Wed, May 11, 2022 page8

• China fears for its overseas assets

  • By Daniel Jia
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  Officials from China’s central bank and finance ministry held an emergency meeting with executives of major banks operating in China to find ways to mitigate the effects of possible US-led sanctions on China’s overseas assets. The meeting was held in secret on April 22, but its key contents were nevertheless leaked to the media as early as April 30.

  It is easy to understand why China is in a panic: Its urge to conquer Taiwan has never been stronger than this crucial moment, when nationalism has become a handy tool to quench domestic anger stirred up by political repression and economic hardship. On the other hand, China is holding its breath as it watches how the overseas foreign reserves of its anti-West partner, Russia, are being frozen over its invasion of Ukraine. China is trying to find ways to either altogether escape sanctions of similar magnitude or their damage, should it dare to launch an invasion of Taiwan.

  After all, more than half of China’s mighty US$3.2 trillion in foreign reserves are in the form of overseas assets, of which more than US$1.5 trillion is held in the US alone, including US$1.1 trillion in US Treasury bonds.

  What is difficult to understand is why China moved such sizeable foreign reserve assets offshore in the first place. Even more puzzling, China’s apparently illogical behavior has not aroused any public suspicion outside of China, especially from the multinational business community, which has been eager to enter and remain in the lucrative Chinese market.

  Since China opened up its markets to the outside world in 1978, foreign investment has been one of the major forces that transformed the country from an economic ruin to the world’s No. 2 economy. To date, economic output generated by foreign investment is still contributing to at least one-third of China’s foreign trade volume and one-quarter of GDP. From these international trading activities, China has accumulated more than US$3 trillion of foreign reserves.

  According to the IMF’s benchmark calibration, an optimal level of reserves for an emerging economy is 10.1 percent of its GDP. That means for China, which had an economy of US$17 trillion as of last year, the portion of its reserves above the US$1.7 trillion threshold might have a negative impact on domestic investment and GDP growth.

  Given an average economic growth of 10 percent over the past 20 years and China’s enthusiasm for bringing in foreign investment to maintain the momentum of its economic growth, why has Beijing allowed the extra US$1.3 trillion of reserves sit idle instead of using it for much-needed domestic investments for a better return?

  The answer: There is no suitable domestic sector for Beijing to invest in and there is a lack of security for domestic investments.

  Foreign investments that enter China are not only in the form of money. Apple, Tesla, Toyota, Sony, Samsung, Foxconn, Pfizer, Starbucks and KFC, to name but a few, bring innovative ideas and expertise, intellectual properties and production lines, management systems and mature overseas marketing strategies. Money is the least significant tool in comparison.

  China, on the other hand, is sitting on its huge extra foreign reserves, but possesses none of these fundamentally crucial qualifications for domestic and international success.

  The only room left for China’s reserves in its domestic market are either the state-monopolized finance and energy sectors, which are already saturated, or the labor-intensive construction and basic infrastructure sectors, which are infested with corruption and insolvency.

  China is well aware of the challenges in its domestic market, and is forced to park a great portion of its extra foreign reserves in US Treasury bonds, a safe haven that guarantees the safety of capital, although their returns cannot even offset the erosive effects of inflation.

  This leads to a worthwhile observation of the fate of multinational business giants that have tried hard to get a share of the Chinese market. Even though some have booked significant gains in China’s market share, they paid heavily by surrendering their intellectual properties to China. Yet many more got burned and had to bite the dust even after accepting all of Beijing’s unfavorable commercial conditions, which are unacceptable in a normal market. Carrefour of France and numerous companies from Taiwan are among the latter.

  Facing the probability of US-led sanctions in the event of a Chinese invasion of Taiwan, the safe haven is no longer safe. China is focusing on making a tough decision: transfer a significant portion of its reserves to a less safe place — such as converting to its own currency — or risk losing everything once sanctions are imposed.

  However, China has missed the bigger picture. Foreign investments are leaving with their profits and assets, leaving behind not a market vacuum to be filled by Chinese companies, but tens of millions of unemployed Chinese to be fed. This will lead to the cessation of China’s international trading charge, the disappearance of domestic consumers’ purchasing power and most importantly, the exhaustion of the source of China’s foreign reserves. Being cut off from a lifeline is much more serious than losing idle funds.

  What China has, or has not, realized is that the root cause of all these difficulties is its vicious treatment of the civilized world, which is often seemingly too weak to not be taken advantage of.

  China will learn its overdue lesson. Better sooner than later, both for China and the world.

  Daniel Jia is founder of consulting firm DJ LLC Integral Services in Spain.
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