Read the papers these days, and you can't help noticing that China is on a global buying spree.
Over the past few months, Chinese firms have been investing billions abroad in everything from oil companies to hedge funds, in deals often sweetened by loans or grants from the Chinese government. The money has gone worldwide -- to Africa, Asia, Latin America and Australia. Soon, China might even develop oil fields in Iraq.
The investment push was predictable. Thanks to its record account surplus, China is flush with $2.1 trillion in foreign exchange reserves, and the global recession has depressed prices of some acquisitions. With worldwide export markets in a slump, China has been scouting even harder for investments abroad.
Two weeks ago, Chinese Premier Wen Jiabao said China will begin using its foreign exchange reserves to speed up overseas expansion and acquisitions, particularly by state-owned Chinese companies such as Petrochina and Chinalco. The two-year-old China Investment Corporation already has been doing that, albeit on a smaller scale.
Beijing's own figures show that outbound investment flows from China soared to $40.7 billion last year. Daniel Rosen, a China-watcher at the Peterson Institute for International Economics, estimates the cumulative value of China's cross-border investments over the years ballooned to $170 billion at the end of 2008.
The buying binge has set off some fears China's competition is a threat to U.S. prosperity -- and security. Much of China's overseas investment has been focused on securing access to critical materials such as oil, gas, iron ore and other commodities that China will need as it grows.
In one of the latest such transactions to emerge, China has promised Petrobras, the Brazilian oil giant, $10 billion in loans in return for guaranteeing Sinopec, a state-owned Chinese oil company, up to 200,000 barrels of oil a day for the next 10 years. And Brazil has indicated it is open to additional deals.
Often, with investment comes political influence. China's business deals abroad have bought it close ties -- and more say -- in a spate of countries. Beijing's approach to outbound foreign investment -- delivering on its promises quickly, without U.S.-style lectures on human rights -- especially appeals to authoritarian governments.
Early this summer, Chinese oil companies began expressing interest in bidding on rights to develop oil fields in Iraq -- a country that had been considered solidly in the U.S. sphere of oil suppliers. Separately, Sinopec also has offered to buy a Swiss-Canadian firm with Iraq operations.
Finally, there's a fear China might be turning to investment to reduce its reliance on the U.S. dollar, a move that theoretically could send the greenback's value down. Top Chinese officials have been asserting for months they'd like to get away from the U.S. currency, which they contend is riskier than it was before the slump.
Economists, however, seem unworried about the Chinese push. Rosen notes that much of the oil and mineral exploration in which China is investing involves digging for new supplies that otherwise wouldn't even be on the market. As a result, they'll largely be adding to the global supply, not hoarding existing resources, he says.
As for any threat against the dollar, Rosen adds, letting China's state-owned corporations use some of its foreign exchange reserves to invest overseas will, if anything, move those dollars abroad, making it more difficult for China to keep the value of its own currency, the yuan, from rising.
That still leaves the political impact of China's new investment binge, particularly here in the United States, where many lawmakers -- and voters -- are wary of Chinese competition, especially when it's bolstered by government subsidies. And history shows the issue can quickly become a volatile one.
Although U.S. policy under both the Bush and Obama administrations has been to encourage China to become more involved in the global economy, in 2004 Congress blocked a bid by the China National Offshore Oil Corporation to take over Unocal, even though the U.S. company's oil holdings were mostly in the Far East.
What the United States can do about China's intensified buying spree is another matter. Except for subsidizing their state-owned firms, the Chinese aren't violating existing international agreements on overseas investment. Indeed, the United States has followed a similar course for years, though it's been more subtle in tying its deals to grants or military aid.
"That, of course, is China's right," says Brad Setser, a China expert at the Council on Foreign Relations. "China's government presumably will deploy its assets to pursue strategic as well as its commercial goals," he says. But he asserts if investments are made using foreign exchange reserves, "they're no longer ordinary business deals."
While China's investment surge wasn't a headline item in the first round of high-level U.S.-Chinese strategy talks last week, U.S. and Chinese officials have quietly begun laying the groundwork for a bilateral investment treaty to set rules to smooth procedural snags in investment.
That isn't likely to slow China's buy-up of foreign companies and resources, but it's a step.
This article appeared in the Saturday, August 8, 2009 edition of National Journal Daily.
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