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Be wary of the rise and rise of China

By Chris Lewis - posted Monday, 26 October 2009


By Western nation standards, Australia appears very lucky when compared to most struggling to overcome economic decline. While the United States may face high debt levels and sluggish economic growth for years to come, Australia in October 2009 became the first G-20 nation to lift interest rates with an expectation that the economy will benefit most from higher Chinese economic growth.

But on present trends, China’s further rise would indeed be at the West’s expense, notwithstanding a view that China’s rise will be tempered by reduced Western spending, bad debt, and real overcapacity (Vitaliy Katsenelson, Foreign Policy, July 23, 2009).

Bill Powell (Fortune Magazine, October 8, 2009) recently noted that CNOOC (one of China’s largest oil companies) was making Western oil powers very nervous with its bid to secure one-sixth of Nigeria’s oil production as part of a push to secure natural resources around the globe. The China Development Bank also lent Brazil’s national oil company (Petrobras) $10 billion to help fund offshore exploration.

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But China is not limiting itself to commodities. While China’s capital investments abroad in 2008 doubled to $US50 billion, although still well behind the US with $US318 billion, it is eager to lesson its reliance on US Treasury debt by buying stakes in foreign banks, utilities, and semiconductor companies. Powell notes that a more valuable currency will also make foreign assets cheaper for acquisitions. Already China’s computer maker Lenovo bought IBM's PC business in 2005, while Geely (a privately owned Chinese automaker) expressed interest in September 2009 to buy Volvo from Ford.

With Beijing’s sovereign wealth fund (China Investment Corporation) predicted to invest $US50 billion in the next year, it may well be that China will seek to purchase financial assets and real estate as some of the world’s leading hedge fund managers make further trips to Beijing seeking investment capital. With assets of about $US300 billion by the end of 2008, the fund during September gave $1 billion to Oaktree Capital Management, a Los Angeles firm that buys distressed debt securities (Powell Fortune Magazine).

So just how liberal should the US and other Western nations be, given that China appears determined to protect its state-owned companies from foreign challenge? Powell suggests that some Chinese investment should be welcome.

To some degree, a protectionist strategy towards China remains, as has been the case since 2005 when China’s CNOOC was not allowed to buy Unocal (the Los Angeles-based oil company). More recently, Australia’s foreign investment review board recommended that no foreign company be allowed more than a 15 per cent in any natural resources companies, while the US imposed a 35 per cent tax on Chinese tire imports.

But the full extent of a trade war between the US and China remains to be seen. With Americans saving more and consuming less, even greater pressure may emerge upon US company tax rates and wages in order to compete in export terms.

Domestic concern may lead to greater pressure by the US government to enforce the commitments that China made when it joined the World Trade Organization in 2001, even if this leads to China’s retaliation and US consumers facing higher prices: and despite the US presently looking to Beijing to help fund $9 trillion in deficits in the next decade.

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Sure, Western nations have promoted the rise of China. After all, with most of China’s high-tech manufacturing exports foreign-owned, Western consumers benefited from cheaper consumer goods while China absorbed a much higher proportion of the world’s industrial output and pollution.

But as communist China seeks to flex its muscle, Western generosity may prove much less generous.

The possibility of greater economic tension between the West and China will increase if the US stimulus package does not revive its economy. I am inclined to agree with the pessimists that Western nations cannot keep losing their productive capacity and expect such a loss to be offset by services and greater consumer debt and spending.

I remain a supporter of liberalism, but anyone who thinks such a concept can work, while a communist nation is benefitting most at the West’s expense, is dreaming.

Australia can kid itself that everything will be OK as a consequence of the rise of China, or that Australia will somehow remain prosperous by exporting more minerals or agricultural products to Asia, or benefiting from the arrival of Asian students and tourists.

How long do Western policy-makers believe they can avoid really tough decisions about China? While Michael Costa (an ex-NSW politician) is right to indicate that “Australia as a trading nation has no other option than to champion free trade globally” (Costa, The Australian, June 19, 2009), China’s rise has important political ramifications that can’t be ignored by any simplistic assumption that a communist nation is crucial to the Australian interest.

And for how long will Australians tolerate much greater influence by Chinese who may have acquired their wealth within China’s dodgy political system? With Australia’s Foreign Investment Review Board, in March 2009, softening rules for foreigners owning property, non-Australians are no longer limited to buying only half of the apartments in a new development while students are now able to spend more than $300,000 on a property. Chinese buyers have recently bought a number of luxury properties in Sydney and new condominium developments (“Australian Property Market Boost Thanks To Chinese Wealth”, August 26, 2009).

With home buyers in Melbourne complaining of being frozen out of a tight housing market by Chinese purchasers who have no intention of living in their new properties, Liberal Party officials have noted concerns about Chinese investment in Australian industries during the process for preselecting candidates for the next federal election, particularly in Victoria.

The rise of China should be a major political issue in Australia. A report commissioned by the Electrical Trades Union (ETU) from the conservative consultancy CPI Strategic rightfully highlights China’s lack of labour rights and little enforcement of regulations in relation to child labour, occupational health and safety and even environmental protection. No wonder the ETU’s Victorian branch is campaigning against Australia signing a free trade agreement with China on the basis that it will destroy thousands of Australian manufacturing industry jobs, a stance supported by three lower house independents (Bob Katter, Tony Windsor and Rob Oakeshott) who want much greater debate about such a deal (Malcolm Colless, The Australian, September 22, 2009).

And where is Australia’s academic concern about a rising China? No doubt greater Chinese influence will be less beneficial to Australia’s national interest when compared to the US alliance (despite the West’s many imperfections). So what sane Western academic would support China’s type of diplomacy - as illustrated by a recent $US2 billion deal with Mozambique which will involve 10,000 Chinese “settlers” on its land in return for $US3 million in military aid from Beijing.

Though Martin Jacques suggests that China’s economic rise may provide a model “to be understood and emulated”, he points to the primary purpose of China promoting the “unity of Chinese civilisation” through its language, customs and even race as 92 per cent of Chinese view themselves as Han Chinese (Guardian, June 23, 2009).

So where are you Professors Robert Manne, Ann Capling and Linda Weiss given your almost hateful attack on Howard’s efforts to forge a closer relationship with the US.

Even some poor African nations are now questioning China’s generosity given the stance by Chinese state companies to keep local hiring to a minimum, a policy which had led to domestic resentment. During September 2009, Libya vetoed a bid by China National Petroleum Corp for Libya-focused Verenex Energy. Further, Angola blocked the sale of Marathon Oil’s 20 per cent oilfield stake to CNOOC and China PetroChemical Corp (Sinopec), although only when signing a tentative agreement with the IMF (Benoit Faucon and Spencer Swartz, The Wall Street Journal, September 30, 2009).

Dream on if one thinks that Western nations can compete with communist China. Just recently Japan expressed concern about Beijing’s stranglehold on global supplies of the lanthanide metals used in hundreds of environmental and military technologies which are also vital to the mechanisms of hybrid cars, wind turbines, iPods, lasers, super-efficient light bulbs and radar systems. With a recent White Paper produced by the Chinese Ministry of Industry and Information Technology proposing an export ban on such rare earth metals, Japan may take China to the WTO as the latter now has 95 per cent of global lanthanide stocks (Leo Lewis, The Times, August 28, 2009).

And with some viewing renewable energy as a new growth industry, it is hardly fair when China openly floods the world market with solar cells and panels. Shi Zhengrong, chief executive and founder of Suntech Power Holdings, recently told the New York Times that Suntech was selling solar panels on the US market for less than the cost of materials in order to build market share.

Not even Germany’s largest producer of solar cells (Q-Cells) can compete with China. After announced a first-half operating loss of E47.6 million and laying off 500 workers, Q-Cell closed a plant, put a further 2,000 workers on short shifts and stepped up plans to establish a solar cell plant in Malaysia employing 2,000 workers. In addition, employment in Spain’s photovoltaic sector has declined from a peak of 41,700 early in 2008 to 13,900 in the 2009 (Dennis Shanahan, The Australian, August 28, 2009).

Do Western governments really believe they can retain their high standards of living and withstand political and economic competition from China based on recent policy trends?

Are Westerners to simply accept a further need for lower wages and tax rates to enhance our employment and investment opportunities while communist China benefits most?

While the inter-dependent relationship between the US and China persists for now with China willing to finance around $US2 trillion of US debt, nothing may prevent a US protectionist response should the US economy disintegrate further.

With the cost of the US social welfare system to increase further as many baby boomers retire, notwithstanding the possibility of extra resources to fund a universal US health care system, there is now much greater talk of new revenue sources that will probably include a value-added tax on goods and services at every stage of production up to the sale (Jeanne Sahadi, CNNMoney.com, August 27, 2009).

The fact is that immense resources and some protection may be needed to fund a variety of US policy needs with any future policy change likely to have enormous ramifications for all nations as the US remains the biggest economy in the world and largest source of capital.

While some Australians may look to a booming China to save its way of living, Australia should prepare for a different scenario if the more powerful and influential US is forced to make dramatic changes in order to uphold its own standard of living.

My gut feeling is that there will be considerable policy change in the near future as many democratic societies conclude that enough is enough; and much more will need to be done to temper a rising China whose national interest is very different to our own.

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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