Wealthy China flexes its muscles

As China’s vice-premier Li Keqiang left Britain after a nine-day shopping trip to Europe, the man tipped to become the emerging superpower’s next prime minister probably reflected that the latest phase in his country’s quest for dominance was going nicely to plan.

Li’s procurement extravaganza ended with a low-carbon flavour in Watford, just north of London, as the UK’s business secretary, Vince Cable, gave the 150-strong Chinese delegation a tour of a sustainable housing community.

It brought to a close a four-day visit to Britain, a trip that has also taken in Germany and Spain and resulted in more than $20-billion in orders for luxury European items, from wine and olive oil to Mercedes cars.

With the latest data showing that China’s foreign exchange reserves jumped by a record $199-billion in the final three months of 2010 to an all-time high of $2,85-trillion, these shopping excursions are set to become bigger and more frequent.

There is nothing new in China buying the assets and debts of countries and companies around the world with the huge foreign currency reserves it accumulates by producing cheap goods that the rest of the world wants to buy. But the speed with which these reserves has grown as China’s economic juggernaut consistently outpaces every other economy is enabling it to exert an ever-tighter grip on global business, finance and, in turn, politics.

Gerard Lyons, the chief economist and group head of global research at Standard Chartered, said: “The last decade could be characterised by the three words, ‘made in China’.
In this next decade it will be ‘owned by China’.”

China turns it around
China kicked off its foreign ownership phase about 10 years ago when it started buying United States treasury bonds. These transactions, which involved China exchanging huge amounts of yuan for US dollars, kept the Chinese currency artificially low, ensuring that its exports remained attractive.

The value of US treasury bonds owned by China soared from $59,5-billion to $906,8-billion in the 10 years to October 2010, to account for 21% of the American government’s entire outstanding debt and more than a third of China’s foreign currency reserves.

Around the middle of the last decade, China began turning its attention to securing the natural resources it would need to cater for its growing population and manufacturing base, snapping up commodities such as iron ore, gold and platinum that it needs as raw materials, as well as land to grow food and timber. Most of these deals were struck in Africa.

In 2008 China branched out further, investing in struggling US banks such as Citigroup and the now defunct Bear Stearns and last year it raised its investment in European government bonds.

China has made public commitments to buy the debt issued by Greece and Portugal, in spite of America’s Pimco, the largest buyer of sovereign debt, declaring the euro countries “a danger zone”. Furthermore, China, which already owns 13% of Spanish government debt, has pledged to buy another €6-billion worth this year as it seeks to diversify holdings away from US dollar-denominated assets.

Analysts said it makes good financial sense to have a diversified investment portfolio, while keeping the euro and eurozone economies strong.

Europe consumes 16% of China’s exports. If the currency disbanded, or some members were forced to leave the eurozone and adopt weaker sovereign currencies, they would be less able to afford to buy Chinese goods, while their own products would become relatively more attractive as exports.

In the latest phase of its global development China is furiously sourcing luxury goods for its fast-growing middle class and sophisticated technology to take its manufacturing upmarket.

“China has moved into a new phase where it has started getting quite vocal about the global economy and is really staking a claim to being a superpower,” said Kathleen Brooks, the research director at online foreign exchange trading company Forex.com. She dates China’s change in attitude to the moment when its foreign currency reserves breached the $2-trillion mark in July 2009.

But experts said China’s growing prosperity represents a great opportunity as well as a threat. With China due to rubber-stamp its 12th five-year plan this year - with the stated aim of using its financial clout to move upmarket—there are huge opportunities for developed economies.

Cash-flush firms embark on international shopping spree
Those watching China’s mammoth shopping spree in recent years might have concluded that it is all about oil or other natural resources.

At first glance, the deal to save the Grangemouth refinery in southeast Scotland fits perfectly into this narrative. As the world’s second-largest economy continues to boom its hunger for resources has far outstripped its ability to produce them. From Sudan to Iran and from Australia to Afghanistan it has sought new supplies, not just of oil and coal but of copper, rubber and crops.

“In the 1990s oil was the first energy source in which China started becoming a net importer. Then, as time went on, gas was imported, too. In the past year it’s become a net importer of coal,” said Zhou Xizhou, the associate director of energy consultancy IHS Cera.

But take another look at PetroChina’s new joint venture with Ineos, Grangemouth’s owner, and it appears rather more complicated. The refinery is a long way from the Pearl River Delta’s manufacturing heartland and it seems unlikely that the Chinese plan to ship the stuff home.

Si Bingjun, the general manager of PetroChina International London, said the company’s strategy was to build a broader business platform in Europe.

As Zhou points out, even China’s energy acquisitions have been driven not just by direct demand but by its broader economic development, specifically by the changes at state-owned companies that began to raise large sums of money through share offerings.

“If you look at all the national companies in China, they are sitting on a lot of cash. So is the government. They need to find a way to invest that money for potentially higher returns,” he said. “The prices for many oil products are regulated in China, but European refineries follow market prices.”

While energy commodities have dominated Chinese purchases, they are certainly not the only acquisitions. In the past few years Chinese firms have invested in Swedish car companies and British menswear retailers; in Spanish olive oil as well as Venezuelan crude oil.

And if state-owned companies boast the biggest wallets, private enterprise seems just as keen to get its hands on assets overseas, drawn by the prospect of profit rather than diktat from above. Of course, there are other strategic advantages for China in such deals.

It is keen to shore up the faltering European economy—the European Union is its largest trade partner—and deflect pressure to allow the yuan to ­appreciate.
But its purchases owe much to market forces as well as to a political blueprint. Zhou pointed out that recent energy deals also reflect the keenness of producing countries to sell. That dynamic was underlined by the global economic crisis, when China snapped up tens of billions of dollars worth of assets.

“If you look at Australia that’s basically how it kept its economy afloat,” he said.—Guardian News & Media 2011

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