China: Meritocracies, Copper, Batteries, Petrol, Solar and GOLD
In the fall of 2011, the LaBorde family attended the New Orleans Investment Conference in New Orleans. A presentation about China by the very passionate Dr. Stephen Leeb, author of Red Alert: How China's Growing Prosperity Threatens the American Way of Life, warned that China is becoming an economic super-predator.
Leeb’s explanation of the current situation reminded me of a boxing match. In one corner there stands a boxer who has a very strong reputation but who does not know he is in the ring. In the other corner stands a boxer who is a little lighter but who has been training hard. To tilt the scales farther in his direction, the latter boxer also purchased all of the boxing shoes, gloves, trainers and ring time while the other boxer was not even paying attention. You can guess which boxer represents the U.S. and China in this scenario. The United States is not necessarily done for, but it is time for us to at least realize that we are in a fight and act accordingly.
A long time chess player, Dr. Leeb expressed that he is downright scared of the way that our opponent is systematically playing an enviable game of strategy while the U.S. hasn’t even started to acknowledge that it is engaged in a competition that threatens our entire way of life. His argument focused on resource acquisition for global economic control. His comments invoked a mixture of respect for the efficiency of the Chinese machine and shock at how far behind the U.S. might be.
Leeb expressed particular concern about China’s workforce development strategies; its growing control of the mining and use of rare earth metals and of copper; its focus on petroleum resources; its dominance in the solar market; and its apparent stockpiling of gold and silver.
Workforce Development
Besides having a massive cadre of working age people and graduating more engineers each year than we have working in this country, China operates on more of a meritocracy, or by rewarding the merit of individuals, than the U.S. does. For example, one of the premier female chess players in the world right now is a Chinese adolescent who was pulled out of the fields as a young girl when someone recognized that she had an aptitude for strategy. If she continues on her current trajectory, Dr. Leeb suspects she will be playing grown men soon.
It is the mindset of elevating the best, brightest and hardest working that permeates much of Chinese society. There are more businesspeople becoming billionaires each year in China than anywhere else in the world. The Chinese have repeatedly been cultivating this kind of talent in government as well, and Dr. Leeb believes that this talent is playing the resource war very well. Now please don’t get me wrong, China’s leaders are not saints, and the country has a fair share of insider nastiness, but the country is playing harder towards merit than the U.S. is by far, and this should pay high dividends in the future.
Rare Earth Metals
Rare earth metals are the bedrock of the future of all long-life, lightweight batteries. Over the years, China has developed its mines in Mongolia and its processing plants to the point that China now produces 97% of the world’s supply. These resources will be increasingly important as the world moves into greater use of electric cars. Clean energy is a global concern, and the efficient storage of this energy is crucial to its adoption and success.
Further, China has stopped exporting rare earth metals in raw form and instead will only sell them as components in finished products such as batteries and permanent magnet motors, a core component of most high-efficiency electric generators. In doing so, China is locking down its control of key components markets.
Copper
China is spending dollar amounts of a similar magnitude in Afghanistan as the United States. The difference is that the Chinese are spending their resources to build infrastructure in Afghanistan, in exchange for the exclusive right to mine the country’s copper, while the U.S. is creating the world’s best distraction for them to do so. The reason that China is getting a leg up on the world’s copper supply is concerning is that copper is at the root of many of the world’s future “green” technologies in addition to being the backbone of many of the world’s existing technologies.
Solar Energy
First Solar is the U.S.-based company that was the second largest producer of solar panels in the world in 2010. Recently, First Solar took a bath, losing 25% of its value, and the reason can be found in a recent quote from a Forbes article examining the firm’s slide. “First Solar did not provide any details but the handwriting was on the wall. Recently, there has been considerable anecdotal evidence that First Solar is no longer competitive with Chinese imports.” The title of the article was even more succinct in its finger-pointing: “China Almost Kills Premier U.S. Solar Company.”
In 2011, First Solar led the roster of the 25 fastest growing technology companies in America. What could bring an innovative giant like this down? According to Forbes, the culprit was a $30 billion dollar helping hand from the Chinese government to its entire solar sector, singlehandedly making U.S. production uncompetitive. With that kind of financial supports in play, there is just not much a company, or country, can do to prevent China from getting a complete lock on the solar industry, a potential lynchpin in the forward motion of clean energy.
The Oil Game
Dr. Leeb’s concern centers on one word, PetroChina. PetroChina Company Limited is the listed arm of the Chinese National Petroleum Corporation, a state-owned producer of oil and gas. The company tripled in value in the years since going public, was the most valuable publicly traded company on the Shanghai exchange as of September 28th of 2011, and was listed as the third most valuable company in the world after Apple and Exxon in 2012. Though the Chinese are gearing up for futuristic energy sources, they seem to have a firm understanding that petroleum-based energy will be ushering all of us into the world of green energy and will be critical in bridging the span between current and future technologies.
Gold
What is China doing with gold you ask? It, along with Russia, appears to be attempting to accumulate enough to one day back its currency with it. It is also encouraging its citizens to acquire gold by opening a new metals exchange and granting tax exemptions for its purchase.
China’s actions in the gold markets point to two important possibilities. First, the U.S. dollar might be in more trouble than the western press has noticed. Second, if metals become popular in a country with a population of 1.33 billion savers, there could be a giant boost in gold’s overall demand, driving up prices significantly. The potential that China is poised to change the global pricing of gold is sobering.
Dr. Leeb’s call to action has some very compelling points and, as a patriot, you can understand his battle cry. “We are at war and we don’t even know it! Wake up, America!”
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