Market experts and investment gurus have warned over time that the Chinese regime is investing aggressively overseas in its quest to become No. 1 in the world’s business environment and through that rule the world from its headquarters in Beijing.
“China’s economic rise, the increasing instances of its muscle-flexing in Asian and global affairs, and perceptions that the US is economically enfeebled have inspired theories that China will inevitably ‘rule the world’ soon,” a 2010 article on the Daily News & Analysis website states.
To soften the message, the article noted that Dr. Robert Sutter, a former U.S. State Department and former CIA employee, said that China ruling the world, including the world’s markets, is not on the horizon. Statements about ruling the world were made in the past about the Soviet Union and Japan, which didn’t materialize either.
The debate continues into 2012, with a February article published by the Council on Foreign Relations on the Foreign Affairs website suggesting that China ruling the world would only occur if the U.S. economy continues on a downward tailspin.
“China’s creditor status does not make up for the fact that its economy is presently less than half the size of the United States’ and its people are barely one-tenth as wealthy as Americans,” the Foreign Affairs article states.
No Longer Cherry Picking Strategic Industries
“Europe is experiencing the start of a structural surge in outbound direct investment in advanced economies by Chinese firms. The take-off was only recent,” according to a June report on the Rhodium Group LLC website.
It appears that between 2006 and 2009, annual outbound foreign direct investments (OFDI) by Chinese firms increased three times as fast as during prior years. Between 2004 and 2008, OFDI amounted to nearly $1 billion annually, increasing to a combined $3 billion annually for 2009 and 2010. In 2011, OFDI amounted to $10 billion.
The majority of investments occurred in France, Germany, and the United Kingdom. The Rhodium report assumes that most investments in these three countries are oriented toward commercial investments and not the technical or natural resources fields. On the other hand, most Eastern European investments are in the energy field as well as completely new enterprises.
Chinese investors are no longer “cherry picking in a handful of strategic industries. … The sectoral mix of Chinese investment in Europe tells us that a shift is under way. Chinese deals are less dominated by natural resources and trade facilitation objectives and more concerned with the full range of industries and assets spread widely across Europe,” according to the Rhodium Group report.
More private than state-owned firms complete deals, but when it comes to the value of investments, state-owned firms take the lead.
“In Europe, the overwhelming majority of deals are done by private players—which we define as having 80% or greater nongovernment ownership. ... The average deal size is of course much smaller than for state-owned enterprises,” the Rhodium Group report suggests.
The question remains, are the so-called privately owned companies really privately owned? Think tanks, economists, and market experts note in many articles that it is difficult to ascertain if a company is solely owned by private individuals or if there is some local or state government connection.
“Many private enterprises formally operate under the legal protection of state or collective enterprises. Hence, it is difficult to calculate the shares of the state and private economies,” an August article on the Library of Economics and Liberty website suggests.
Future Implications of Chinese OFDI
“Chinese investment in Europe can be both positive and negative at the same time, depending on who you are,” the Rhodium Group report states.
For example, Huawei Technologies Sweden AB, a telecommunication equipment manufacturer, sells mobile equipment in Scandinavia, but has become “disruptive new competition for European incumbents and their employees,” according to the Rhodium Group report.
The Rhodium Group also states that the China Ocean Shipping Group, a provider of international ocean shipping services in Greece at very low cost “may threaten the privileges of unionized Greek labor, but it will provide hundreds of millions of Euros to modernize container terminals and expand freight traffic and related jobs.”
Europeans are highly suspicious of Chinese intentions and are worried that Chinese investors are looking for investments in firms that have operations they can move to China and are not interested in how it affects labor and the market in the host country.
Europe’s business community has not forgotten when the Yankuang Group Co. Ltd. bought the German Kaiserstuhl coking plant in Germany’s Ruhr Valley, disassembled it using Chinese workers in 2003, and reassembled it in Shandong Province.
“Chinese firms are more likely than investors from elsewhere to acquire European assets, move technology and valuable assets back home, and shut down European operations,” the Rhodium Group report suggests.
Competitive forces come into play too. The Chinese regime could potentially grant low-cost loans for OFDI, and thus competitors not privy to such loans could be driven into bankruptcy.
In short, China’s market distortions jeopardize a market-based competitive system and does not allow for the market to set a fair price for products. This market distortion could conceivably destroy a competitor’s ability to compete fairly.
Furthermore, the Chinese regime has “de facto control over both state-owned (through ownership and nomination of executives) and private (through financial system domination, capital controls, and regulatory control) firms,” and thus it is difficult to predict what will happen to a company once it is in Chinese hands.
It has been noted that Chinese unfair business ethics are brought to the West and create problems in the Western market. Labor law violations, tax evasion, and other violations by Chinese-owned firms have been brought to light in the Italian city of Prato and in Sweden.
“If Chinese firms holding assets in Europe fail to internalize Western business norms, they will be more vulnerable to litigation in EU courts, something they were immune from when serving EU markets solely through exports,” the Rhodium Group report warns.
A new problem is the attitude by European politicians who are eyeing Chinese investments without keeping in mind the many market distorting activities that could harm local markets in the short term and the world’s markets in the long term.
“The promise of new Chinese investment is already captivating the imagination of European politicians, and some are already whispering about moderating their behavior toward China to better their prospects,” according to the Rhodium report.
Chinese Firms Investing in U.S.
Chinese investments in the United States have surged again after taking a downward trajectory in the second half of 2011. During the last quarter of 2011, Chinese investments reached $69 million; while during the first half of 2012, Chinese investments in the United States reached $3.6 billion.
The United States has learned some lessons along the way from the way the Chinese state handles negotiations and has shown that it will use regulations for bringing about policy changes in China favorable to U.S. businesses.
“In a March 2012 speech Secretary of State Clinton also suggested that US officials are increasingly ready to use Chinese investment interests in the US as leverage for achieving broader goals in US-China economic relations,” according to a July report from the Rhodium Group.
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