China's Foreign Policy and Corporations - Focusing on the Energy Sector

EAI China Panel Report No. 10

Author

Kim Young-jin, Professor, Graduate School of International Studies, Kookmin University. He holds a Ph.D. in Political Science from Freie Universität Berlin. He has served as a lecturer at Kyung Hee University, Sungkyunkwan University, Seoul National University, and Soongsil University, as a visiting scholar at Peking University, and as a research professor at Claremont Colleges in the United States. His main research areas include theories of political economy, the Chinese labor market, and recently, ancient Chinese history. His publications include "China's Marketization and Labor Politics" (1998), "China's Urban Labor Market and Society" (2002, 2011), and "Beyond Market Liberalism: Karl Polanyi's Socio-Economic Theory" (2005).

I. Introduction

The role of corporations in China's foreign policy decision-making process is increasingly drawing attention. This can be understood for several reasons, broadly summarized as structural and actor-based aspects of foreign relations. First, concerning the structural aspect of foreign relations, there is the diversification of foreign relations and the consequent expansion of the economic dimension's importance. In other words, the economic or corporate dimension is increasingly significant in China's international interests and power dynamics. This is related to the overall situation of strengthened economic interdependence between nations as globalization progresses, as well as China's active "Go Out" (走出去) strategy. In 2012, China's export volume was $2.0478 trillion, ranking first globally, and its outward investment volume was $62.4 billion, ranking sixth globally (WTO & OECD Statistics Databases 2013). As international economic exchanges increase with globalization, the importance of economic factors in foreign policy is also growing (Wei Ling 2002, 29-32; Cui Shaozhong 2012, 80-83).

Second, concerning the actor-based aspect, it signifies the diversification of actors in policy decision-making, not only domestically but also in foreign policy. Economic entities, including various types of corporations, are exerting increasing influence on policy decisions. Some argue for the participation of Chinese corporations in foreign policy-making, conceptualizing them as classical interest groups that differentiate interests (ideas), organize these differentiated interests, and pursue common interests (Li Xin 2012a, 163-175; National Committee of the CPPCC Foreign Affairs Committee 2012, 5-10). While it remains uncertain whether corporations directly influence China's foreign policy as interest groups in the Western sense, their collective interests and influence on foreign policy are increasingly gaining attention. One area of emerging actors in Chinese diplomacy is energy, particularly oil and gas. Securing energy is crucial for sustained economic growth and cannot be met by domestic production alone. Therefore, as the Chinese leadership actively pursued the "Go Out" strategy in the 2000s, energy-related corporations became the subjects of overseas direct investment.

As the foreign trade and investment of state-owned enterprises expand, demands for reflecting their collective or individual interests in foreign policy are also growing. Particularly, as Chinese corporations actively engage in international expansion in sectors such as oil, steel, telecommunications, energy, and basic infrastructure, their influence on foreign policy is steadily increasing. As is well known, under the past centrally planned economy, corporations could not function as independent management entities. Following reforms, they have gradually transformed into management entities with the inherent goal of profit maximization. Therefore, what are the mechanisms through which they can organize and express their interests? This paper will examine this, focusing on the energy sector, represented by the petrochemical industry.

The relationship between foreign policy and corporations can be approached from two main perspectives. One is how foreign policy affects the unique objectives of corporations, such as profit maximization. This impact can be positive or negative, as corporate objectives may be supported by foreign policy or sacrificed for geopolitical objectives. In any case, corporations are influenced by foreign policy and are thus considered a dependent variable. The second perspective is when corporations exert a certain influence on foreign policy for their own objectives. In this case, foreign policy functions as a means to achieve corporate goals, making corporations an independent variable rather than a dependent one.

Existing research indeed confirms these two different approaches. The first perspective suggests that Chinese corporations are heavily constrained by the policies of the Party and the government, thus failing to achieve business objectives like profit maximization in their overseas investments (Yu 2012, 32-37). In other words, Chinese corporations, subordinate to the socialist political and economic system, merely act as agents executing China's foreign energy strategy. The Chinese government is reportedly encouraging these corporations to actively engage in overseas development and supply contracts solely to procure energy and resources for domestic manufacturing.

Furthermore, while general corporations do not venture into new businesses without a certain expected rate of return, Chinese corporations undertake new ventures even with low profits or at a loss for the sake of national strategic objectives (Zweig and Jianhai 2005, 25-26; Taylor 2006, 941–944). China has invested heavily to diversify its oil imports while simultaneously constructing oil pipelines. China is reducing its oil dependency on the Middle East, a region of ongoing conflict, while increasing imports from the Middle East and Africa. This effort aims to secure resources stably by circumventing the Strait of Malacca, which is difficult for China's navy to control compared to the U.S. navy. Concurrently, China has jointly constructed oil pipelines worth hundreds of millions of dollars with Central Asian countries, including Kazakhstan and Russia, receiving millions of tons of crude oil annually. Additionally, China is in negotiations with several Central Asian countries, including Russia, for the construction of natural gas pipelines. Recently, China completed and commissioned a 1,100-kilometer oil and gas pipeline, built at an investment of $2.5 billion, connecting the deep-sea base in Sittwe, Myanmar, to Kunming in southwestern China (<The Kookmin Ilbo>, 2013/01/22, 18). State-owned oil companies such as the China National Petroleum Corporation (CNPC) are participating in this project.

In China, large state-owned enterprises play a crucial role in foreign economic relations. Their leaders are still Communist Party members and are appointed by the government and the Party. Consequently, corporate management is inevitably constrained by comprehensive national policies. In this sense, the role of corporations is subordinate to the objectives of foreign policy. It is noteworthy that, as will be examined below, state-owned oil companies are maintained through substantial financial support from the Chinese government.

Conversely, some researchers point out limitations in the Chinese government's control over corporations. The process of profit-seeking by corporations is complex and thus requires managerial autonomy. These companies are engaged in the exploration and development of energy resources abroad, participate in the construction and operation of oil and gas pipelines, and are involved in capital markets through large-scale investments such as mergers and acquisitions. Therefore, the Chinese government fundamentally recognizes the independence of these corporations in their management processes (Energy Research Institute 2008, 17-18). Various reports published by these companies indicate that corporate management is focused on profit generation, the primary objective of asset owners, just like other companies.

Furthermore, according to some research, supervisory bodies such as the Ministry of Foreign Affairs and the Ministry of Commerce do not have control over the overseas activities of Chinese corporations. This exemplifies the typical principal-agent dilemma (Gill and Reilly 2007, 39-40). For instance, when acquiring oil or gas assets, decisions are often made from the bottom up, leading to a chaotic and uncoordinated process, rather than following top-down directives based on a well-coordinated strategy by the government (Downs 2007, 48-51; Liou 2009, 670-690). The recent large-scale investigations into corruption allegations against CEOs of oil companies by the Chinese government also attest to the difficulty of government control over corporate operations themselves.

As policy-making and interest relations in China become more diversified, the variables and actors related to foreign policy also reflect this trend. While in the past, the core leadership of the Communist Party and the government monopolized foreign policy, now various government departments, local governments, various types of corporations, mass organizations like NGOs, the media, and public opinion can influence foreign policy to varying degrees and in diverse ways. Especially as China's economic opening and international linkages strengthen, greater attention needs to be paid to the interests and roles of corporations in foreign policy. The government utilizes state-owned energy companies as vanguards for energy security, while corporations use the government's energy security policies as a means to strengthen their own positions. The two exist in a symbiotic relationship.

Ultimately, research on the role of corporations in foreign policy must consider both of the aforementioned aspects. That is, corporations seek to influence foreign policy to pursue their own unique objectives, while simultaneously being mobilized for the state's foreign policy goals. However, given the trend of increasing corporate autonomy compared to the past, the active aspect of corporations as new actors in foreign policy is gradually gaining significance. The historical trend of change must be actively considered in the study of the role of corporations in foreign policy. In this context, this paper aims to focus on the following issues:

① China's Global Strategy and Energy Security

② Organizational Structure and Activities of National Oil Companies (NOCs)

③ Status of Overseas Expansion by National Oil Companies

④ Alignment and Conflict between Government Foreign Policy and Corporate Business Activities

To this end, this paper will primarily utilize the following documentary sources. First are the annual reports published by the respective companies. China National Offshore Oil Corporation (CNOOC), China Petroleum & Chemical Corporation (Sinopec), China National Petroleum Corporation (CNPC), and PetroChina all publish annual or monthly reports. These typically include messages from the companies' CEOs, general company introductions, major annual activities, and business performance. In addition, data from the China Investment Corporation (CIC, 中国投资有限公司), which manages sovereign wealth funds (SWF, 主权财富基金) and leads China's overseas investments, will be utilized. Furthermore, materials published by international oil companies, such as the Statistical Review of World Energy by British Petroleum (BP), will also be used.

Regarding the activities of these companies, news articles from major foreign media will be employed. Reuters, Bloomberg, and Xinhua News Agency are representative examples. The energy sector, with its active large-scale overseas investments and M&A activities, receives real-time coverage from domestic and international media. In addition, reports from relevant research institutions and experts will be utilized. Examples include the Center on China's Transnational Relations at the Hong Kong University of Science and Technology, the London School of Economics, the S. Rajaratnam School of International Studies, the U.S. Energy Information Administration (EIA), the International Energy Agency (IEA), the consulting firm Deloitte, the Brookings Institute, and The Jamestown Foundation. Finally, relevant academic journal articles published in Chinese and English will be consulted.

II. Global Strategy and Energy

The securing of energy resources in China is established as a core national security imperative. This is primarily related to the situation where China's rapid economic growth is leading to a surge in energy demand. Competition for securing energy resources is fierce not only among China but also among most energy-importing countries such as the United States and Japan. In particular, it is crucial to ensure that energy supply is long-term and stable, free from political and economic constraints. Among these, oil is drawing attention because it is concentrated in certain regions, and these regions, such as the Middle East and Africa, are politically unstable (Zhang 2006; Blair et al. 2006; Houser 2008).

Following China's transition to becoming a net oil importer in the early 1990s, the proportion of imports in its consumption has continuously increased. As shown in [Table-1], by the 2010s, China had become dependent on imports for approximately 70% of its domestic consumption. It is also noteworthy that this proportion continues to expand. In the case of natural gas, as shown in [Table-2], after becoming a net importer in 2009, the import dependency rate has been rapidly increasing. To reduce air pollution, China must continue to increase its natural gas consumption. The trend of China's increasing external dependency on energy resources is the background for approaching this issue from a security perspective, as mentioned earlier. Particularly, as the United States succeeds in shale gas development, leading to a long-term reduction in its external dependency on oil, China, with its increasing imports, is emerging as a major actor in the international energy market, replacing the U.S.... (continued)