China exporting capital
Source Jim Devine
Date 13/06/02/12:02
China’s Economic Empire

HONG KONG — THE combination of a strong, rising China and economic
stagnation in Europe and America is making the West increasingly
uncomfortable. While China is not taking over the world militarily, it
seems to be steadily taking it over commercially. In just the past
week, Chinese companies and investors have sought to buy two iconic
Western companies, Smithfield Foods, the American pork producer, and
Club Med, the French resort company.

Europeans and Americans tend to fret over Beijing’s assertiveness in
the South China Sea, its territorial disputes with Japan, and
cyberattacks on Western firms, but all of this is much less important
than a phenomenon that is less visible but more disturbing: the
aggressive worldwide push of Chinese state capitalism.

By buying companies, exploiting natural resources, building
infrastructure and giving loans all over the world, China is pursuing
a soft but unstoppable form of economic domination. Beijing’s
essentially unlimited financial resources allow the country to be a
game-changing force in both the developed and developing world, one
that threatens to obliterate the competitive edge of Western firms,
kill jobs in Europe and America and blunt criticism of human rights
abuses in China.

Ultimately, thanks to the deposits of over a billion Chinese savers,
China Inc. has been able to acquire strategic assets worldwide. This
is possible because those deposits are financially repressed — savers
receive negative returns because of interest rates below the inflation
rate and strict capital controls that prevent savers from investing
their money in more profitable investments abroad. Consequently, the
Chinese government now controls oil and gas pipelines from
Turkmenistan to China and from South Sudan to the Red Sea.

Another pipeline, from the Indian Ocean to the Chinese city of
Kunming, running through Myanmar, is scheduled to be completed soon,
and yet another, from Siberia to northern China, has already been
built. China has also invested heavily in building infrastructure,
undertaking huge hydroelectric projects like the Merowe Dam on the
Nile in Sudan — the biggest Chinese engineering project in Africa —
and Ecuador’s $2.3 billion Coca Codo Sinclair Dam. And China is
currently involved in the building of more than 200 other dams across
the planet, according to International Rivers, a nonprofit
environmental organization.

China has become the world’s leading exporter; it also surpassed the
United States as the world’s biggest trading nation in 2012. In the
span of just a few years, China has become the leading trading partner
of countries like Australia, Brazil and Chile as it seeks resources
like iron ore, soybeans and copper. Lower tariffs and China’s booming
economy explain this exponential growth. By buying mainly natural
resources and food, China is ensuring that two of the country’s
economic engines — urbanization and the export sector — are securely
supplied with the needed resources.

In Europe and North America, China’s arrival on the scene has been
more recent but the figures clearly show a growing trend: annual
investment from China to the European Union grew from less than $1
billion annually before 2008 to more than $10 billion in the past two
years. And in the United States, investment surged from less than $1
billion in 2008 to a record high of $6.7 billion in 2012, according to
the Rhodium Group, an economic research firm. Last year, Europe was
the destination for 33 percent of China’s foreign direct investment.

Government support, through hidden subsidies and cheap financing,
gives Chinese state-owned firms a major advantage over competitors.
Since 2008, the West’s economic downturn has allowed them to gain
broad access to Western markets to hunt for technology, know-how and
deals that weren’t previously available to them. Western assets that
weren’t on sale in the past now are, and Chinese investments have
provided desperately needed liquidity.

This trend will only increase in the future, as China’s foreign direct
investment skyrockets in the coming years. It is projected to reach as
much as $1 trillion to $2 trillion by 2020, according to the Rhodium
Group. This means that Chinese state-owned companies that enjoy a
monopolistic position at home can now pursue ambitious international
expansions and compete with global corporate giants. The unfairness of
this situation is clearest in the steel and solar- panel industries,
where China has gone from a net importer to the world’s largest
producer and exporter in only a few years. It has been able to flood
the market with products well below market price — and consequently
destroy industries and employment in the West and elsewhere.

THIS is the real threat to the United States and other countries.
However, most Western governments don’t seem to be addressing China’s
state-driven expansionism as an immediate priority.

On the contrary, European governments dealing with their own economic
crises see China as a country that can help, either by buying
sovereign debt or going ahead with investments in their countries that
will create jobs.

The Chinese state-owned company Cosco currently manages the main cargo
terminal in the biggest Greek port, Piraeus, near Athens — a 35-year
concession deal. And China’s sovereign wealth fund, C.I.C., took a 10
percent stake in London’s Heathrow Airport in 2012, as well as a
nearly 9 percent stake in the British utility company Thames Water.
The state-owned firms Three Gorges Corporation and State Grid are the
main foreign investors in Portugal’s power-generation sector, and
C.I.C. also bought a 7 percent stake in France’s Eutelsat

In the Greek port the Chinese have been able to triple capacity, amid
local unions’ criticism of worsening labor conditions. It’s too early
to measure China’s impact in the other investments, but the fact that
Chinese companies are able to invest in sectors that are closed or
restricted for European firms in China says a lot about how minimal
Europe’s leverage with China is.

Take Germany, which accounts for nearly half of the European Union’s
exports to China. It’s highly unlikely that Berlin would make unfair
competition the cornerstone of its China policy. Moreover, the lack of
leverage and leadership in Brussels means that the union is unable to
take firm action to force China into adopting measures that would
level the playing field or guarantee reciprocity in its domestic

The only exception is the United States, which seems to be addressing
the issue by pushing forward the Trans-Pacific Partnership, a regional
trade association that is seen by critics in Beijing and elsewhere as
an American-led policy to contain China. The club is thought to be
restricted to countries that meet high American standards on issues
like free competition, labor and environmental standards and
intellectual property rights. As China doesn’t meet those standards,
it will have to reform or risk regional isolation. Moreover, the
United States has made life difficult for the Chinese telecom giant
Huawei by refusing to grant it contracts from leading American telecom
companies. This is not just about national security concerns but also
about sending Beijing a clear message that the United States
government is willing to block one of China’s most visible and
successful companies.

While Western companies complain about barriers to public procurement
and bidding and struggles to compete in restricted sectors in China,
Chinese companies enjoy red carpet treatment in Europe, buying up
strategic assets and major companies like Volvo and the German
equipment manufacturer Putzmeister. [!!]

The perception is that China is now unavoidable and, consequently, the
only option is to be accommodating — offering everything from a
generous investment environment to essentially dropping human rights
from the agenda. “We don’t have any stick. We can just offer carrots
and hope for the best,” a senior European official told us.

Greenland, a massive resource-rich territory largely controlled by
Denmark, is a case in point. Last year, it passed legislation to allow
foreign workers into the country who earned salaries below the local
legal minimum wage (the minimum wage there is one of the highest in
the world). Chinese representatives had made it clear that Chinese
state-owned banks and companies would invest in the high-risk, costly
exploitation of Greenland’s vast mining resources only if the
modification of local regulations would allow the arrival of thousands
of low-wage Chinese workers.

The Arctic territory didn’t have too many alternatives. No other
country is in a position to become Greenland’s strategic partner for
its future development, given the business risks involved in the
Arctic region and the scale of the investment needed in a territory
bigger than Mexico but without a single highway. An American oil
company couldn’t have handled the task alone. The Chinese state
capitalist system, by contrast, allows multiple state-owned companies
to work together, making it possible for the China National Petroleum
Corporation, for instance, to extract oil while China Railway builds
basic infrastructure.

Greenland’s leaders accepted China’s terms because they likely
believed these costly projects might never go ahead if the Chinese
didn’t get involved; only China has the money, the demand, the
experience and the political will to proceed. Moreover, there are not
enough skilled workers in Greenland for such projects, so the
Greenlandic government made an exception to the law, allowing Chinese
laborers to earn less than minimum wage figuring that local residents
would benefit from new infrastructure and royalties.

China’s deep pockets, as well as its extensive labor force and
unlimited demand for natural resources, made all the difference, and
accordingly Greenland was prepared to pass tailor-made legislation to
meet Chinese needs. Even Denmark, which holds authority in Greenland
in areas like migration and foreign policy, decided not to interfere.

IT is even happening in progressive bastions like Canada. President
Obama’s refusal thus far to approve the Keystone pipeline project has
made Prime Minister Stephen Harper’s conservative government turn to
China to secure an export market for Canadian crude oil reserves. The
Calgary-based oil industry has lobbied Mr. Harper to adopt a new
diversification strategy that includes the construction of a
controversial pipeline to western British Columbia, despite strong
opposition from environmental groups, the First Nations aboriginal
communities and the public. In the meantime, Canada also signed a
Foreign Investment Promotion and Protection Agreement with China,
which gives remarkably generous investment protection to the Chinese.

With China in the center of debates over FIPA and the west coast
pipeline, Canada’s government then approved the takeover of the
Canadian energy giant Nexen by the Chinese state-owned oil firm Cnooc.
The $15.1 billion transaction was China’s largest foreign takeover.

Closer economic ties have had political side effects; the Harper
administration now seems much more cautious in criticizing China’s
human rights record. Given that Canada was until very recently one of
the fiercest voices on China’s handling of dissidents, this is not
only a remarkable 180-degree turn, but also a clear indication of how
China’s economic influence can push the political agenda to the
sidelines, even in the West.

In Australia, Chinese accumulated investment inflows at the end of
2012 surpassed $50 billion. The trend is striking: Chinese direct
investment in Australia in 2012 increased 21 percent from 2011 levels
to reach $11.4 billion, making it an important player in Australia’s
mining industry. Australia’s trade portfolio remains highly
diversified, but the Chinese share is growing rapidly.

China has also become the biggest investor in Germany (in terms of the
number of deals), surpassing the United States. Chinese companies are
looking for companies that, like Putzmeister, have a technological
edge and have become world leaders in niche markets. Those takeovers
also allow them to absorb Western know-how on branding, marketing,
distribution and customer relations. Others are more opportunistic.
Faced with recession, struggling European firms like Volvo quickly
welcomed Chinese partners who were ready to inject capital and take
full control.

The loans that Beijing is giving worldwide are even more significant,
in dollar terms, than direct foreign investment. These loans include
$40 billion to Venezuela and more than $8 billion to Turkmenistan in
recent years. China’s policy banks (China Development Bank and
Export-Import Bank of China) are the key institutions supporting
China’s “Go global” strategy, as they provide billions of dollars in
loans to foreign countries to acquire Chinese goods; finance
Chinese-built infrastructure; and start projects in the extractive and
other industries.

This is clearest in countries where the West claims to link its aid to
human rights and good business practices. Chinese loans have been
crucial in countries like Angola that have faced threats of a cutoff
in financing from Western creditors, the World Bank and the
International Monetary Fund. Ecuador, Venezuela, Turkmenistan, Sudan
and Iran have all faced such difficulties, and China has stepped in
without political or ethical strings attached. Chinese statistics
reveal little about these loans, but a study by The Financial Times
showed that, between 2009 and 2010, China was the world’s largest
lender, doling out $110 billion, more than the World Bank.

It is important to remember what is really behind China’s global
economic expansion: the state. China may be moving in the right
direction on a number of issues, but when Chinese state-owned
companies go abroad and seek to play by rules that emanate from an
authoritarian regime, there is grave danger that Western countries
will, out of economic need, end up playing by Beijing’s rules.

As China becomes a global player and a fierce competitor in American
and European markets, its political system and state capitalist
ideology pose a threat. It is therefore essential that Western
governments stick to what has been the core of Western prosperity: the
rule of law, political freedom and fair competition.

They must not think shortsightedly. Giving up on our commitment to
human rights, or being compliant in the face of rapacious state
capitalism, will hurt Western countries in the long term. It is China
that needs to adapt to the world, not the other way around.

Heriberto Araújo and Juan Pablo Cardenal are the authors of “China’s
Silent Army: The Pioneers, Traders, Fixers and Workers Who Are
Remaking The World in Beijing’s Image.”

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