Monday, June 3, 2013

China's Economic Empire

China's Economic Empire
OPINION, The New York Times
June 1, 2013

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

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.

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

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 Ara�jo 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."

A version of this op-ed appeared in print on June 2, 2013, on page SR1
of the New York edition with the headline: China's Economic Empire.

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