China’s Economic Woes

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Huang Nubo

Huang Nubo, chairman of Beijing Zhongkun Investment Group. Has investments in The US as well as potential investments in Iceland. Image from Beijing Zhongkun Investment Group.

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Since the formation of the Chinese Communist party, the world has watched China evolve into the world power it is today. While it is clearly evident that China is continually increasing its soft power around the world, it is less evident that China is in the midst of serious economic woes. Many of China’s efforts to expand its soft power focus on utilizing its comparative economic might, others, however, focus on expanding China’s culture. Through its acclaimed Confucian Institutes, China is planting footholds throughout Africa. These footholds increase awareness and notoriety for China throughout the entire continent. In addition, China is pouring capital into Africa, Iceland, and the United States. These foreign investments indicate a weakening homeland where Chinese billionaires do not want to store their capital. China is playing a deceiving game of economic protectionism masked by a rise in soft power. Given China’s current track, competing world powers need not fear China’s total economic dominance.

Although the worldwide recession has hit China, it has not been to the same level as other countries. However, both Chinese investors and government bodies are seeking secure investments overseas. While at first glance, huge foreign investments seem to indicate a strong economy, however, an interesting analysis shows that this is not the case. Stratfor, a geopolitical intelligence firm, ran an article highlighting the correlation between 1980’s Japan and 2013’s China. They note that Japan in the 1980’s was seen as a miracle of economic growth, much as China is today. They also note that the result of Japan’s economic boom was an eventual decline leading to years of stagnation. The stagnation was in part due to Japanese investments in foreign markets and not in Japan’s own infrastructure. Japanese investors knew that the economy had trouble and hesitated investing in their own economy. Similarly, as “Chinese markets have stagnated or declined in recent years”, investors have recognized this and are seeking capital refuge elsewhere.

As a developing nation, China should be investing in its infrastructure to move towards becoming a fully developed nation. Instead China is heavily investing overseas. This is a clear indicator that China’s wealthiest private and public citizens do not trust the homeland economic situation. “Since most of the heavy money in China is tied into the state in some way, it is government money as much as private cash seeking safe havens.” This means that China will not have access to the capital going overseas. Therefore, China’s development model is not likely to improve and attract investments in the future either. One method that China is employing to address its development problem is by building an international network of public institutions called Confucian Institutes (CI). The CI’s purpose is to not just promote cultural understanding or China’s soft power abroad, but to draw foreign investment into China. The very fact that China builds CI’s where they invest proves how desperate they are for countries to reciprocate investments. The map below shows the correlation between investments and the creation of CI’s. While the CI benefits multiple aspects of Chinese soft power, many of which are wholly unrelated to the economy, China will not be around to reap the benefits of soft power if the economy does not stabilize.

china africa map

Data on Chinese official finance in Africa is from http://china.aiddata.org/map (as of 7/19/13) and includes both ODA and OOF flows consistent with the OECD’s terminology. Confucius Institute data is from http://cimap.chinese.cn/.

Some sources, however, argue that China’s economic situation is stable, or even improving. These sources state that China’s Foreign Direct Investments (FDI) are increasing, however, it is still too soon to declare any change in trend. In fact, a recent survey by the American Chamber of Commerce in China showed “a drop in the number of U.S. companies saying China is a top priority for investing: 47 percent of respondents said China was one of their top three choices for global investment, down from 58 percent that said the same a year earlier.” It is indeed difficult for Americans to invest in China while there are glaring “technology transfer requirements, difficulties in obtaining business licenses, poor intellectual property protections, and worries about corporate espionage.”

There are several policy options that United States policymakers could reasonably pursue. The first is continued investment by both the Department of Commerce as well as the potential pool of American investors in China’s domestic economy. Investors would be directly supporting the PRC’s new directive to switch to a consumption based economy. This could benefit the world by aiding China’s transition to a developed major world player, which could lead to a decrease in human rights violations and an increases in education and civil liberties. An alternate outcome of this strategy is an increase in economic disparity coupled with further human rights violations as the Communist party gains additional power.

Another option is that the United States could pursue a course of more powerful extraction from Direct Investment in China. This would exacerbate the economic crisis in China and possibly increase foreign investment in the US from Chinese investors.  An added benefit of this strategy would be the weakening of Chinese influence abroad, particularly in Africa. Pursuing a policy of reducing Chinese influence abroad is a long-term strategy that will avoid potential future conflicts between US and Chinese interests.

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One Response to “China’s Economic Woes”

  1. Christian Says:

    Very interesting analysis. To be fair, though, aren’t there other explanations for this investment abroad? Most major investment firms in the first world seek for diversified investment portfolios, and that usually means putting money into a variety of countries. Is it not possible that Chinese firms are merely getting big enough to do the same – investing both abroad and in China? What percentage of their assets are moving abroad? Is it possible that they are still investing the bulk of their money at home, and that increases in overseas investment just reflects the fact that they now have more money to invest and don’t intend to invest it all in one place? I honestly don’t know the answers to these questions (frankly, with murky Chinese accounting, I don’t know that anyone does), but they do need to be asked. While this flight of investment (and people – many of the children of the elite end up going to school overseas) may indicate domestic weakness, there are other potential explanations.