Chinese Vice Premier Li -Keqiang (李克強) left Britain on Wednesday after a nine-day shopping trip to Europe, the man tipped to become the emerging superpower’s next prime minister will probably reflect that the latest phase in his country’s quest for global dominance is going nicely to plan.
Li’s procurement extravaganza ended with a low-carbon flavor in Watford, England, just north of London, on Wednesday as British Business Secretary Vince Cable gave the 150-strong Chinese delegation a tour of a sustainable housing community.
This brought to a close a four-day visit to Britain, on a trip which also took in Germany and Spain and resulted in more than US$20 billion of orders for luxury European items, from wine and olive oil to Mercedes-Benz automobiles.
With the data on Tuesday showing China’s foreign exchange reserves jumped by a record US$199 billion in the final three months of last year to an all-time high of US$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.
However, 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.
“The last decade could be characterized by the three words: ‘Made in China.’ In this next decade, it will be ‘Owned by China,’” said Gerard Lyons, chief economist and group head of global research at Standard Chartered.
China kicked off its foreign ownership phase about 10 years ago when it started buying US treasury bonds. These transactions, which involved China exchanging huge amounts of yuan for US dollars, kept the Chinese currency artificially low, ensuring its exports remained attractive.
The value of US treasury bonds owned by China soared from US$59.5 billion to US$906.8 billion in the 10 years to October last year, to account for 21 percent of the US government’s entire outstanding debt and more than a third of China’s foreign currency reserves.
At about the middle of the last decade, China began turning its attention to securing the natural resources it would need to cater for its huge and 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 upped investment in European government bonds.
China has made public commitments to buy debt issued by Greece and Portugal, despite the US’ Pimco, the largest buyer of sovereign debt, declaring the euro countries “a danger zone.”
Furthermore, China, which already owns 13 percent of Spanish government debt, has pledged to buy another 6 billion euros (US$8 billion) this year as it seeks to diversify holdings away from US dollar-denominated assets.
Analysts say it makes good financial sense to have a diversified investment portfolio, while keeping the euro and eurozone economies strong. Europe consumes 16 percent 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, undermining China’s competitive advantage.
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.
“In the last 18 months 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, 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 US$2 trillion mark in July 2009.
However, experts say 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.
Meanwhile, some analysts watching China’s mammoth shopping spree in recent years still cling to the conclusion that it is all about oil or other natural resources.
At first glance, the deal to save the Grangemouth refinery in south east 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. Factories producing goods for the world need something with which to make them.
“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 last year it’s become a net importer of coal,” said Zhou Xizhou (周希舟), associate director of global energy consultancy IHS CERA.
However, 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 heartlands and it seems unlikely the Chinese plan to ship the stuff home. Si Bingjun (司丙軍), 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 last 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 profits 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 EU is its largest trade partner — and deflect pressure to allow the yuan to appreciate.
However, its purchases owe much to market forces as well as 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 US dollars worth of assets.
“If you look at Australia, that’s basically how it kept its economy afloat,” he said.
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