It’s worth remembering that only a generation ago, mothers in the West would tell their offspring to finish their dinner because there were starving children in China crying out for a taste of boiled cabbage.
Many 20-somethings in China can remember the first time they ate meat, at age 10 or so, and others can remember tasting rice for the first time at around the same age. The post-1980s capitalist explosion has meant that most children growing up now have no idea of the hardships their predecessors suffered.
Fueled by foreign investment, China has become the assembly line to the world – a world that now sees it as an insatiable beast sucking in investment, natural resources and jobs and spitting out mountains of plastic junk and home appliances.
However, this no longer reflects the full picture. Nominally Communist China has a new export – capital.
Those starving children of a generation ago are rapping on the doors of the ones who wouldn’t finish their cabbage and asking if they’d like to sell their house, their mine, or their private equity firm.
The announcement in May that the Chinese government was spending US$3 billion on a 10% stake in US private equity firm Blackstone through its nascent State Investment Corporation (SIC) came as a shock to the rest of the world. Shadowy government interests were joining forces with secretive takeover bandits in a quest to expand their evil empires, or so the story was told.
China’s capital outflows are already well established in the resources industries as state-backed operators have scoured the earth for metals and minerals to power the country’s boom.
The establishment of the SIC – which officials say will start off with US$200-300 billion in the coffers – has taken things to a new level. It is mandated to buy everything from stocks in London to oil in Canada and could become the world’s largest investment fund.
The SIC was approved by the top leadership at the beginning of the year almost as an emergency measure to deal with the country’s ballooning foreign exchange reserves, which are on course to comfortably exceed US$1.5 trillion by the end of this year.
The size of the reserves has seen Beijing caught between two poles.
Trade partners point to it as proof China keeps its currency artificially undervalued, contributing to ever-widening trade imbalances and threats of retaliatory action.
Domestic critics, meanwhile, complain that the majority of the country’s foreign exchange is being recycled into low-yield US treasury bonds. China is effectively selling cheap goods to Americans and lending the revenues straight back to the buyers at a scandalously low interest rate.
The SIC is there principally to generate better returns on a portion of the forex reserves but it also serves another important policy function.
With all the money flowing into the country the central bank is hard-pressed to control liquidity – and avoid inflation. The consumer price index hit a two-year high of 3.4% in May, while the country is in the midst of a stock market fever that has pushed prices to stratospheric levels.
The SIC provides another way to remove some of the money sloshing around in the system. This is because it will issue bonds to exchange for the forex reserves, either into the market or directly to the central bank, which can then use them for liquidity-draining operations as it sees fit.
Grappling with governance
One question nobody seems to have asked about the SIC is how it will be governed so as to avoid the sort of graft and corruption that permeates the entire Chinese political system.
Another question that is almost certainly on minds in Washington is how the fund will be used to advance China’s strategic objectives, particularly in Africa and South America. As with Japan’s spending spree in the 1980s, China’s new role as an exporter of capital is likely to be met in the West with a large dose of xenophobia and unfounded fears of impending global domination.
But there will also be legitimate questions at home and abroad about whether a secretive and corrupt authoritarian dictatorship is the sort of employer you want to work for when they come knocking to buy your company.
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