China Grows Stronger during Economic Bad Times

Stephen DeAngelis

March 25, 2009

The best time to have money is when nobody else does. Head to any foreclosure sale and you’ll understand what I mean. Chinese companies, which have amassed fortunes during past couple of decades, are now starting to spend some of that cash looking for bargains [“China Gains Key Assets In Spate of Purchases,” by Ariana Eunchung Cha, Washington Post, 17 March 2009]. What’s most interesting is where they are looking for those bargains and what they are buying.

“Chinese companies have been on a shopping spree in the past month, snapping up tens of billions of dollars’ worth of key assets in Iran, Brazil, Russia, Venezuela, Australia and France in a global fire sale set off by the financial crisis. The deals have allowed China to lock up supplies of oil, minerals, metals and other strategic natural resources it needs to continue to fuel its growth. The sheer scope of the agreements marks a shift in global finance, roiling energy markets and feeding worries about the future availability and prices of those commodities in other countries that compete for them, including the United States.”

As someone obviously interested in development because of Enterra Solutions’ Development-in-a-Box™ offering, I’m not surprised that China is looking to invest primarily in emerging market countries. I’ve argued for some time that the best potential growth opportunities are to be found in emerging market countries. Although many countries are wary about China’s economic and political strategy, they find themselves reluctantly grateful that it has emerged as “a major force driving new lending and investment.” The good news about Chinese investments is that it demonstrates that Chinese leaders are optimistic about the future. Instead of hunkering down behind a bamboo curtain, they are boldly investing in the basic resources they believe will continue to fuel China’s rise to the top of the economic pyramid. For example, Cha reports that China’s largest, state-owned mining company just doubled its share of the world’s largest mining company, Australia’s Rio Tinto. China’s state-owned oil company has also offered significant loans to Russia and Venezuela in “in exchange for long-term commitments to supply oil.” The China Development Bank struck a similar deal with Brazil’s state-owned oil company. China and Iran have also agreed to explore for natural gas in the Persian Gulf.

Cha reports that “China has dramatically stepped up its outbound investment” at a time when overall “global financial flows have slowed sharply.” The Chinese media not only knows about the spending spree but applauds it; calling it “an opportunity that comes once in a hundred years.” Cha reports that it is not only state-owned companies that are reaching out, but the Chinese government itself. “The Chinese government also has come to the rescue of ailing countries, such as Jamaica and Pakistan, that it wants as allies, extending generous loans.” Chinese consumers, who are notorious savers, are also getting in on the spending spree.

“In a shopping trip last month organized by an online real estate brokerage, a group of 50 individual investors from China traveled to New York, Los Angeles and San Francisco to purchase homes at prices that have crashed since the subprime crisis.”

Except for small real estate transactions, the United States has been conspicuously absent in China’s spending plans. Cha notes that China’s wariness about investing in the United States is understandable.

“Many Chinese investors are still stung by the memory of China National Offshore Oil’s 2005 attempt to buy a stake in the U.S. energy company Unocal. The deal fell apart after U.S. lawmakers expressed concern about the national security implications of China controlling some of the country’s oil resources.”

Chinese leaders certainly couldn’t be blamed for believing that the current state of affairs justifies China’s historical belief that it is the center of the world. It couldn’t have been better positioned to exploit the financial crisis. [“In Downturn, China Sees Path to Growth,” by Keith Bradsher, New York Times, 17 March 2009].

“China’s leaders are turning economic crisis to competitive advantage, said economic analysts. The country is using its nearly $600 billion economic stimulus package to make its companies better able to compete in markets at home and abroad, to retrain migrant workers on an immense scale and to rapidly expand subsidies for research and development. Construction has already begun on new highways and rail lines that are likely to permanently reduce transportation costs. And while American leaders struggle to revive lending — in the latest effort with a $15 billion program to help small businesses — Chinese banks lent more in the last three months than in the preceding 12 months.”

When I discuss development with leaders of emerging market countries, I encourage them to look at the current situation as an opportunity to position themselves for the inevitable recovery of the global economy. Chinese leaders understand that positioning themselves now for a more competitive future will put them that much ahead when good times return. Bradsher reminds readers that even though China is better positioned to ride the storm than most countries, it has not been untouched by the recession.

“The recession in most of the large economies in the world is inflicting real pain here — causing a record plunge in Chinese exports, putting 20 million migrant workers from within China out of their jobs and raising the potential for increased and sustained social unrest. But as President Hu Jintao told the National People’s Congress, … ‘Challenge and opportunity always come together — under certain conditions, one could be transformed into the other.’ To that end, Chinese companies are shopping for foreign businesses to acquire.”

The Chinese are also taking advantage of slow economic times to train or retrain its workforce so that it is better prepared to compete in the future.

“Guangdong province alone … is quadrupling its vocational training program this year to teach four million workers engaged in three-month or six-month programs. … The Guangdong training programs are half in the classroom and half in the factory, usually the business that plans to employ the trainees. By increasing productivity, training programs can hold down corporate labor costs per unit of production for years to come.

Bradsher claims, however, that “little is being done to shift the economy away from a heavy reliance on capital spending and toward greater consumption. The social safety net of pensions, health care and education barely exists, so Chinese families save heavily.” The hope in China (and elsewhere around the globe) is that the Chinese do begin to consume more. The demand for goods and services created by an upsurge in spending would go a long ways towards global economic recovery. One sign that China understands its new role as an economic and political global power is that it is trying to find a compromise position on greenhouse gas emissions and not trying to duck the issue altogether [“China Hopes Climate Deal Omits Exports,” Associated Press, Washington Post, 17 March 2009].

“Li Gao, China’s top climate negotiator, said any fair international agreement to curb the gases blamed for global warming would not require China to reduce emissions caused by goods manufactured to meet demand elsewhere.”

China is now the world’s largest emitter of greenhouse gases (having surpassed the United States). Li asserts that 15 to 25 percent of those emissions are directly attributable to the manufacture of products that will be consumed elsewhere. The more connected and involved China becomes with the world economy, the more it will have assert leadership. China will undoubtedly emerge from this financial crisis in a stronger and more influential position. To fully realize its dreams, it must learn to cooperate with rather confront other great powers. Recent naval brinkmanship in the South China Sea demonstrates that its leaders have not fully grasped that point. A better future relies on the U.S. and China becoming friendly rivals rather than bitter enemies.