Gold Mining in China
As of 2012 China has the second largest economy in the world with a Gross Domestic Product of 7.298 trillion US dollars; that is 9.1% more that it was in 2011. The countries growth is expected to steadily increase by an average 9.5 % between 2012 -2015. This would lead many firms to believe that selling their product or even moving their firm to China would be a smart business move. However, when doing so you should know the ins and outs of the market in which you plan to do business. You should also know the economic, cultural, and political forces that you will be going up against by doing business there.
A major leader in the mining industry in China is the Zijin Mining Group Gold. It is led by Chairman, President, and Chief Engineer Chen Jinghe. Last year it saw a 44.77% sales growth just between 2010 and 2011. Zijin had a net income of 897.44 million in 2011. They own 8 gold mines including the Zijinshan Gold Mine, which is the largest open pit in China. The opportunity for discovering and mining gold is clearly abundant in China. One major issue you will run into, as Google saw in 2007 when they attempted to open a market in China, is the government.
Chinese government has recognized the importance of a strong mineral industry for its ever growing economy. Until recently the country had very strict laws controlling the exploration, mining, and selling of gold and silver that came out of the land. Under the 1983 rule put in place by the Bank of China, all gold that was to be purchased or distributed had to be sold to the Bank of China. Exporting gold was illegal; the metal was considered “special industry.”
Foreign entities and individuals were allowed to invest in mineral exploration and exploitation abiding by the Mineral Resource Law, and were subject to all other laws. While they are still subject to the Mineral Resource Law and all other laws in China, the Mineral Resource Law was amended in 1996 allowing foreign investment enterprises to be treated the same as domestic enterprises. One of China’s goals is to increase government revenues, technology, and raw materials. They have realized that allowing such investors is the best way to achieve this goal at a faster rate. However, doing business in China provides many obstacles and can be extremely risky, even more so for the mining industry.
There are several rules and regulations set in place by all forms of government. China has a tri-level structured government. They include The National People’s Congress, State Administration, and Provincial Congresses. Each of these tiers has their own policies and rules that everyone must abide by, everyone including foreign businesses in China. There are several steps you must go through to mine in China. They have recently adopted a “permit” type system. Exploration Permits can be purchased by the Central or the Provincial Bureau of Land and Resources. They issue licenses in 3 year leases and they only allow your exploration in a certain area of the land (usually about 848 acres.) If a deposit is found after purchasing the Exploration Permit the licensee may apply for a 2 year renewal or retention of the exploration right within 30 days of the expiration of the previous exploration term. The Ministry of Land and Resources is in charge of approving exploitation applications.
Along with those applications and permits there are several taxations through each level of government for mining minerals. According to the Environmental Protection Agency Chinese mining accounts for 85% of Chinese solid waste each year. The government taxes firms based on the level of emissions they put in the environment, which according to the statistic above, emissions for mining companies is quite substantial. A seven step process for foreign exploration investment has been formulated at the Central Government level.
Those steps are: inquire with the Ministry about available land areas; reserve the name of the proposed entity; apply to the Ministry for designation of an exploration (or mining) area; apply to the Ministry of foreign trade and economic cooperation for authority of the proposed business entity; obtain a business license; apply to the Ministry for a grant of the exploration (or mining) right; and apply to the Ministry for a land use right. There are several rules that holders of these permits must follow. One is they must start the exploration within the permitted time period. They must report to the appropriate exploration management government agency, conduct a comprehensive exploration program for all key and associated minerals, and conduct exploration activities in accordance with the permit. Finally they must also submit mineral exploration reports for review and approval and to comply with other applicable laws and regulations.
As you can see everything is controlled by some sort of government entity, here lies one of the largest hurdles you will encounter while attempting to mine or explore in China. China recently went through political reform in the 1970’s. At this current moment it is governed by the Communist Party of China. The country is officially known as “The People’s Republic of China.” Until 1978 China had a planned economy, now the country has a mixed economy. There is still a lot of political corruption and uncertainty, which can lead to risky business. One major problem firms have after moving their business or having business ventures in China is that the government lacks predictability. They have an inconsistent legal and regulatory system, and they lack government protection of property rights. Since China joined the World Trade Organization (WTO) in 2001, China’s government has taken many steps to improve their Intellectual Property Rights laws. Since then they have amended the laws in 2008.
However one of the areas that the provisions did not cover is the protection of inventors in joint research. Google is a prime example of how taking your business to China can be risky. They encountered many issues just within the first few years. Google.cn went live on January 27, 2006. They were hoping for a smooth start, they had complied with all government policies and gotten all the licenses they needed. They were censoring all material that the government had out-lawed. Then they began experiencing unexplained outages. While of course Google’s main competitor in China, Baidu, was experiencing no such outages.
This was just a preview of what was to come. Not long after purchasing their operating license from the government, Google was told that the license was no longer valid. They were told that the terms of the license were not clear. So, they began the renegotiation for their operating license, which took a year and a half. After which their service stabilized. Because of China’s lack of enforcement of Intellectual Property Rights Google had a firm policy against storing personal data in China. Which lead to complications with their engineers because they did not have access to Google’s production code. This made some of their employees disgruntled, making them feel like “second-rate employees.” This is a primary example of what doing business is China can lead to. Policy makers are constantly accused of “flip-flopping.”
They change their laws and which ones they want to enforce based on individual cases. Cultural differences between China and the United States are quite substantial, another issue that Google had to deal with. Julie Zhu, Google’s first Government Relations Head, was very experienced with the Chinese bureaucracies. She had reportedly accused Google of not cooperating enough with the government. She was eventually terminated along with another employee when Google discovered that she had given Chinese officials IPods and charged it to the companies account without permission. In the Chinese culture giving gifts in business is considered standard. However in the United States it is illegal and is considered a violation of the U.S. Foreign Corrupt Practices Act. Since Google is an American company simply doing business in China, they must adhere to U.S. law as well as Chinese law. When first arriving in China to do business, you will most likely hear the term Guanxi.
This word is very important to the Chinese business culture. Guanxi has been used for thousands of years in Chinese business and is based on traditional Chinese values of accountability, loyalty, and obligation—the notion that if somebody does you a favor, you will be expected to repay it one day. The word Guanxi more or less means “connections,” in other words, “It’s all about who you know.” It is rumored that Chinese Business leaders prefer to do business with ‘other Chinese’ – which already puts foreign investors at a disadvantage. In the case of gold mining, with all the licenses, taxation, and approval you need to acquire, Guanxi will be a very big part of either succeeding or failing.
Although Guanxi is a huge part of doing business in China there are several other cultural barriers you will encounter. For example, when the Chinese greet each other in the morning they will ask you ‘what you did last night?’ or ‘what did you have for breakfast?’ Whereas in America a simple ‘how are you?’ will do. The way they address each other in a business setting is also extremely different to what we are accustomed to. For example, some Americans will refer to elders by their first name. To the Chinese this is considered extremely disrespectful; instead they will refer their elders as Grandma or Grandpa. Another instance where the culture differences will make doing business in China difficult is the Chinese’s perception of time. Westerners are notorious for punctuality or importance of it. Chinese do not value time as we do; they also are known to take “noon naps.” Lastly, one major difference is that Chinese executives do not promote creativity in the workplace. The managers feel like the employees would be too difficult to control and they may have too many different ideas if they allow creativity. All of these differences will prove to be obstacles in bringing your business or doing business in China.
Due to the calling of economic reform in recent years in China the presence of a middle class is becoming more and more apparent. However, wages for urban China have not increased by any substantial amount. Many studies have been done to show the income inequality in China. The conclusion is always the same- Chinese people in the outskirts of the city (urban China) find themselves migrating towards the cities to achieve a higher pay. State-owned enterprises and the public sector pay exceptionally well in comparison to the firms in urban China. Due to the fact that the gold mines are mainly in the not so developed section of China, employment will not be an issue. According to an article in Economist.com unemployment in mining towns are probably as high as 40%. This being said you can also employee the majority of these workers or miners for very low wage, which China is notoriously known for.
China has a booming economy, some say that they are going through their “Industrial Revolution.” If their government can keep up this rate of growth they have been experiencing will continue. Aside from the typical issues you will come across by doing business globally, it seems as if China provides a few more than normal. If gold mining companies wish to successfully do business in China I strongly suggest they learn from Google’s mistakes- that they cooperate with the government. Although there are many hoops to jump through I feel as if the end result will be rewarding. Make sure you have a phenomenal legal team to make sure you are complying with the many regulations set in place by all tiers of government. Another key to success in mining in China will also be the major cultural differences and understanding the fact that business is conducted very different. Understanding the concept of Guanxi will also help you in the long run. I believe that since China is a communist country and they are known for being rather corrupt, staying out of the limelight will help you as well. Over all, I believe that China is a great place to go to make your firm a global force, just be aware of the struggles you will have to go through to achieve market supremacy.
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