This report discusses about China’s entrance into capital markets of sovereign countries in terms of investments and donations and why such investments MUST be managed.
‘China buys up the world’ sounds threatening, for most people around the world than the phrase ‘America buys up the whole universe’. It is mainly due to the fact that China being a communist country and also with its not-so-transparent media and human rights scorecard. People in developed continents such as North America, Europe and Australia for example, are not so fond of China; as well as they don’t like the rationale behind Chinese acquisitions. On the other hand, the African and Asian nations are more interested in Chinese inflow of capital into their countries.
In this report, a concise look at the history of the economy of China will be explicated under the topic “The rising super power” in order to understand the background and current status of China as a global player. Subsequently, the report will elaborate about China’s current acquisition drive from natural resources to automakers, high-tech firms, and real estate under “The dragon goes on shopping and giving”.
The “Who and what drive the shopping spree” topic will cover the real motives of these acquisitions and investments. The section under topic “How danger the dragon is” will cover the aspects of the dangers and risks of letting Chinese enter freely into countries for all out investments.
China being the world’s fastest-growing and the second largest economy with average growth rates of 10% that helped the economy to grow more than 10 times in the past 30 years. Currently China is the largest exporter and second largest importer of goods in the world. The amount of excess money they have for investments is huge. They have identified their strengths and today almost all economic columns in media talk about Chinese shopping spree.
There have been speculations about the recent accelerated acquisitions, donations and investments by China. Most of the concerns stem from developed countries of the world such as the United States, Australia and etc. China didn’t stop at taking over large western companies; they even went on and invested in developing countries as a “friend in need” where political problems exist. More details and the motives of these investments will be discussed in this report.
The rising super power
China as a country has always been adapting, evolving and facing policy changes and strategy making for decades that helped it to reach the current position. They had clear goals and they have successfully achieved most of them.
In this period the strategy was to rapidly transform the economy from an agrarian economy into a modern communist society. agriculturalisation, industrialization, and collectivization were the main processes of the strategy.
In 1949, a socialist heavy industry development strategy, or the “Big Push” strategy was followed where rapid industrialization was given high priority. The government took the control of majority of the economy.
In this era the Chinese government introduced aspects of capitalist economic system to their own system. Foreign trade was focused as a major medium for economic growth. In 1978, permission for foreign direct investment was given in several small “special economic zones”.
However the Chinese government had to add more incentives to their strategies to attract foreign capital, due to the fact that bureaucratic nature of country’s economy discouraged foreign investments.
Reforms were done to corporatize state-owned enterprises (SOEs) and to downsize the state sector. Moreover China survived Asian financial crisis (1997), due to their huge reserves, a rigid currency that was not freely convertible and long term capital investments.
In 2007 China became the world’s 3rd largest economy by gross domestic product. China launched its Economic Stimulus Plan to deal with the Global financial crisis of 2008–2009. In 2010 China became the world’s 2nd largest economy surpassing Japan and second only to the United States. China is on its way of becoming the world’s largest economy by 2020.
China is also the largest creditor nation that accounts for over 20% of foreign owned US Treasury securities.
In recent times, Chinese investors have been busy with series of acquisitions and mergers of enterprises throughout the world where some of them failed due to political influence but most of them were successful. There should be some valid reasons as to why governments didn’t like such acquisitions.
However in 2009 as the world faced the biggest economic recession in the decade, China realized that the time was right to intensify its shopping spree. The target was to invest in energy as much as possible.
In mid 2009, the China Development Bank, lent the Brazilian oil giant Petrobras, $10 billion in exchange for oil to China. They signed similar deals with Russia of $25 billion in exchange for 15 million tons of crude oil for 20 years. In Venezuela $6 billion was lent to increase its oil exports to China. In Brazil, they signed a $10 billion “loan-for-oil” deal that guarantees China up to 160,000 barrels a day at market prices. Similar deals were and are in place with Sudan, Nigeria, and Angola. These events came after an unsuccessful bid by China for Unlocal, the American oil company in 2005 which was rejected due to the opposition by US politicians.
They were not only satisfied with oil. China’s biggest aluminum producer tried to invest in one of the world’s biggest mining company Rio Tinto, Australia for $19.5 billion. But finally the deal was opposed by the company’s shareholders according to the official statement. But later the Australian government passed a law that prohibits any foreign company from taking over more than 15% of any natural resource company.
China had been able to deal with countries that have access to large supplies of oil and minerals, but where the western powers are not well positioned, such as parts of Africa and the Middle East.
China has been pouring billions of dollars into Africa and Asia as aid and as soft loans where these economies are in need of capital to grow. Best case would be Africa where China’s foreign aid to Africa has amounted to 44.4 billion. A more relevant example would be how China aided Sri Lanka during the war against LTTE. An article of the Times Online of UK said that “China gave Sri Lanka – apparently free of charge – six F7 jet fighters last year”. In 2008 China also spent $1 billion as aids to Sri Lanka. By comparison, the United States gave $7.4 million and Britain just £1.25 million. In 2009 China again became the single biggest donor by providing $1.2 billion in loans and grants. Furthermore, China is building a $1 billion port in Hambantota where the port’s location is strategically decisive in terms of a hub to control this part of the Indian Ocean.
Almost all giant companies in China that drives the so called shopping spree are backed by the state. This is due to the strategies that pro-socialist Chinese government has put in place. As explained in the introduction, the Chinese government loves grasping the large enterprises and letting go smaller ones.
The Chinese government is involved in any such deal that goes through companies such as CNOOC (China National Offshore Oil Corporation), China State Construction Engineering Corporation, China Railway Construction, Sinohydro, CNPC (China National Petroleum Corporation), Chalco (Aluminum Corporation of China Limited), China International Marine Containers and etc to name few.
In terms of loans and aids to countries, Chinese government managed to break records at surprising rates. In Africa, China could be after the natural resources. In Sri Lanka, they were interested in the Hambantota port where all believe that it has the best strategic placement in this part of the Indian ocean in terms of strategic war significance.
The question is whether these Chinese corporations motive is just to make money? Secure energy for next 20 years? Make profits? Donate the poor or be the next global leader?
Most acquisitions are rather deal oriented driving the Chinese buyers to bid as far as they can to buy out the business. The Economist article titled “Being eaten by the dragon – What it feels like to be bought by a Chinese firm” contains information from interviewing executives of companies that were brought by Chinese firms. It says that “authority within Chinese firms is opaque and arbitrary.”, and also goes on to say that “Chinese negotiators often use booze to break down barriers—and to try to get the upper hand” and “They would bring in people to try to get you drunk…At one point I was sure they’d brought in a lady from the switchboard.”. The behavior and tactics used by Chinese buyers are often questionable. Does a buyer really need to use such tactics in winning a bid? If so, they would not hesitate to even go a bit further and forcefully enter into markets, when they are in a better position in 10 years from now. Nobody can give a guarantee about that. A company or a government that uses informal and unethical methods to gain upper hand is hardly credible in its future actions.
The article further states that “Chinese companies’ power structure is a bit of a mystery to outsiders” and “they are controlled by a parallel hierarchy of Communist Party officials”. This means that Chinese companies that take over other companies all over the world are not working independently but by the book of their only boss, the Chinese government. The decision making power is zero even for the top most figures in such Chinese companies. Only the government can call the shots. An interviewee told the Economist that “In China you’re dealing with the government,” and “In India you’re dealing with companies.” Naturally having bought by a company and then come to know that you are now controlled by a foreign government sounds too odd and frightening.
On the other hand, a question that many ask is that whether it is possible for any foreign company to go into China as investors. The simple answer is No. But there are exceptions. China has eased off its legislations to allow more foreign money. But they have always been quite selective and cautious and China has never let acquisitions in the scale that they currently do all around the world.
We have seen monolithic global leaders in the past whose intention was to grasp as much as they can for their own goodwill and then dump the countries in disarray when they are done with them. Nobody can argue that it’s not the case with China. However we are yet to see a socialist global super power.
Given the amount of aid given by China to developing countries in African and Asian region, China sends a clear message all around the world indicating that it is serious in assisting these countries. If one looks at the countries that China’s aid is going, most of them are countries are rich in natural resources. It is obvious that China is after the natural resources rather than helping the poor.
There is always a hidden agenda behind every transaction that China is involved in. For example, in Sri Lanka: when western countries refused to aid Sri Lanka in terms of weaponry and loans citing human rights record, China has always been there to help. They even went on to deliver a fleet of fighter jets free of charge and become the largest donor to Sri Lanka beating Japan for the first time. These help to win the 30 year old war with fewer problems. A $1 billion dollar port is being made in Hambantota by China, the best in Sri Lanka strategically, as far as the location is concerned. They can operate and a take proportion of revenue made from the port for many years. They could easily use the port to refuel and moreover it could easily be a small naval base of China as things progress.
The opaque natures of Chinese companies who are involved in worldwide acquisitions are leading to more and more problems and raised eyebrows. The same problem forced world’s most open markets, Canada and Australia to look back and revise its legislations. Nobody likes to be sold to a company with less transparency when it comes to decision making among many other things. One of the major issues with Chinese acquisitions is that after the deal is done, there is a notably high chance that key employees would leave the company. If one digs into the root cause of the problem, it is found that all of these Chinese companies are run by some kind of Chinese government related agency where decision making is done. The figure heads that you see when the deal is in progress, are not by any chance, the real people who call shots.
There are however growing concerns about Chinese acquisitions of energy even though smaller in size today, there’s no sign of stop for China. When China acquires enough energy or for example oil sites and companies enough to control the global supply, it would not be hard for China to take decisions about the world’s demand. They have invested on Oil in Sudan and Nigeria; where political problems exist. China has been able to creep in many nations where they have less or rather unclear interests in the United States. Therefore in a way, for those governments China is an option they can take without obeying to western rules that are often about Human Rights. This in turn can create long time problems for the stability of the global political arena because countries with poor human rights records can easily turn to China when they face problems from western world. China on the other hand is welcoming these invitations regardless of the situation since they are only focused on achieving their own goals rather than calculating what’s right and what’s wrong.
The major concern with foreign investments is that who is behind the scene. If it’s a company, obviously profit is the driving force. But if it’s a government, it is not the case. A government can have different goals and plans that range from just making money to execute strategic foreign policy ambitions. The problem is that the line between private industry and state enterprise is often blurry.
It’s not an easy task ahead for China to be successful with every aspect of economic stability, when one looks at the challenges it has to face in the near future. Being more open to public by creating transparency within government, loosing rigid policies to ease off the local economy of China, discuss with North Korea to solve the nuclear program issue, and face next big economic challenge; appreciating China’s currency against US dollar are main things out of many.
As the demand for energy increases China is obviously looking for more and more options around the world to invest, where in turn, China can benefit from the deals. Donations, aids and soft loans are just branches of the same tree that one can see.
Allowing China to invest freely in any country without proper control would be catastrophic in the long run as the socialist government seems to be only enthusiastic about its own goals even though it appears as the main donor or savior in one point of view. This is the same reason why countries like Australia and Canada have taken measures to stay away from unfair and imbalance deals stemming from China.
There are even instances where the United States blocked some multibillion dollar deals at the last moment after political involvement. The rigid policies of Chinese government make it harder for any government to come to a common ground. This in fact worsens the credibility and trust on the Chinese government making it harder to predict the future actions of it.
Therefore, given the history and the current ground realities of China as a country and as an organization, it is still not the right time to switch the green light on, and welcome Chinese firms to freely invest in a country. Countries would be able to do so, if the issues highlighted would be addressed and if governments around the world will realize there is pure and core intent to behind the course of actions that China takes.
Being eaten by the dragon – What it feels like to be bought by a Chinese firm. (n.d.). Retrieved Feb 11, 2011, from economist.com: http://www.economist.com/node/17460954
China buys up the world – And the world should stay open for business. (n.d.). Retrieved Feb 11, 2011, from economist.com: http://www.economist.com/node/17463473
China Overtakes Japan as World’s Second-Biggest Economy. (n.d.). Retrieved Feb 10, 2011, from Bloomberg News: http://www.bloomberg.com/news/2010-08-16/china-economy-passes-japan-s-in-second-quarter-capping-three-decade-rise.html
China signs $10 bln loan-for-oil deal with Brazil. (n.d.). Retrieved Feb 05, 2011, from reuters.com: http://www.reuters.com/article/2009/05/19/china-brazil-oil-idUSPEK26898520090519
Chinese billions in Sri Lanka fund battle against Tamil Tigers. (n.d.). Retrieved Feb 13, 2011, from timesonline.co.uk: http://www.timesonline.co.uk/tol/news/world/asia/article6207487.ece
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Petrobras Gets $10 Billion China Loan, Sinopec Deal. (n.d.). Retrieved Feb 13, 2011, from bloomberg.com: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUcQstVre0Po
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With Warning, Obama Presses China on Currency. (n.d.). Retrieved Feb 10, 2011, from nytimes.com: http://www.nytimes.com/2010/09/24/world/24prexy.html