Beijing's capital ideas
Kerry Brown and Peter Wood
Sunday 10 May 2009
While much of the world sinks in a welter of public and
private debt, and stock markets continue to struggle,
there is one place where the money is still looking good.
China's £2 trillion of foreign currency reserves – accrued
through two decades of strong exports and foreign
investment – is casting a long shadow.
While the developed world has spent, China has been saving.
This mountain of capital, in the hands of the world's last
major one-party state, is the result partly of the
non-convertibility of the Chinese currency, the yuan, and
part of the hunger of the EU and the US in the last decade
for cheap goods from China. And as the G20 in April made
clear, having helped China build up this mountain of
money, it now expects Beijing to contribute some of these
riches towards solving the current global economic crisis.
The question is how much will China play along with this.
Having this much money, as the Chinese premier, Wen
Jiabao, admitted a year ago, is a mixed blessing. A weak
dollar back then meant that billions were wiped off the
value of these reserves (70% of the money is kept in
dollars). The strengthening of the dollar has solved that
problem, for the moment. But the challenge to Chinese
policymakers of how to use this money remains – and using a
universal currency, as one Chinese minister speculated
earlier this year, only solves the problem of currency
depreciation. It does nothing about what use to actually
put this capital to.
There is one clear area where the Chinese can, and are,
using their money: overseas investment. China now ranks as
the world's sixth largest outward investor, according to
the UN Conference on Trade and Development. Even this
figure is almost certainly an underes-timate. Chinese
financial institutions have significant minority
shareholdings in US and European financial institutions. In
2008 the UK overtook Germany as the largest destination for
outward-bound money. As one commentator has said, the era
of Made in China is drawing to a close. The era of Owned by
China is starting. And we had better be ready for a rapid
The Chinese government encourages its large state-owned
enterprises (SOEs) and some of its non-state companies to
"go out". The aim is to expose Chinese companies to
international markets and to show others that China is not
only interested in selling but also in investing and
building globally competitive companies and brands. Partly
as a result of this, China's global integration has moved
up several notches in the last two years. The current
economic crisis has accelerated this.
Foreign governments ask two questions about Chinese
investment. Will it be managed on a purely commercial,
profit-driven basis? And will the Chinese government seek
to use investments for political ends? The answers at
present are mixed. China's investments last year in Costa
Rica appear to have been made on condition that the country
shifted its allegiance from Taiwan to the People's Republic
of China. But the behaviour of Chinese SOEs has evolved
considerably over the past decade. The government has made
it clear that it expects them to generate a return and pay
dividends to the state. The top managers of Chinese SOEs
themselves have become a lobby group in their own right,
seeking increasingly to maximise their own interests.
The west needs to overcome its doubts about Chinese outward
investment and recognise that a more welcoming approach
will bring not only immediate economic gain, especially
welcome at the moment, but also longer-term strategic
benefits. The benefits ought to be obvious. Western
economies will receive much needed investment. The economic
integration between China and the west will deepen. A
powerful interest group within the Chinese elite will be
drawn into fuller engagement with their western
counterparts. And perhaps the west will find that the
political influence of which it is most afraid works both
One thing is certain: some time in the coming year, we have
to expect a bold move from China. We had better make our
minds up before then how we are going to respond to this.
Otherwise it will look as if we've just allowed ourselves
to be bought out. And that is in no one's interests.
Kerry Brown is senior fellow, Asia programme, Chatham
House; Peter Wood is an independent China strategist based
in Hong Kong