Why splashing the cash can’t buy China love
Major investments have run into regulatory roadblocks in US and EU, triggering a debate about the risks linked to Beijing-backed deals
Back in 1964, Can’t Buy Me Love was released as Beatles mania was starting to rock the Western world. At the time, China was languishing under The Great Helmsman, Chairman Mao Zedong, with a GDP less than US$60 billion, according to the World Bank, compared to the United States’ figure of $685 billion.
Fast forward more than 50 years, and the gap has dramatically narrowed.
In 2016, China cemented its place as the undisputed second-largest economy in the world with GDP hovering around $11.2 trillion compared to $18.5 trillion in the US. By 2032, it is expected to overtake the world’s only superpower, a report released by the Centre for Economics and Business Research in London highlighted.
For the original architect of this transformation, it would be a vindication of his dream. Deng Xiaoping laid the foundations for the rise of modern China as an economic colossus when he accelerated reforms in the late 1970s as “Paramount Leader.”
“Development,” he said, “is the only truth. If we don’t develop, we will be bullied.”
Today, there is a growing feeling in the West that China is doing just that by using its financial muscle.
I’ll get you anything my friend if it makes you feel alright …
Last year, a report by the United Nations Conference on Trade and Development showed that Chinese companies increased their overseas footprint by 44% in 2016.
The rise was spearheaded by state-owned enterprises with foreign direct investment hitting $183 billion as the country jumped from fifth to second place in the FDI table behind the US.
“Chinese MNEs [multination enterprises] invested abroad to gain access to new markets and to acquire assets that generated revenue streams in foreign currencies,” the UN report stated. “The rise in outward investment was not without controversy, as a number of deals were scrutinized by policymakers both in China and abroad.”
Favorite destinations were the European Union, the US and major players involved in the Belt and Road Initiative, a trillion-dollar program of ‘New Silk Road’ superhighways, connecting the country with Asia, Africa, the Middle East and Europe.
But many of the investments ran into regulatory roadblocks in the US and the EU, prompting a debate about the risks linked to Beijing-backed deals.
In his annual State of the Union address in 2017, the EU President Jean-Claude Juncker spelled out the dangers.
“Let me say once and for all: we are not naive free traders,” he said. “Europe must always defend its strategic interests. This is why today we are proposing a new EU framework for investment screening.
“If a foreign, state-owned company wants to purchase a European harbor, part of our energy infrastructure or a defense technology firm, this should only happen in transparency, with scrutiny and debate,” he added. “It is a political responsibility to know what is going on in our own backyard so that we can protect our collective security if needed.”
I may not have a lot to give but what I got I’ll give to you …
Junker’s “harbor” reference was a far from subtle reprimand of the sale of a majority stake in Greece’s Piraeus port to China’s state-controlled Cosco Shipping. In EU circles, this was considered a port in the eye of an investment storm and step too far in Beijing’s all-consuming Belt and Road project.
A similar row erupted in the US last month when regulators blocked Ant Financial, part of the powerful Alibaba group, from acquiring the money transfer company MoneyGram for $1.2 billion. National security concerns, revolving around the question of data protection, were the main issue.
Predictably, the fallout quickly came in China’s state-owned media. “China and the United States are about to ride a bumpy journey in trade in 2018 if the US government goes its own way, and retaliatory measures by China could be on the table,” the Xinhua News Agency reported.
Still, Beijing is delighted to rein in private-sector foreign investment on a select number of companies as part of its plan to reduce capital overflow from the country and squeeze corporate debt.
Last year, China’s non-financial FDI declined for the first time in nearly eight years, shrinking 29% to $120 billion compared to 2016, the Ministry of Commerce announced in January. “We have successfully curbed irrational offshore investments,” the ministry stated.
I’ll give you all I got to give if you say you’ll love me too …
Yet scratch beneath the surface of cold, hard numbers and there is another reason for China’s intriguing dance on the world stage. Image building, or “public diplomacy,” is part of Beijing’s “soft power” policy, The Economist reported in an article entitled, China is spending billions to make the world love it. According to David Shambaugh, of George Washington University, the country is pumping $10 billion a year into the project to smooth away the rough edges.
“The party borrowed the idea of soft power from an American academic, Joseph Nye, who coined the term in 1990. Nye argued that hard power alone was not enough to wield influence in the world,” The Economist pointed out.
While this is still a work in progress, the results so far have been disappointing in surveys released by Portland Communications and Monocle, the global affairs and lifestyle magazine, when compared to Western competitors.
“Many reasons for China’s relative weakness despite its spending have been put forward,” Martin Davidson, the former head of the British Council and the chairman of Adam Smith International, wrote in a blog on the University of South California Center of Public Diplomacy website.
“The foremost of these is the gap between how China wants to be seen, and its ambitious growth in hard power and often repressive stance at home,” he added.
But that is only part of the problem as the country continues to throw its financial weight around. There is an increasing perception in Washington that Beijing is bending the concept of free trade to suit its domestic agenda and global ambitions, a view echoed by President Donald Trump’s administration.
Earlier this month, the US Commerce Secretary, Wilbur Ross, issued the findings of an investigation into the national security impact of cheap steel and aluminum imports from China. The reports also opened the door to what could be punitive tariffs.
“I want to keep prices down but I also want to make sure that we have a steel industry and an aluminum industry, and we do need that for national defense,” President Trump told a meeting with US politicians. “If we ever have a conflict, we don’t want to be buying steel [from] a country we are fighting,” he added.
Naturally, the move triggered consternation in Beijing. “If the United States’ final decision affects China’s interests, we will take necessary measures to defend our rights,” Wang Hejun, a director at the Commerce Ministry, said in a statement.
The writing, of course, has been on the wall for some time. In Davos last month at the World Economic Forum, billionaire financier Ross outlined Washington’s new approach to China.
“Trade wars are fought every single day,” he said. “And there are various parties violating the rules and trying to take [an] unfair advantage. So, trade wars have been in place for quite a little while. The difference is the US troops are now coming to the ramparts,” he added.
Soft power, hard power or economic power, Beijing is at the crossroads. As the Beatles belted out 54 years ago …
*Can’t buy me love, no no no, no …
*Can’t Buy Me Love (music and lyrics by Lennon and McCartney, 1964) The Beatles