such resentments have sparked violent riots, leaving many Chinese-owned shops looted or destroyed.

‘Non-interference’ policy

The rise of an unfamiliar new power always triggers volatile reactions. But that is not enough to stop it. The growth of Chinese investment continues, and now China is even moving into the provision of government-style services, a way of filling the vacuum in countries with weak states.

As it has done in Africa, China has begun providing development aid in PNG. It is sending medical teams to hospitals, giving students scholarships, building school dormitories, renovating a military hospital, inviting military officers on exchanges and, according to a Chinese report, providing “technical advice on the rehabilitation of prisoners” — an odd form of expertise for a police state to offer.

China insists that its foreign policy is based on “non-interference” — yet this policy has a strong political impact of its own. By providing aid and investment to authoritarian regimes, it has made it much easier for them to resist sanctions and stay in power.

In the Pacific, its money bolstered Fiji’s junta after other governments pulled out in protest against the military coup. In Africa, its trade and investment has helped to ensure the survival of authoritarian governments, and Chinese state media have even criticized African democracies — blaming democracy for the tribal bloodshed in Kenya earlier this year, for instance.

But the experience in PNG shows that China can build up political capital with democratic governments too, even if their citizens are sometimes unhappy about it.

Back in the jungle along the Ramu River, village landowners are plotting their next move against the mining company. They admit that the Chinese-built bridge is a boon to their economy, connecting them to the rest of the country for the first time. Yet they insist they are not getting their promised compensation for the loss of trees and land.

“They never talk to us. They only bring in their bulldozers,” says Peter Momeya, who says he lost valuable betel-nut trees to make room for the nickel mine.

Next month, the landowners are planning a new tactic: They will weld bars across the bridge to block it until their compensation demands are satisfied.

For the Chinese investors, the learning curve is about to take another steep jump.”

This entry was posted on Monday, January 5th, 2009 at 12:35 pm and is filed under China.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.