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Ripples in China’s placid waters
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‘Is China buying the world?’
Chinese FDI in developed countries is small compared with FDI coming into China, failed to acquire Western assets.
The writer, a former chief economist of the Planning Commission, is at present based at Cambridge in the UK [email protected]
This is the title of the recently published book by Peter Nolan, professor of Chinese development at the University of Cambridge, who was also my faculty adviser when I was doing my PhD here in the 1980s. According to the Financial Times, he “knows more about Chinese companies and their international competition than anyone else on earth, including in China”. After the fall of the Soviet Union, transition experts like Jeffrey Sachs began warning China about the incompatibility of the Communist Party with the market economy. To borrow (and slightly modify) Mark Twain’s famous words, the news of the death of the Chinese economy was ‘vastly exaggerated’. The Chinese Communist Party is alive and kicking, overseeing the country’s spectacular rise that has seen it become the second largest economy of the world in a very short span of time. So much so that the influential Western media is now busy churning out story after story about the threat of the Chinese buying up the world, be it the huge Western firms, African energy resources or Latin America’s natural resources. Nolan’s book contains a wealth of information and insightful analysis to show that the shopping spree is more noise than news.
Of course, China possesses in its coffers the world’s largest foreign exchange reserves. However, the depth of the Chinese purse ought to be seen in the proper perspective. Around one-fourth of America’s externally-held debt is owned by China. But this is only 12 per cent of America’s publicly held debt and eight per cent of its publicly and non-publicly held government debt. The so-called Beijing Consensus is still no match for the Washington Consensus. Even if China has money, it still faces some insurmountable barriers to entry in the Western world.
In the globalised economy, there is no such thing as a level playing field. First, three decades of intense globalisation has led to very high levels of concentration. To give only two out of the many examples in the book: 80 per cent of the global production of industrial gases is in the hands of only three firms and 75 per cent of the supply of braking systems for large commercial aircrafts is controlled by only two firms. Most of the concentration occurs in what Nolan calls “superior technologies”. A small number of system integrators atop the global value chain control 50 per cent of the world market. Second, the top 100 firms control 60 per cent of research and development (R&D) spending, giving them an immense competitive advantage.
Among the top 500 global firms listed in the Financial Times, there are only 79 firms from low and middle income counties, which mostly consist of banks and state-owned entities, which are all users rather than producers of high technology. Again, the Foreign Direct Investment (FDI) from developing countries has increased, but an overwhelming proportion of it is from firms with headquarters in developed countries. China heads this list of developing countries, but it is still far from catching up with the developed countries. Its income per capita is only 16 per cent of the figure for developed countries.
No Chinese firm is among the top 100 firms in terms of R&D spending. In terms of FDI, Chinese investment in developed countries is very small compared with FDI coming into China. Attempts to acquire Western assets have mostly failed.
Western countries are more into China than China is into them. “China has not yet bought the world and shows little sign of doing so in near future”, concludes Peter Nolan.
Published in The Express Tribune, June 1st, 2012.
Reader Comments (17)
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This is a well-written article; fear of China using its deep coffers to exert disproportionate influence in world affairs is a major concern for the status quo powers, and much of the hype surrounding China’s opaque intentions come from their grist mills. However, China is still very low down the knowledge value chain in comparison to developed economies, and still depends on it relatively low cost of manufacturing and high labor productivity to increase the standard of living of its people – the record FDI that they are able to attract also helps in the impressive infrastructure development and in pulling millions of people in their western regions out of poverty; this will continue for the forseeable future. A far greater danger is in China queering the pitch for democratic reforms and people’s civil rights in developing nations in favor of despots and extremist regimes – in its quest for energy security and natural resources. Another concern in the immediate region is rising Chinese nationalism, a clear consequence of the country’s success creating unsustainable expectations within a jingoistic section of the population.
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Correct! China has a long way to go. Just a footnote to your very persuasive essay. Economic growth also involves well established infrastructure, structural growth including state structures, social and political inclusiveness, and shift in ideology (post-industrial shift). China has made tremendous progress in industrial output but it is nowhere close to advanced industrial societies.
Dr. Sahib, It is time to reflect on just-out Economic Survey of Pakistan. I have already requested another scholar/former policy-maker to enrich us through his analytical skills. I will request you to do the same. It will help us to understand it in a better way. Thanks.
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I can buy all I want but in the end I have to sell.
China is busy in buying good will and her current investments are aimed at keeping her current economic engine running with uninterrupted supply. Unfortunately , china is depended on buyers, and US FDI in technology and market are the fuel. The more china buys her supply chain logistics, the better for US FDI, for example.
If Marsians were to write a history of the earth they can see that the Twentieth century is American civilization and their lead in R&D will continue to shape the 21st century and beyond. There is not enough money in the world to buy the knowledge accumulated in R&D.
Example in economics: the human civilization was bonded to shiny metals and it took US to break them free from bondage.
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OK, China has made a lot of money selling toys and towels – but this money is being used to arm itself and threaten neighours. What do you say of this?
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Most of China’s buying came from underdeveloped countries in Africa and some in Latin America. Its accumulation of wealth in western countries has been very low. Its true that its more of a noise than reality. But China has gone through troremendous growth but it is bound to face developmental crisis as soon as it runs out of its human resources as its major portion of population is set to enter retirement age and many other countries catch up with producing low tech products that China has monopoly on, massive investment in infrastructure development, social uplift , human development and high tech R & D. China is a very good story of success in such a short span of time but its Rise is grossly exaggerated.Recommend
How do you go from buying up the world to debt. When actually SOE’s are expanding massively and buying more market shares in the world than any other country or free market put together.
Rider I
Anti Economic Warfare Blog Post
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I worked in Tanzania twenty years ago and you would not see Chinese there. I was not even conscious of China. When I visited there again three years ago everything had changed. You saw Chinese everywhere. Chinese companies. Chinese products. Chinese technicians. Chinese entrepreneurs. It is just incredible and scary how fast the Chinese are moving forward. The whites ruled the world now it is the turn of the yellow man.
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Agreed with the author. Excellent and well written article based on factual data rather mere rhetorical hypothesis. Its long way to go for China to catch up with the developed nations in the west. China though growing above 7% for the last three decades or so mainly due to export based economy which rely mainly on foreign direct investment rather domestic consumption. China economy is over heated and we don’t know yet what happens when the bubble bust.
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China is investing more on natural resources . This will pay off in the the future.
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@Raheem:
The way things are going on in Pakistan,After sometime you will see Chinese everywhere in Pakistan.Finally its going to be Chinese Pakistan
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@ Aditya
Pakistan already functions like a Chinese vassal state!
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I really have to disagree here. Let’s take the example of telecom equipment makers. Six years ago Chinese firms were barely able to win contracts. Now, because of the cheaper costs, Chinese firms like Huawei and ZTE have not only monopolized the market but giant vendors like Nokia-Siemens, Alcatel, Motorola etc have been made redundant. China is not only about making towels and toys now, Everything is made there now. Just find out where all the Apple products are made. Investing in R&D is not a very important factor.
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China is no threat to Pakistan and it has probably the largest trade with India. So there is no chance of any war with India either. Western dominated media cries foul whenever they are loosing. And they are loosing hell number of jobs to China and India and to other small countries. The failing economies and health issues are another concern for the so-called developed countries of the West. No wonder they want to push China to the wall – and earn more media points in the process.
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@fahad:
“Just find out where all the Apple products are made. Investing in R&D is not a very important factor.”
If you do not know which tool to make and how to make it, you cannot make a tool. The civilization that invented the tools progressed ahead than the one who copied them. Look around the room, and make a list of who invented what.
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Nolan and Pervez are economists looking at numbers on capitalization and wealth accumulation. But remember the number game that hid the bubble ridden economies of Europe and the US? China may not be buying the world, but it is selling to the world. What makes more business sense?
My own PhD research at Oxford Business School shows innovation in China and other emerging markets is increasing fast. And I am not talking about RnD spending since that is only one measure of innovation. The West is pursuing a philosophy of “doing more with more” as in the case of increased RnD spending, and more so at the risk of depleting their already debt ridden coffers. The Chinese and other emerging market players such as Brazil and India are pursuing a strategy of “doing more with less”. Again what makes more business sense?
In contrast an economist’s perspective, have a look at a historian’s insight on early signs of a civilizations waning: Neil Ferguson’s “Civilization: The West and the Rest” and the Channel 4 documentary “Is the West History?”
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Excellent article coupled with scholarly comments from John B and Yasser Bhatti. In my opinion, as China will further progress in terms of economy; the developed economy will require and induce better levels of skills/education consequently creating higher levels of intelligence; the spending on R&D will automatically increase as a need of the industry and intelligent human capital.
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No one claims that China has already outgrown the worth hence giving figures of China’s per capita GDP being 16% of west amounts to cherry-picking facts. The point is that China has been rising phenominally and over the next decade will eclipse the U.S. to become the largest economy in the world. Will it be number 1 per capita wise? no – that honor will perhaps continue to be held by Luxumburgh or Qatar or norway etc. Sure there will be fields where China will spend less than the west and there will be fields where China will spend more. And saying that so many firms are from so country is not worth as much as it’s crancked out to be. A company is a private entity in most cases accountable to its board and its shareholders – that’s it. If need be, country hopping can easily be done. The incredible story for nations like Pakistan is that here’s a nation that’s growing at over ten percent per year – think of the opportunities that Pakistani businesses can have tapping that market rather than concentrating the already ailing and slow-moving western economies. A smart business person can easily detect them – unfortunately many of our economists cannot.
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