On consecutive days in September, China's State Administration
for Foreign Exchange (SAFE) found itself in a tough spot: a
headline. First, the Financial Times reported that SAFE
agreed to buy Costa Rican bonds in exchange for a switch in
recognition from Taiwan to China. The deal, however, was contingent
on Costa Rica blocking public knowledge of the arrangement. Then
Thomson Reuters cataloged SAFE's small stakes in 45 British firms,
including National Grid and British Energy-at least $17 billion in
investments SAFE refused to discuss.
These reports are only the tip of the iceberg. While the focus
has been on sovereign fund China Investment Corp., SAFE is the much
bigger entity. Its holdings of American bonds approach $1 trillion.
It has also become active in global equities purchases. In
addition, large Chinese state-owned enterprises swarm over Africa,
the Middle East, and elsewhere searching for energy, metal ores,
and construction contracts.
The buzz of activity has some feeling besieged. An examination
of available information reveals no substantial threat regarding
how much is spent or where it is going. The real problem is how
much we do not know about the situation. What we do know with
certainty, however, is that in many cases-as in the Costa Rican
example-money is being directed according to non-economic
A Broad Sweep
Reports covering Chinese outward investment invariably mention
$1.8 trillion in foreign reserves held by SAFE and their
remorseless climb-$45 billion monthly in the first half of 2008.
Official American debt is estimated to account for over half.
China's purchase of American bonds reached $504 billion in
treasuries and perhaps $446 billion in agency debt at the end of
June. For currency balancing, official European
and Japanese debt is held in significant quantities. There is also
corporate debt of many stripes. The principal market worry is
usually that this investment may come to an end.
In contrast, the fretting over China's other outward investment,
in equities and physical assets, is that it will continue and
intensify. Equity stakes are naturally concentrated in more
developed economies, where more attractive companies are based. Direct
acquisition of physical assets is more evenly distributed. The
expansion of Chinese business into Africa and the Middle East has
received the most attention, but Australia has attracted more
Chinese money than any other single country.
It might be reassuring that direct investment is relatively
small. The quality of the data provided by China's Ministry of
Commerce is low, but outward "non-financial" investment was put at
$25.7 billion for the first half of 2008, with an accumulated stock
of perhaps $110 billion. While American and Chinese numbers are not
directly comparable, the former was $314 billion in 2007 with
accumulated stock of $2.8 trillion.
Present financial problems show how too much liquidity breeds
overspending. China is going to spend-and waste-a great deal of
money simply because it has accumulated so much via trade surpluses
and defense of the yuan. This undercuts the stated reason for more
aggressive investment of reserves: higher returns. Higher returns just
add to a stockpile that, with a nonconvertible currency, now does
little to enhance China's true wealth.
Hence, other motives for outward investment are at least as
important. It can bring political good will from job creation. As
Japan did, China will invest in part to protect lucrative trade
links. Outward investment can also secure outright political gains
in small countries, as in the Costa Rica example. Acquisitions of
minority stakes bring exposure to better corporate practices;
majority stakes bring unique assets.
This last relates to the main objection to Chinese spending: It
is a resource grab, especially of physical assets such as oil
fields. There is certainly a non-commercial
component to the behavior of state enterprises. Following national
priorities in securing mineral supplies can trump proper valuation.
This bids up global commodities prices beyond the additional demand
introduced by China's rapid growth.
Transparency Is Key
As China becomes an investment fixture, there will be more
competition over broadly desired assets. If China wants free and
fair access to American and European companies and what they own,
it should grant the same access to its resources and corporate
sector. This is much easier said than done, but given the amount of
money involved, it is worth a protracted struggle.
What must be quickly achieved is greater transparency from SAFE
as well as state firms. SAFE declines to discuss even the existence
of offshore arms through which purchases are made. Just a quarterly
report of SAFE's holdings would go far. If transparency can be
achieved, China's outward investment would be a large net positive
for business, reintroducing capital otherwise tucked away. Without
transparency, the world will continue to be suspicious of China's
intentions, and headlines exposing political or other dubious
motives will generate increasing levels of political heat.
Derek Scissors, Ph.D., is
Research Fellow in the Asian Studies Center at The Heritage
"China may cut its dollar holdings-CICC," China Daily,
September 12, 2008, at http://www.chinadaily.com.cn/china/2008-09/
12/content_7020656.htm (September 24, 2008); U.S.
Department of the Treasury, Treasury International Capital System,
Major Foreign Holders of Treasury Securities July 2007 to July
2008, at http://www.ustreas.gov/tic/mfh.txt
(September 24, 2008).
"Ping An Buys Stake in Fortis for $2.7 billion," International
Herald Tribune, November 29, 2007, at http://www.iht.com/articles/2007/11/29
/business/insure.php (September 24, 2008).
"China's Overseas Investments More Than Double in First Half:
Govt," Agence France-Presse, July 23, 2008, at http://afp.google.com/article/ALeqM5gv8Gifdvu
O9Q7RITM4jUiSWpJkQA (September 24, 2008); China Daily,
"Overseas Non-Financial Investment Rises 6%," China Cultural
Industries, April 23, 2008, at http://e.cnci.gov.cn/doce/news/news_detail.aspx?news_id=4455
(September 24, 2008).