Graham:
We are about to start soon, so please standby.
Christopher:
Good afternoon and welcome to today's NMIC's
seminar presented by the National Minerals
Information Center one of the US geological
survey science centers devoted to the research,
analysis, and dissemination of minerals information.
My name is Christopher Tuck and I will be
the moderator for today.
Before we begin, I'd like to thank you all
for being here the USGS National Center and
those of you joining us online on our Facebook
live web.
During a sound check earlier we were lucky
enough to have thousands of people watching
joining us from across the world, and I think
we're going to see the same crowd here this
afternoon.
Very enthusiastic participators.
We will be taking questions afterwards in
a question and answer session both from individuals
in the audience and from those of you online.
If you'd like to leave a question if you're
on Facebook, please leave a comment with your
question and make sure you mention where you're
at so we know where the questions are coming
from.
I'd also like to remind everyone that NMIC
Seminars has a new website, usgs.gov/nmicseminars
which I recommend checking out for information
on upcoming events to sign up for our announcements
and to find more about what we do at the center
and on this team.
It is not my pleasure to introduce the associate
director of the National Minerals Information
Center, Michael J. Magyar.
Graham:
My name's Mike Magyar.
I'm the associate director of the Center.
For those who may not be familiar with what
we do and who we are I thought I'd give a
little background before we got started.
The Secretary of the Department of the Interior
is mandated by Congress to collect information
on the minerals occurrence, production and
use.
For the last 20 years or so, that responsibility
has been delegated through USGS and the Mineral
Research Program to our center here at USGS.
Prior to that, it was at the US Bureau of
Mines.
All total, our center has been at this minerals
information function for more than 100 years.
To accomplish this mission, we survey 19,000
establishments involved in the mineral industry
in the United States covering about 85 non-fuel
mineral commodities, and then we also [inaudible
00:04:53] to about 150 nations internationally
to collect minerals information.
All of that data is aggregated and published
in a series of publications unique to our
center, more than 700 per year.
We aggregate the data so that nothing that
is company proprietary information is every
disclosed.
That is the core and the basis of all of our
work that we do.
It's all available on our website at minerals.usgs.gov/minerals,
and there's about 10 years of all the publications
that we do up there.
Beyond the 700 publications that are our core
we work with agencies like Defense Logistics
Agency, CIA, State Department, Commerce, and
we do deeper dives, greater detailed studies
of the material flow and supply chain assisted
with minerals essential to the US economy
and our national security.
All of those are also published on the website
as they become available.
If you have any questions, our contact information
is up there, minerals.usgs.gov/minerals, and
I'll turn it back over to Christopher to go
on with today's festivities.
Thank you.
Christopher:
Thank you, sir.
We're very proud of what we do here, and I
would suggest you definitely go check out
the NMIC website, minerals.usgs.gov/minerals,
for more information.
I'd also like to take this opportunity today
to introduce our newest members to our team.
Sitting over here, I know our Facebook folks
can't see them, but we have Erin McCollum,
Robert Callaghan, Graham Lederer and Jamie
Brainard.
I'd also like to thank Sinan Hastorun for
his continue dedication to our program here.
We are volunteers and we do this in addition
to our regular day jobs as a commodity country,
state and materials flow specialists.
I'd also like to take the opportunity to thank
Mike Jarvis, Sophia Liu, Douglas, unfortunately,
I didn't get his last name, Aleeza Wilkins
and Jane Jenness and everyone else who helped
to set this up today.
We're very excited to be reaching out to our
online audience.
With that, I'd like to introduce Mr. Graham
Lederer to discuss our upcoming presentations.
Graham:
Thank you, Chris.
I have the honor of introducing a few upcoming
talks, so very exciting time and new seminars
coming up.
In September on the 16th, we have a talk on
the Mineral Resources and Industry of Iran
by Jugen Krestchmann coming all the way from
Germany.
You'll definitely want to sign up to the listserv
to be notified about these talks.
In October, we have a talk on the Lithium-ion
Battery Supply Chain by Andrew Miller who
has actually been here before and gave a really
interesting talk on the graphite anodes, another
not to miss seminar coming up in October.
Lastly, in December we have a seminar on Mapping
Middle East Deposits.
This is one of our own, Lyle Mars, from the
USGS.
All three of these talks will be down here
on the first floor of the USGS building in
the visitor center.
With that, I'd like to introduce Sinan Hastorun
who will have our last introduction for our
speaker today.
Sinan:
Thank you, Graham.
Good afternoon everybody.
Welcome to a NMIC seminar series.
I'd like to welcome Scott Kennedy.
We're very honored to have Scott, Dr. Kennedy,
speak to us today on China's economic rebalancing.
Dr. Kennedy is the deputy director and the
Freeman Chair in China studies and director
of the project on Chinese business and political
economy at the Center for Strategic and International
Studies in Washington, DC.
Dr. Kennedy is the leading authority on China's
economic policy and its global economic relations.
Specific areas of focus include industrial
policy, business lobbying, multinational business
challenges in China, Chinese participation
in global economic regimes and philanthropy.
Dr. Kennedy is the author of The Business
of Lobbying in China and the editor of three
books including Beyond the Middle Kingdom,
Comparative Perspectives on China's Capitalist
Transformation and the upcoming book, The
Dragon's Learning Curve Global Governance
and China.
Dr. Kennedy holds a Ph.D. in political science
from George Washington University and he also
obtained an MA in China Studies from Johns
Hopkins School of Advanced International Studies.
With that, I'd like to once again welcome
Dr. Kennedy to the National Mineral's Information
Center.
Dr. Kennedy:
Good afternoon.
It's a real honor to be here.
I want to thank Hastorun for the kind introduction,
NMIC for the invitation and for all of you
coming here and for the many more that are
sitting at their desks or on the beach with
their cell phones and iPads open trying to
learn today about China.
I can tell that based on the others who was
scheduled to speak this fall that my topic
may be a little bit different than the typical
type of lecture that is presented, and I think
that's okay.
It's good to get a variety of different points
of view.
I do follow commodities in China, broader
trends, in that area, but I'm going to talk
to you today about broader trends in China's
economy, its politics which have implications
for the type of work that you all do for others
that are in the space.
What I'm going to do is try to provide some
context where China's going because certainly
supply and demand in China have an effect
on mineral markets for which has probably
been for businesses for governments as well.
I want to focus on the broader picture first,
and then you all will guide me to decide what
specific things during the Q&A you really
want to focus in on, and then I'll help you
as much as I can, and where I can't then I'll
jot down as many questions as I as can and
get answers back to you.
I've been following China now for 28 years.
First went to China in 1988, go there regularly.
This year I've already been five times.
I have several more trips coming up.
It shows my love for United Airlines even
though they don't love me.
China's a fascinating place.
For most of the time I've been following China
over these three decades I've been an optimist.
Just if you know Chinese people, if you've
watched where China has been, how far it's
come, having a glass half full view of China
is not a bad bet.
All the folks who have been thinking that
China was going to collapse, who want to go
short on China, they've all lost.
They've all lost a lot of money.
In general, I've been an optimist on China,
but I would say the past couple years I've
not been.
Now I'm actually quite worried about the direction
that it's going in.
I wanted to explain why and what the implications
are for those that engage in China.
As you know, China today is led by Xi Jinping
who's the president of the country, head of
the Communist Parties, head of the military.
He needs several business cards to interact
with those.
It's a very long list of titles.
He was selected to be China's leader in 2007.
As Hu Jintao was getting ready to start his
second term, they identified Xi Jinping as
his successor.
Xi Jinping had five years, essentially, to
decide what kind of leadership would he provide.
As he was looking at China then he noticed
a variety of problems and challenges.
The first was that China had an economy which
was very mediocre.
It had grown but was highly inefficient.
It wasn't dominant in any industries and it
had a variety of problems.
China also had environmental problems, lots
of issues to resolve.
Politically, China had a lot of corruption,
rampant corruption, where officials had benefited
immensely from their positions to enrich themselves.
That was totally out of control.
In addition, within China they had allowed
for the growth of civil society organizations,
NGOs, foundations, media organizations, law
firms and others to help govern the country,
but these organizations weren't all toeing
the line.
They putting a lot of pressure on the party.
As China looked at the color revolutions elsewhere
in the world they were quite concerned about
these groups.
Lastly, he looked at China's global position
and realized that China didn't have the type
of influence he thought it should.
That it was relatively weak.
It was passive.
It basically had to maintain good relations
with the United States no matter what because
the US was so dominant.
Xi Jinping saw a range of problems as he was
coming into office.
He had a variety of things that he could deduct.
The first would've been the suggestion that
would've come from Americans, Westners and
Liberals.
He could liberalize across the board.
He could have opened up China's economy, reduced
government intervention, reduced barriers
to international trade and investment.
That would've been one way to approach the
economy.
He could have liberalized China's political
space to give society groups more room, give
them clear authority, protect them, provide
a clear legal foundation for their operations.
He could have introduced rule of law to deal
with corruption.
Instead of a political campaign he could just
give judges and the police much more independent
authority to investigate and prosecute corruption
wherever they found it, perhaps by an independent
commission which is the way, for example,
Hong Kong and Singapore have dealt with corruption.
He could have tried to improve relations with
the United States and develop a strategic
partnership based on the shared vision for
their respective roles in the world for global
governance, institutions and for international
rule of law.
That would've been one set of things that
he could've done that would've had a pretty
consistent theme to them and that many mentioned.
He didn't take that advice.
He, in fact, went in the opposite direction
on every single one of those.
He has spent the last several years since
he came into power in the late 2012 of cracking
down on simple society, reducing their space,
eliminating the gray zones where NGOs for
lawyers, for non-profits to operate.
He has in addition to that an anti-corruption
campaign which has been very aggressive, highly
politicized, not based upon independent rule
of law.
He has had a foreign policy which has meant
to increase China's voice in the system, and
within Asia challenged the US military for
dominance in the region.
Anyone who has followed East Asia or gone
to CSIS website or read the New York Times
has seen the photographs of what China's been
doing in the South China Sea and elsewhere.
That really dares us to the Chinese embassy
having those [inaudible 00:18:13] up there.
Those are all pertinent.
In addition, changes in economic governance
which I want to focus mostly on today, all
consistent with each other, all centered around
the idea of control but expanding control,
state control.
That's how they have focused, and there's
a lot of consequences for that trend which
is very different from how China was governed
before Xi Jinping [inaudible 00:18:48].
In terms of economic policy, more specifically,
in general, as I said before, I'm an optimist
about China.
It has a lot of growth potential despite the
fact that you have a demographic shift that
is leading to the graying of the population
of much higher proportion of people who are
retired relative to those in the active work
force over time because of China's one child
policy.
Eventually, all those people that just shifts.
You could just watch the trend over time of
how the demographics shift.
China's environmental problems are extremely
serious and just simply math which you all
know much better than me.
The increment that you need to keep the same
percentage of growth each year in absolute
terms that just keeps getting larger and bigger
you are, and so it's just simply hard to sustain
long-term growth.
China's growth at 9+% per year for 38 straight
years.
Those things all suggest a slow down, but
there're many reasons that China has the potential
to continue to grow at a relatively high rate
for another decade or two.
It still has an extremely smart population.
It has excellent logistics, and there are
so many policies that all of us could think
of that they could adopt to make their economy
much more efficient.
They could liberalize services.
The could extend the retirement age.
The could make it easier for labor to move
around the country.
There's just a long list of things that they
could do to make this economy more efficient,
but they decided they didn't want to do those
things.
Instead what they've done under Xi Jinping
is they've double down on government intervention
across the board.
Then, China talks about reform all the time.
It's one of the favorite buzz words the Chinese
use.
Go to any Chinese government website, media
organization, and you'll see the word reform
all across the page.
Xi Jinping created a leading small group on
comprehensively deepening reform.
There is the leading small group for reform
of soccer in China.
Many areas of reform they are focusing on.
Notice the Chinese didn't have any teams in
the Olympics in soccer.
The idea of reform in China has been totally
separated from the idea of what it used to
be which is liberalization and marketization.
If you look, for example, there's a long list
of things that the Chinese have done related
to intervention from a little over a year
ago when the Chinese intervened in the stock
market.
First they intervened to push the market up.
China's real estate market was suffering.
It was an obvious bubble.
They were worried, so they figured let's pop
that bubble and what we'll do is push money
into the stock market.
They did that, 2014-2015, the stock market
went way up, and then lo and behold, gravity
kicked in and the stock market collapsed.
The Chinese government intervened haphazardly
causing lots of problems, reducing confidence
in what they were doing.
Then in about a year ago, last August, the
Chinese announced reforms related to how the
Remminbi's exchange rate is set, and they
totally bungled that.
They said that they were doing that to reform
and liberalize that exchange rate system to
prepare China to have the UN join the SDR
basket that the IMF oversees.
Other Chinese government officials said what
they were really trying to do is spur Chinese
exports by devalue because they devalued at
the same time they announced those reforms.
Markets really didn't take this well.
The Renminbi went up and down for several
months until the Chinese intervened the capital
markets and are still intervening today.
Last September, the Chinese announced plans
to reform state run enterprises.
China still has 150,000, so easily account
for about one-third of industrial output.
They account for two-thirds of credit to industry
in China, so that's not even balanced.
SOEs have about one-third the return on assets
that private companies in China do, so they
are big, big sink and need to be addressed.
Last September when they announced the reforms
they announced the most paltry limited policy
changes one could imagine, basically suggesting
that they had no idea what they were going
to do.
They didn't want to privatize SOEs.
They don't want to bankrupt SOEs that are
going bad.
They want to instead merge SOEs with each
other, have good ones take over bad ones,
reduce the pay for the leaders of SOEs so
that they make incomes more like government
officials.
I don't know what benefit that would have
other than making them want to find outside
income, but nevertheless that's something
that they mentioned.
Another idea they had is, I don't know if
you all are familiar with Singapore has a
very large state owned investment company
called Temasek.
They thought we could follow the Temasek model.
Temasek is a holding company under the Ministry
of Finance in Singapore.
It has outside boards of directors.
It has about 100+ companies that it oversees
all of which operate according to market principles.
No government intervention from the Singaporean
government.
China said maybe we could that, maybe we could
instead of directly managing state owned enterprises
we could just manage them like capital but
not intervene in what they do day to day.
As you know how China operates, you know that
Communist Party organizations are inside SOEs
have a lot of role in managing SOEs.
In China, independence is not a word with
depth.
You actually see it practiced a lot.
If China follows the Temasek model it will
do everything that the Temasek model has except
everything that the Temasek model has which
means they won't do anything like the Temasek
model.
That's not possible.
Since then, they've announced a couple of
other variety reforms to SOEs all of which
add up to zero.
In March of this year, China issued its latest
five-year plan.
China still has five-year plans which go back
to the early 1950s.
These are indicative plans.
This isn't input/output tables that engineers
use, but these are indicative targets.
Nevertheless, the five-year plan in our bright
neon lights that tell everybody what the direction
of economic policy is going to be, what their
priorities are, where money is going to be
spent, where it won't be spent which is a
signal to officials across the national bureaucracies,
the local government officials, what they
ought to emphasize, what they ought to not
emphasize, what will effect their promotions.
It signals to companies and countries that
interact with China.
If China has a priority in some area, well
then it'd be a really good idea if your company
got involved, or even if you weren't directly
involved to market it to make it look like
that was your priority.
These plans are extremely important.
The plan that they issued in March we wrote
our own report on the plan which is on our
website.
It is very forward looking in terms of what
they want the economy to look like in five
years and even beyond in terms of re-structuring
away from heavy investment in infrastructure,
toward services, away from assembly and manufacturing
towards design, innovation and high tech,
towards a much greener environment, less use
of fossil fuels, much more renewable technologies,
greater conservation, a whole long list.
I don't think anyone in this room, all of
together, could've come up with a better list
of economic targets in ways they wanted to
make the economy be much more effective, much
more efficient, at least in terms of the outcome.
In terms of how they would get there, this
report, the plan depends heavily on government
intervention to achieve every single one of
these goals.
To reduce capacity and production, energy
intensive industries, in infrastructure, it's
all about government intervention to identify
and force the closure of companies that are
producing these things.
To have government spend trillions of dollars
on subsidies and funding for companies to
develop products, China's developed a leading
small group on semiconductors, for example.
This basically is sort of the China, Inc.
board of directors for how to develop China
semiconductor industry.
China currently imports almost all of the
semiconductors that it uses that go into things
that are in your pockets or purses today,
so your phones and everything.
Those all come from abroad.
The Chinese would like to actually move the
technology ladder in semiconductors.
They've already earmarked I think this year
somewhere around 130 billion US dollars in
R&D to develop their own capacity.
Not only has the central government done that,
but almost every provincial government has
a semiconductor development plan to create
their own FAS.
Counties in China have that.
Can you imagine Fairfax county, Arlington
county, Rappahannock county, Montgomery county,
all having their own plans to raise money
and develop their own FAS.
That's not a great idea.
China's always intervened in the economy.
It's never been a pure free market.
That's a joke.
There's a few reasons why it was more effective
than what I'm describing now.
The first is that China is essentially catching
up for the last 30 some years.
When you catch up you know the target, you
just throw a bunch of money, bunch of smart
people, organized.
Catching up that's a reasonable way to use
government intervention.
China's now the technology frontier in many
industries, and picking winner and losers
is hard for the markets let alone for government
bureaucrats.
Then, when you have a financial system like
China's where there aren't hard budget constraints
and government officials see losses from making
bad choices that makes things even worse.
All of those things suggest that the type
of approach they have before is not going
to work and they need to change.
Then in addition, despite the fact that China's
always had a lot of intervention in the economy
the way the dynamics of the political system
always encouraged going in a different direction
and using the market [inaudible 00:30:31]
adjusting.
China's a big place, lot of bureaucracy, lot
of different ministries, commissions at the
national level, 34 provincial level bodies.
I think China has 2,000 counties, 700,000
villages.
It's a big place.
When you don't have a very authoritarian leader
at the top who tries to control everything
you get a lot of different voices speaking
up.
You get different leaders discussing with
each other what they think policy ought to
be.
You get different bureaucracies putting their
two cents in.
You get different localities putting their
two cents in.
Usually, the product of that is a negotiated
policy outcome in which the sharpest edges
of government intervention usually get reduced,
or you find some advocate someplace for a
market solution.
You have, for example, local governments competing
to attract investment from General Electric,
for example.
To attract General Electric investment they'll
not only provide tax holidays and other things,
they'll provide other types of benefits or
things that help GE do business in China,
reduce market entry barriers.
That competition between localities or between
different bureaucracies always ended up helping
encourage a more liberal outcome than what
even the most hard line nationalists protectionists
in China would want.
In addition, China has over the last 20 years
business lobbying has emerged in China, something
I wrote about.
Businesses in China lobby not only for protection,
but some also lobby for openness.
You think of anti-dumping case when you have
Chinese steel companies seeking protection
from foreign steel, downstream industries
like Chinese auto makers, oil companies, lobbying
against that because they want to import the
higher quality steel than they can get domestically.
You have essentially as a result of all of
those things what I call porous protections.
Now that you have a bunch more centralized
hierarchical system with Xi Jinping firmly
in control no other leaders contending with
him an anti-crushing campaign which is quite
vigorous, it scares the begeebers out of everybody,
central and local, to not want to cross him.
That reduces the ability of this system to
move in a liberal direction even when there's
a policy difference in Beijing.
The Chinese have this phrase, the sky is high
and the emperor is far away.
Basically, means that localities can get away
with what they want because there's just too
many places to control.
Now under Xi Jinping the sky isn't quite as
high, the emperor isn't quite as far away
as it used to be.
The result of extensive government intervention
is essentially an economy that's continue
to grow but not grow in a healthy way.
It now takes $9 to get one unit of GDP growth.
Several years ago, it would only take $2 to
get one unit of GDP growth.
That's four and a half times, that's a horrible
trend.
They are spending way more to get the same
unit of GDP growth than they've had before.
That's a bad trend.
The only way you're going to get a better
trend is a much more efficient economy where
you raise productivity of human capital, financial
capital, of finance.
The policies that they have in place now aren't
going to move them in that direction.
Where are things going?
First of all, I think a crisis is highly unlikely
in China of, a financial crisis.
Some people think that debt can only pile
up so high before bankers call it in.
I remember in 1988 when I was in a college
in the United Stated just getting interested
in China and the US had a trade deficit of
about 15 billion a year people said it can't
get much higher.
The Federal government had a budget deficit
under Reagan about 80 billion a year or something
like that.
It couldn't get any higher.
The US is just going to get wiped out.
Lo and behold, here we are 28 some odd years
later.
We have 19+ trillion of debt and everyone's
still buying American treasuries, stock markets
at all time highs.
We did have a little crisis, not even little,
but nevertheless, it can go on for a really
long time.
The Chinese are actually in a better position
to extend things than we are.
They have far more savings in their banks
than we do, savings deposits.
They have two plus trillion in foreign exchange
reserves.
They can open and close the capital account
in China with a push of a button.
No one's going to get in the way for that.
If they need to, they can print all the money
that they want.
A financial crisis is really unlikely in China.
If they pursue the track that they're on and
don't change, then for me what the most likely
outcome is is instead of China having a crisis
what they're going to do is push all of the
adjustment cost on everybody else.
What you're going to see is continue stimulus
to try and keep the economy growing which
will be high calorie, cheap stimulus that
gives short-term results but leads to a lot
of volatility.
You're going to see volatility in China's
housing market, in other areas of infrastructure,
in the high tech.
That volatility is then going to spill over
to the rest of the world because China's market
isn't entirely closed.
Obviously, they're the world's largest trading
country.
Their capital markets are somewhat open.
As we saw last summer and the beginning of
this year, when Chinese markets get excited
we get really excited.
Last August 11th, the morning they announced
their foreign exchange reforms and people
didn't know what was going on they thought
it was a devaluation.
The New York Stock Exchange opened and that
Monday morning went down 500 points right
away.
I expect a lot of volatility in financial
markets as a result.
I think the biggest concerns that I have aren't
financial markets because I don't have any
money.
I work at a think tank, so I don't have any
investments to depend on, so wherever the
market goes it's just I'm like sitting in
the woods.
I'm ready to retire.
What I am worried about are physical markets
and the industries associated with them.
I'll give you an example, last year, and I
might not have the exact numbers right but
just for example, take aluminum for example,
last year China produced I think somewhere
around 31 million tons of aluminum.
Don't worry about the math, but they only
consumed 29 million tons, something like that.
There were two million extra tons of aluminum
that they needed to do something with.
What they did is they exported those.
Some they exported directly, some they sent
to Vietnam, smelt down, and then sent it out
in a different form.
That's two million extra tons on the global
market for aluminum.
That sent aluminum prices down.
If you're a company like Alcoa that doesn't
have the loose budget constraints of Chinalco
and Chinese aluminum providers that's a big
problem.
Just look at the papers this year, what did
Alcoa do?
Alcoa split into two and a lot of the aluminum
business that they used to be in they're not
in it anymore.
If you look at steel industry, similar problem,
but magnified since China makes 54% of the
world's steel.
Consumes 60 some odd percent of the globally
traded iron core.
Prices for steel have gone the same direction,
and the same consequences for US steel manufacturers
and same in Europe.
China could do for semiconductors what they've
done for aluminum and steel and for a lot
of other products.
That's a market share problem.
It's actually more about business model.
They could really hurt those, the basic business
models of those sectors, it it doesn't get
it's house improved and change.
It needs to become much more efficient.
Imagine China that continues to grow on cheap
calorie stimulus and say triple the size that
it is now.
It goes from having say 30 million tons of
aluminum to produce and say 100.
If it still has the same gap, then it would
go from two million tons of difference to
six million tons.
Now imagine six million tons on the market.
China actually triple its efficiency over
the time it grows so that the market consequences
globally don't rise anymore.
China has to become much more efficient to
spare the rest of the global economy.
To me, that's a big, big challenge For China.
All of us have a lot at stake in China getting
it right simply because it's so big.
If China were Ethiopia, it was Burundi, it
if was Bolivia, it wouldn't really make a
big difference on global markets and the effect
of others.
It would be a bad story regionally for China,
but it wouldn't have such a big effect.
China's size gives it a lot of opportunities.
It also gives it way more responsibilities,
but it also puts a lot of responsibility on
us on trying to guide the Chinese and encourage
them.
I'll just wind up with a couple words.
When you talk to Chinese, especially officials,
they will argue that they are engaging in
important structural reform and the data shows
that yes China's moved from industry in the
services as of the end of July were counted
about 54% of GDP, much higher than 38% 10
years ago.
Consumers are consuming at a faster rate than
ever before, so they are making that transition
but in an efficient way at all.
Most of the rise in services, actually financial
services, people doing trades, speculators.
I love speculators, but I don't see why that's
counted as growth in GDP.
That transition is not really significant
for making China's economy more efficient
or for solving their core problems.
The people on the other side, the people who
worry about debt, as I said I don't think
debt's likely, I think what we're likely to
see is what I said the problem being pushed
on everybody else.
If you do think in terms of policy choices,
if you think China is getting things right
and gradually transitioning, then it's just
about patience.
Give them time.
It's complicated.
It's a big place.
You have to give Xi Jinping some slack, eventually
they will fix this because they want to.
It's just complicated.
If you're worried about the debt problem and
you think that's where everything is situated,
then what you want to do is tell them is get
your debt under control, and then you want
to protect Americans, the rest of the global
economy.
Don't have your pension funds go invest in
China.
Don't let the Chinese issue debt abroad or
in the United States, basically keep that
as separated as you possibly can.
If you think it's about the potential for
China to continue to grow and push everything
on everyone else, then patience is a horrible
idea.
Really what you need to do is you need to
explain to the Chinese why their current path
is bad for them and they could have things
much better.
You also need to prepare your industries to
be able to deal with in case that isn't what
happens, the volatility that's come there's
going to be much more volatility that we've
been used to before.
Thank you very much.
Christopher:
Thank you, sir.
Dr. Kennedy:
Sure, sure.
Christopher:
Wonderful, wonderful.
Dr. Kennedy:
Thanks.
Christopher:
I'd like to thank you again for such a wonderful
presentation and add to it if I may.
One of the comments that we had online they
spoke of the reliance that we have on these
minerals and the products they go into, specifically
iPhones in this instance.
Scott touched very angrily on the steel industry
and the crisis it faces and import reliance
and the international trade balance, making
sure competition doesn't interfere with the
US and its industry.
That's a big topic of what we research and
look into in the way that minerals interact.
Minerals go into everything, and that's one
of our big points here.
They go into phones and cars and buildings
and everything.
China and their influence on that industry
is going to be felt everywhere when we do,
as he said, possibly volatility.
I'm a big fan of crowd sourcing, so we want
to make sure we ask everybody now that we're
done if they'd like to add any comment on
Facebook and where they're from we'll make
sure we address that in the Q&A.
Also, to submit your ideas about future mineral
seminars online at our website, usgs.gov/nmicseminars.
Also, if you enjoyed today's presentation,
we are [inaudible 00:44:38] of past presentations
and in the coming weeks we will make it available,
a number of our videos for those presentations
as well, so look forward to that great resource.
We'll Scott take a quick break, and Sophia
Liu is going to share some information on
mineral resource program crowd sourcing project
that she's working on.
Sophia.
Sophia:
Hi, thank you so much.
My name is Sophia Liu.
I'm an innovation specialist at the US Geological
Survey, and I appreciate this opportunity.
I really want to just put out there you gave
a really good example and many stories on
the complexity of this issue around minerals
in China.
I think what we do really well at USGS is
we have a lot of amazing statistics and data
in that's these books.
What I hope to do is try to explore how we
present this type of data in new ways, how
can we create much more data driven stories,
being able to engage a variety of users engaged
in these efforts around understanding critical
minerals.
This is sort of a call out to any volunteers
on both inhouse here internally at USGS but
also any of those online that are interested
in trying to engage on how we can tell better
stories around critical minerals, especially
in Asia, on the web and other interactive
visualizations.
Thank you so much for this opportunity to
[inaudible 00:46:00].
Christopher:
We're going to go ahead and bring Scott Kennedy
back up.
To lead our Q&A today, Ms. Erin McCollum,
and our gentleman microphone handlers which
are Graham Lederer and David Bernard.
If you have any questions in the room please
just get their attention and I'll turn it
over here.
Erin:
Thank you very much, Dr. Kennedy, for your
thoughtful presentation and for graciously
taking time out of your busy day to join us.
At this time, we'd also like acknowledge the
audience in house with us in Western Virginia
and to thank the online [inaudible 00:46:35]
conversation as well.
Chris mentioned a comment about the minerals
in iPhones.
This is true, and I would also at this time
like to open the floor to our audience with
us live.
At this time, we have no other online questions,
but if you're live with us please send them
in and we will acknowledge them.
Audience:
Thank you.
I'd like to take a question to the three different
[inaudible 00:47:04] that you had.
One is the drive for a more centralized government,
two, the fact that control seems to be dispersed
with provincial and local governments, and
three, that there is an over supply or an
over capacity in such things as you mentioned
like steel and aluminum.
There have been central government policies
trying to rationalize and close inefficient
and polluting industries in order to cut pollution
as well as energy usage and inefficiency in
their grid system.
Yet at the same time we're not seeing this
happening because of the local provincial
interest [inaudible 00:47:49] employment and
so force, so there seems to be a push-pull.
Do you see the rationalization actually catching
hold and more of it taking place in the future?
Dr. Kennedy:
That's a great question.
I know that China's heart is in the right
place economically, but I think the approach
that they're taking it's the way that I deal
with the weeds in my yard.
I cut them down and they grow right back.
I actually don't actually fix.
I don't make my lawn more beautiful and more
healthy.
I think we need to ask why did China have
an over capacity problem in the first place.
The US Chamber of Commerce have a report on
this, and then also the European EU Chamber
Commerce in China wrote also an excellent
report on over capacity as well last year.
It's something that I've tried to pay attention
to.
I think the core, the problem is China's financial
system.
Of course, there are bouts of over supply.
That's normal.
You're going to have just disequilibrium all
the time.
Markets are usually disequilibrium, so that's
not the problem.
The challenge is that in China there are still
so many distortions, particularly in financial
markets that there are few serious incentives
or penalties for over investment because local
governments have ties to banks, big companies
have ties to local governments and to the
banks, so that if things if go badly they
don't have to face the consequences.
I actually I'm in favor of local competition.
I want Reston to compete for hosting companies,
innovate government institutions with Austin,
Texas, that competes with San Diego that competes
with others.
If things go badly, the folks that made the
investments ought to face the music.
In China, you don't face the music.
Your loans get rolled over.
Your bonds get renewed.
You don't go under, and so the moral hazard
problem that's endemic in Chinese financial
system is what keeps this going on.
It's what makes local governments not want
to listen to Beijing.
Until you fix that moral hazard problem that's
at the core of the financial system basically
what you're doing is you're solving the problem
momentarily, but it's just going to come back.
Of course, the amount of over capacity that
China has now is much larger than the previous
bouts of over capacity that they had say in
1994-1997 or early in Hu Jintao's administration
when he came in and they just threw a ton
of money at [inaudible 00:50:38] just after
[inaudible 00:50:39] reform.
It's getting bigger.
Our suggestion still is that you're not going
to fix this problem until they fix the financial
system.
I think the problem doesn't lie in [inaudible
00:50:54] China.
It lies in Beijing.
Once you fix the set there, then that principle
agent problem becomes much easier to address.
Many of my Chinese friends say that's impossible,
a lot of those Communist Parties in power
they're not going to change this because they
need to control the financial system because
they're based on industrial policy, then you're
just going to be cutting weeds.
Erin:
Thank you so much.
We'll have another question from the audience,
please.
Audience:
My question is about the [inaudible 00:51:36]
China and the national development, specifically
in Africa.
The latest [inaudible 00:51:47] for them review
of [inaudible 00:51:52] discussion of China
there was a lot of talk about the role of
China [inaudible 00:51:57] supporting infrastructure
in Africa.
I think the country is number one in the world
not [inaudible 00:52:05] for United States
or Europe to support [inaudible 00:52:08]
China.
Dr. Kennedy:
I think it's amazing the transition that China's
gone from being a recipient of foreign aid
to being a provider of foreign aid.
China's essentially graduated, although I
think there's still some [inaudible 00:52:27]
projects [inaudible 00:52:28] received some
funds in some parts of China which it's hard
to believe given how wealthy the country is
now.
There is a lot of potential criticism and
the criticism has been made of Chinese investment
or aid in Africa as being tied to Chinese
business that they'll only build infrastructure,
stadiums, roads, telecom networks if the business
goes to Chinese or if Chinese workers can
carry them out.
I think the research is much more mixed on
actually what they're doing.
There's been a lot of success.
Not entirely, but look at the portfolio of
US foreign aid, that AID, for example, and
how things have worked out or even the World
Bank.
China created the AIIB at the beginning of
last year.
That's, in my mind, a good opportunity to
put a little bit more pressure on the World
Bank and other multilateral development institutions
to approve how they do business.
I think when people were looking at the creation
of the AIIB originally their view was this
is just simply going to be a [inaudible 00:53:50]
for China to promote state of enterprise exports
and benefit China and not the regions.
I can see there being some legitimate concern.
I thought the US government went too far in
essentially opposing by encouraging other
Western countries to not join.
The US was never going to join because the
US Congress would never allocate the funds
for the US to become a member.
The US took a much more assertive stance against
the creation of the bank.
That was a mistake because the bank's going
to be created anyway regardless of what the
US position was.
I think the US was really concerned about
the bank.
What they should've done was encourage is
encouraged its creation.
Should've said, "Good luck.
We hope it goes well."
Then, if it goes well, and it adapted to international
norms and maybe prove upon them then the US
could say, "Look, we didn't get in the way
of this new Chinese initiative.
We welcomed China to participate in global
economic governance," provide a leadership
role.
If it had gone poorly, then US could've said,
"We told you so.
Not our fault," but no one else was paying
attention.
I think now it's very difficult to unring
that bell, and if things go wrong with the
AIIB many would look to the US.
AIIB's done a lot of work to try and collaborate
with the World Bank with the Asian Development
Bank and others.
I think actually once they start issuing their
loans and those great projects it'll be interesting
to see.
Infrastructure is a very difficult area because
it's hard to find bankable projects, projects
that will generate eventually a return, that
will yield, that will justify you to pay back
the loan and generate ongoing income creation.
There's a huge infrastructure gap, and so
funds are needed.
The US can help, not necessarily with all
the money, but with technical assistance,
coordination, bringing the private sector
in whether that be in Asia or in Africa because
a lot more of the US could do.
I think the Obama administration actually
has been quite creative in figuring out how
they can do more with less funds.
I think that the trend is going to be how
you take Chinese money, American know-how
and put those two things together and bring
the private sector in.
The one area that I'm still worried about
which goes back to my talk is if China's domestic
economic model continues the way it is and
it doesn't become efficient and it generates
more balance of over capacity or the opposite,
then China's going to be using foreign aid
or development [inaudible 00:56:50] or other
types of international arrangements to solve
their domestic problem, basically [inaudible
00:56:56] this excess capacity, and I think
that's not necessarily going to be a good
thing for those countries whether they're
African or Asia or other places.
If China institutes more thorough going economic
reform and liberalization, then I think that
would have a positive spill over on the types
of collaborations that it has in Africa and
elsewhere.
Erin:
I'd like to pose question that submitted to
us from our online community.
During your conversations, you mentioned steel
[inaudible 00:57:26] briefly.
This one pertains to rare earth elements and
the question is, doesn't China control a lot
of rare earth element deposits?
Then the question would be what does this
mean for us?
Dr. Kennedy:
Sure.
Yes, it does.
I first started paying attention to rare earths
in 2009 and 2010.
As people will remember, in 2010 the Chinese
navy ran into some Japanese fishing boats.
No, Chinese fishing boats ran into Japanese
navy.
The result of that was China closed off its
rare earth exports to Japan.
It notified, basically, told customs don't
let any of these things go out.
That was the first time the world paid attention
because everyone knows what rare earths go
into.
They're not actually very rare, but they go
into a whole variety of high tech things,
civil and military.
The US in the 1970s [inaudible 00:58:25] which
produced a lot of rare earth minerals stopped
because of the environmental consequences
in doing so, and so a lot of places in the
US and other places closed down leaving it
to China.
My sense is that China thought that it could
used its monopoly of the provision of rare
earths to, one, make a lot of money from just
the sale of rare earths, and then use that
also as leverage to force other countries
down the supply chain to invest in China so
that they could move up the technology ladder.
Rare earths, for example, go into the magnets
for wind turbines.
China's tried to encourage those that make
wind turbines to do those in China because
they said, "We're going to make the price,
the export price, for those types of rare
earths much higher, so invest here and you
can get access to those at a cheaper price."
Deng Xiaoping has a famous saying, the Middle
East has oil, we have rare earths.
The consequence of that type of thinking that
China could use its monopoly of rare earths
to squeeze the global marketplace and others
I think led to disaster for China, not for
everybody else but for China.
China increasingly regulated rare earths,
moving away from the market principles to
administrative intervention to the extent
now that there are only a small number of
rare earth providers in China in very hierarchical
institutions.
I, in 2011, went to Baotou which is the center
of Northern China's rare earths and went to
the largest rare earths company there and
went out to the mine, the Baiyun mine in Northern
Mongolia, inner Mongolia but the northern
half.
The drive up there is really dangerous, so
I don't encourage everyone to do it.
Looked into the mine and went around with
one of the mine drivers.
They make about 4,000 Renminbi a year, these
drivers, and cancer and everything is just
horrible for these folks.
It's just a terrible job.
It's not the core of the story, but it's just
an interesting sector.
They totally intervened and made this less
and less a true market.
I think the Chinese were surprised that the
rest of the world didn't sympathize with them
in their conflict with Japan.
Why would you agree to do something back to
Japan to teach them a lesson?
Your relationship with Japan is different
than everyone else's.
The consequence of China taking those steps
led to the development of rare earths in other
places.
Investments in rare earths in Molycorp back
here, in Australia by Linus and other companies,
but the bigger trend was the movement into,
I guess the second would be to conserve and
figure out how you can use fewer rare earths
per unit of item that we need them for, and
then the third thing was finding substitutes
for rare earths to making them less important.
All of that stuff has sent the price of rare
earths falling.
Since 2010 and 2011, maybe they've recovered
a little bit, but they're not back to the
prices that they were.
I think that China made a horrible mistake
in trying to overly exploit its monopoly.
I think the rest of the world has figured
out how to respond.
There're other minerals and things that the
Chinese produce a lot of or they're the number
one buyer, for example iron where they tried
to exert the same type of pressure.
I don't think it's had the same type of effect.
Erin:
Thank you very much, Dr. Kennedy, appreciate
your [inaudible 01:02:35] with us.
This concludes all the time we've allotted
for question and answer, and at this time
I'd also like to extend my appreciation to
our virtual and our live audiences.
Thank you.
Christopher:
Thank you, sir.
I will say you are lot more popular on Facebook
than I am.
My wife just usually gives me a pity like
on my science posts, but you've garnered a
couple hundred, so we're happy and glad that
everybody was able to join us.
Thank you.
I'd also like to take a second to thank our
leadership here who helped us realize the
great potential in the program and our improvements
we're going to make, Dr. Steven Fortier, Michael
Magyar, Elizabeth Scott Sangine and Steve
Textoris and Patricia Leversque for all their
hard work in helping all of us do what we
do.
I'd like to again thank Dr. Scott Kennedy,
thank you so much, sir, and invite everyone
to please join us next month as we present
the Mineral Industry of Iran.
That would be a wonderful talk.
Thank you all for attending.
Have a great day.
