Planet China

August 15, 2011

Planet China

It was a very small article in the Financial Times that triggered my interest today, located in the News digest section of the paper. It announced the acquisition of Australia-based Manassen Foods by China's state-owned Bright Food Group (Bright Food). Bright is making a $516 million investment to gain 75% ownership of the company. According to the Financial Times, Bright Food has attempted previous expansion, but failed to close bids for other players including the French company Yoplait.

Yet, today's post is not about Bright Food, Manassen, or Yoplait.

I am intrigued by China's continued ambition to dominate and build emerging allies. I am fascinated by the country's prowess and the hype. It was time to take stock, particularly after Mark Blyth outlined a noteworthy scenario for China's global dominance, accelerated by the financial crisis in the U.S. and Europe. Though he referred to his own scenario as far-fetched, I think it deserves attention. [An absolute must-read: China's European Shopping Spree, Foreign Affairs, July 25, 2011.] The following is not meant to imply negative intentions by China or give into some kind of conspiracy theory. Nonetheless, I better  inquire whether my son's preschool offers Chinese language classes…

Over the last 12 to 24 months, many excellent features have been published on China and the country's drive often lovingly described as wanting to "take over the world" (see links of select articles at the end of this post). China currently holds an estimated 8% stake in U.S. debt and is the largest single foreign investor in U.S. treasury securities. It is estimated that China accounted for 10.4% of Africa's total trade in 2010. China is pouring investments into Brazil, Australia, Canada, Pakistan, India, Iran, as well as many other countries. China holds over $3 trillion in currency reserves, reportedly the world's largest.

China's acquisitions have focused largely on natural resources and commodities such as iron ore, oil, zinc, oil, aluminum, oil, minerals, oil and other resources. Oh yes, and did I mention oil? There was a short period of investments in the Western financial services space in 2007, but China has since seemingly pulled out of this (unstable) sector. It's only paper after all. China has invested billions of dollars in oil, minerals, and other resources in Africa and the investments are welcome under the premise of building Africa's infrastructure.

China has been building a network of interesting allies across the globe and found willing partners in Africa, as well as Brazil and Russia. Combined, the latter two countries borrowed roughly $35 billion from China in return for a seemingly endless supply of oil. In an article dating back to 2009 in The Independent, the managing director of an investment bank was quoted as stating "China could [have bought] every bank in Europe [with the deal…] but it chose not to." The question that should have been asked here, but was not, is "Why not?" China does not want debt! It's only paper. China wants assets, resources, commodities. What better way to claim economic dominance than by controlling the majority of global resources and commodities. When financial and technology markets fail, it’s those natural resources – the basics – that will determine economic strength.

Analysts have evaluated China's motives many times over and not a day goes by China's actions are not reported on in the news. But typically, analyses end with the conclusion that there is "no real evidence of predatory behaviour by Chinese investors in the global resources sector." What kind of evidence are analysts looking for?

In early 2010, some journalists already noted "now China has more worldwide clout, and public opinion at home has taken on a combative (and sometimes downright jingoistic) tone. […] Beijing has begun to push harder to reshape international systems to make them more China-friendly. […] Already one can see worrisome changes in the way China deals with foreign firms. [The principle behind] the country's overall drive to move ahead of the rest of the world: to make sure it gets a real say in setting its future rules and standards. […] The idea that as China got rich it would simply become more like America, or at least more sympathetic to the U.S. agenda, is turning out to be wrong." This was in March 2010!

China's most recent shopping spree appears to be a bit more "diversified" i.e., automobile, food industry [Intentional diversion?], but resources/commodities continue to be the core of China's acquisition strategy. (Recall July acquisition of Canada-based oil sands producer OPTI).

As developed economies crumble, the timing appears to be once again right for China to take its assets and expand its global stake. A 2010 article in the Economist accurately framed the concerns of developed markets in the following way: "Chinese firms are going global for the usual reasons: to acquire raw materials, get technical know-how, and gain access to foreign markets. But they are under the guidance of a state that many countries consider a strategic competitor, not an ally." When China made some heavy investments in commodities in Australia in 2009, nay-sayers raised concerns about "leaving Australian sources of wealth in foreign hands. The Australian government would never be allowed to buy a mine in China, so why would we allow the Chinese government to buy and control a strategic asset in our country?"

It would probably take months to draft an accurate timeline of Chinese acquisitions between 2005 through 2011, but it would highlight a clear focus on commodities, with some (possibly intentional) distractions by making bids and acquisitions for other foreign companies. According to an Economist article, governments are creating greater hurdles for China to gain control over their resources and the author states "China is miles away from posing […] a threat. […]Even in natural resources, where it has been most active in dealmaking, it is not close to controlling enough supply to rig the market for most commodities." Hm,….

The much acclaimed article by Mark Blyth, starts by hypothesizing about a potential acquisition – by China – of as much as 50% of Greece's debt, after Chinese Premier Wen Jiabao commented on how a "stable eurozone is vital to China and that China is Europe's friend." An estimated quarter of all of China's foreign currency reserves are in euro-denominated assets. Blyth goes on to lead the reader through an economic scenario that would allow China to purchase key aerospace, technology, and defense-related assets. Assets that would allow China to obtain global dominance, largely due to a lack of remaining financial options for the United States and Europe and are seeking alternative revenue sources.

Blyth closes his feature by stating that the scenario may be far-fetched, but possible. I would like to close my feature by saying, no ill-will intended, but "Welcome to Planet China."

Worthy reads:

China's European Shopping Spree, Mark Blyth, Foreign Affairs, July 2011.

China buys up the world, The Economist, November 2010.

The Queensway syndicate and the African trade, The Economist, August 2011.

It's China's World We're Just Living in it, Rana Foroohar, The Daily Beast, March 2010.

China's shopping spree, The Independent, March 2009.

China's control over world resources?, Peter Drysdale, China, Development, Investment, September 2010.

Image Credit: Modification to image obtained from www.kenmusgrave.com/planet.jpg.