China Can’t Conquer the World With Cash
I don’t quite get the panic over Chinese acquisitions of companies and property abroad. The New York Times has a prominent op-ed today putting the case in fine scare-mongering fashion. The thesis: China fixes artificially-low interest rates in order to provide artificially cheap capital to companies, which gives them an “unfair” advantage in acquisitions abroad. China is pursuing a state strategy of “strategic asset acquisition” which will guarantee them natural resources and economic clients abroad. I cannot read the minds of Chinese leaders, and this may well be what they are doing – however, such a national strategy would be an absurd gambit for Chinese world dominance for many reasons. Off the top of my head, here are the problems I see for China pursuing a “buy the world” strategy:
The principal-agent problem: The government is not directly purchasing these assets – rather, large Chinese corporations are. The government is tightly intertwined with these corporations, many of which are de facto or de jure state-run (often only one or the other!). However, putting state money in the hands of private corporations to act on your behalf has some agency issues; it’s hard to tell whether the agents (corporate managers) are acting on your behalf.
For example, I would guess that graft is pervasive in these deals. Imagine Chinese project manager Li running a hydroelectric project in Nigeria, with an unlimited state credit card. It’s easy for Li to have the Nigerian contractors over-bid and under-deliver, skim off the savings, and split the difference with his Nigerian comrades. The whole effort is riddled with these problems – especially given that the money is from the state, not watched very carefully, and these scams are common even at home.
Furthermore, when the time comes to yank those strings in foreign countries, will project manager Li respond? Well, maybe. He’s not a Chinese government agent, and the government may have limited ways to make him effectively serve state interests. Especially when he’s taken the ill-gotten gains and lit off for the territories.
Capital Flight: “Chinese money buying up foreign resources” is one way to view this. Another is as a vector of capital flight. Buying international assets is a good way for citizens of corrupt countries to stash their money where their own government cannot get it. For example, all those Russians with houses in London. Think back to project manager Li – he will undoubtedly be happy when those Nigerian hydroelectric projects come along, not just because it offers an opportunity to acquire cash gratis of Chinese accountholders, but also to stash it beyond reach of the Chinese government. And of course Li’s bosses get their cut, which will go towards their houses in London. It’s unclear how much of the money going into these projects gets lost in corruption, but my guess is more than people in America can imagine. Even when it’s not lost in corruption, it’s still capital leaving China for more productive shores.
No coercive power: China exerting effective control over these foreign investments depends on the cooperation of their host governments to protect their property rights. The governments of Myanmar and Sudan, two countries noted, are not really noted for diligently observing property rights. And the record of Third World governments expropriating foreign property is long and distinguished. Yes, China could stop them from doing so with military or economic threats, but it could do that anyway! The actual foreign direct investment provides not coercive power, and in fact requires coercive power to maintain.
Hayekian Malinvestment: Firms getting artificially cheap capital are likely to fritter it away on shitty investments. If no company was willing to undertake these projects with regular unsubsidized capital, it’s likely a project with a marginal return on investment that may turn out to have negative ROI. Firms getting flooded with cheap capital and a mandate to look abroad are likely throwing their money at uneconomic projects left and right. At best, this money will be largely wasted – at worst, they will be a continuing drain on government as firms’ political ties turn them into a continuing sinkhole for money, throwing good money after bad.
There are likely a far larger number of objections to this type of argument, but these come to mind immediately. It’s a terrible take-over-the-world strategy, and the problems with it are so glaring that the Chinese leadership cannot fail to see them. I think it makes much more sense as a vector of true soft power – that there’s just real value in getting businesses across the world used to the Chinese way of doing business. The economic costs of doing so are likely small, and it could yield huge returns down the road by making it easier for Chinese multinationals to compete on an American-dominated stage.
Ultimately, there’s no real nefarious threat here – mostly just an epiphenomena of the cheap-credit policies that are primarily directed at the Chinese domestic economy. That’s where the real action is, and many times the amount of money – the Chinese investment overseas is basically just leakage. The strong version of this possibility is more interesting (and I don’t know if it is right) – that more capital will leak overseas as the investment possibilities within China grow more marginal. That is, increasing Chinese FDI indicates growing levels of Hayekian malinvestment within the core and is a leading indicator for internal economic malaise.