ABSTRACT
Chapter 4 analyzes the Chinese underpricing narrative that was established by the former Chinese Prime Minister Wen Jiabao. While Rare Earths were sold at the price of salt in the 1980s, they deserved to be sold at the price of gold. In order to analyze this underpricing narrative, Chapter 4 first introduces the Hotelling rule as a theoretical tool to model optimal paths of extraction and price development for exhaustible natural resources, and then explains the determinants for deviations from the optimal path. Furthermore, the Hotelling rule is utilized to compare the historical Rare Earths price path from 1965 to 2012 with a theoretical optimal price path in order to evaluate the potential underpricing. Due to the fact that Chinese mines are expected to peak in 2024 at the current rate of production, the Hotelling rule is then used to model an optimal future Rare Earths production path from China’s point of view. Finally, the results are summarized and critically assessed in an intermediate conclusion.
