China’s Economic Empire

From NEW YORK TIMES

OPINION

China’s Economic EmpireVicto Ngai

By HERIBERTO ARAÚJO and JUAN PABLO CARDENAL

Published: June 1, 2013 8 Comments

 

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 oiland 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 Communications.

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 market.

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.