By Geoff Dyer
Published: September 12 2010 20:03 | Last updated: September 12 2010 20:03
www.ft.com Deep in the Amazon jungle, huge chunks of red earth are torn out of the
ground at Carajás, the biggest iron ore mine in the world, to be
transported halfway round the globe to the steel mills on China's
eastern seaboard. There they are turned into the backbone for millions
of tower blocks in hundreds of booming Chinese cities.
Last year, China overtook the US to become Brazil's biggest trading
partner. The two large developing countries may be on opposite sides of
the planet but their growing economic ties over the past decade have
become among the enduring symbols of shifts in the global economy.
The duo could also be forging a path for one of the potential biggest
realignments in the global economy over the next decade. With little
fanfare, China is likely to emerge as the biggest direct investor in
Brazil this year, following a string of deals announced in mining,
steel, construction equipment and electricity transmission.
Such investments are part of a slow-burning but hugely important trend.
Newly crowned the second-largest economy, eclipsing Japan, China is
becoming the anchor for a new cycle of self-sustaining economic
development between Asia and the rest of the developing world – one that
is bypassing the economies of Europe and the US.
China is not only sucking in raw materials from other developing
economies, just as it has during the past decade. It has also begun
making investments in infrastructure and industry in those countries,
some of which are made possible by its cut-price and increasingly
sophisticated manufacturing companies or by the attractive financing
terms it can offer. Beijing has for some years been investing in this
way in parts of Africa: now such deals are being rolled out around the
world. For many developing countries, the impact of the China boom is
coming full circle.
"It is the start of a new cycle," says Ben Simpfendorfer, an economist
at RBS and author of The New Silk Road, a book on the surging economic
ties between China and the Middle East, central Asia and south Asia.
"China has companies that are willing to invest, they have products that
are good enough, and they are backed by abundant liquidity in the
country's financial system."
Ian Bremmer, president of the Eurasia consultancy and author of the
recent book, The End of The Free Market, says there is no accident to
this China-led process of decoupling from the west. It is, he says, a
strategy to reduce economic – and to some extent political – dependence
on the US.
"It is a very conscious policy, on the top of the agenda for the entire
Chinese leadership," he says. "They are looking for a hedging strategy
because they feel uncertain about the long-term economic prospects of
the developed world."
Promoting innovation and stimulating domestic consumption are also part
of that strategy, he argues, but pushing stronger economic integration
with the rest of the developing world is the "one strategy that can be
done quite quickly".
Nowhere is the impact of this process being felt more keenly than in Brazil.
As trade has boomed with China during the past decade, Brazilians have
sometimes complained of being relegated once again to their 20th-century
role of providing commodities to the industrial powers. In the past
year, however, the long-awaited wave of Chinese investment in the
country appears finally to have reached Brazil's shores. While it
reached only $92m in 2009, the country's officials estimate that it will
exceed $10bn this year.
Wuhan Iron and Steel, for instance, paid $400m for a stake in a mining
company owned by Brazilian industrialist Eike Batista, and is planning
to build a huge steel mill beside the port near Rio de Janeiro that
another of Mr Batista's companies is constructing. Lifan, one of China's
biggest manufacturers of motorcycles and cars, already exports heavily
to Brazil. Now the company's founder, Yin Mingshan, says it is
considering opening a plant to build cars in the country. "Brazil is a
very promising market, with a vast territory and a big domestic market,"
he says. "Some Chinese businessmen are foolish enough to ignore doing
business in Brazil but I am not that stupid."
If investment in Brazil is one symbol of this new stage of economic
Chinese engagement with the developing world, another is the flurry of
new rail networks taking shape globally. Chinese railway construction
companies are some of the most efficient anywhere, and have for several
years been operating in neighbouring countries in central and south-east
Asia. But in the past year they have also signed contracts in such
diverse places as Ukraine, Turkey and Argentina.
Chinese companies in the sector have not restricted their activities to
the manual task of laying rail lines. They are hoping to start signing
overseas deals to sell high-speed rail equipment, including locomotives
and signalling systems. The first customer could be the planned
high-speed line between São Paulo and Rio de Janeiro.
There are two factors that have made these new links possible. The first
is that China has produced a generation of companies making capital
goods that are now internationally competitive. They can offer
developing countries new trains, power stations, mining machinery and
telecommunications equipment of sufficient quality at prices that are
often well below those of their multinational competitors.
The second element is the financial backing from a banking system that
has been mobilised to follow behind these businesses. Yi Huiman, a
senior executive at Industrial and Commercial Bank of China, told a
conference recently that the institution was working with the government
to provide "railroads plus finance" around the world. Vale, the
Brazilian company that operates the giant iron ore mine in the Amazon,
announced on Friday that it had signed a $1.23bn credit with two Chinese
banks to finance the purchase of 12 huge cargo ships from a Chinese
shipyard, which will transport iron ore between the two countries.
The scale of these transactions is clearly much smaller than Beijing's
holdings of US securities, estimated to be in the order of $1,500bn, but
the underlying dynamic is the same: the Chinese financial system is
starting to recycle some of its holdings of foreign currency into the
economies of its developing country trading partners, in order to
stimulate demand for its own goods.
The impact is already apparent in China's trade statistics, with the
biggest increases in exports in the past year coming from developing
countries. Trade with the Association of Southeast Asian Nations
increased by 54.7 per cent in the first half of the year, and by 60.3
per cent with Brazil.
If Chinese investment does indeed help to kick off a growth cycle in
other parts of the developing world, it will be a tonic for a global
economy in which the outlook for many leading economies remains subdued,
with some even facing the risk of a double-dip recession. The
combination of Chinese demand and booming investment is one reason for
Brazil's ability to record China-style growth rates of 8.9 per cent in
the first half of the year.
Yet for western economies there are also plenty or risks involved. The
investment push is likely to herald an era of intense competition
between developed-world multinationals and state-owned Chinese
companies. The strong financial backing that such groups receive is also
likely to fuel accusations that they are not playing on a level field.
It is perhaps no surprise that some of the multinationals that in recent
months have publicly voiced criticisms of Beijing's industrial policies
– GE and Siemens – operate in sectors in which China is becoming a
fierce competitor, such as power equipment and railways.
China's new clout is also raising questions about the future of the
dollar. Chinese officials have talked about a long-term goal of
replacing it as the global reserve currency with a basket of others,
potentially including the renminbi.
As trade with the developing world balloons, Beijing has also been
taking important steps to expand the international use of the renminbi,
including allowing overseas holdings of the currency to be invested in
the onshore bond market. Some economists believe it could become the
reference currency for Asian trade over the course of the next decade.
Yet the irony is that, while there is strong economic momentum behind
the Chinese currency taking on a much larger international role, Beijing
is reluctant to let this happen. "China is still very hesitant about
whether it really wants the currency to be international," says Yu
Yongding, an influential economist at the Chinese Academy of Social
Sciences think-tank.
To become an important trading currency is one thing: but to become a
global reserve currency with the power to threaten the role of the
dollar, the government would need to lower capital controls and open up
its domestic bond market. This would mean giving up its tight control of
exchange and interest rates.
Furthermore, if economic integration with other developing countries is
really to take off, it will require careful management by Beijing. There
is a very real risk that the new-found interest in emerging markets will
provoke a backlash, especially if China's exports of manufactured goods
keep up such a rapid pace of growth.
There are already plenty of warning signs. India, for instance, has
tried this year to reduce supplies of Chinese power equipment in favour
of goods made by local producers. For several months, New Delhi blocked
Huawei, the Chinese maker of telecoms equipment, from the Indian market.
In Brazil, there are fears that companies such as carmaker Lifan want to
use the country to assemble kits of nearly-completed cars made in China
rather than promote a domestic industry. There is also concern about
fresh competition for access to markets elsewhere in Latin America.
Kevin Gallagher of Boston University calculates that 91 per cent of
Brazilian exports of manufactured goods to the region are under threat
from lower-priced Chinese products. If that market wilts away, industry
is likely to become much more critical of the new China ties.
China's growing links with the rest of the developing world could
provide a huge boost both to the country itself and to the global
economy during the course of the next decade. But a wave of
protectionism could yet halt the process. Beijing will need to work hard
to ensure its new partners in the developing world do not feel
steamrollered by the Chinese juggernaut.
