US Debt Crisis Can Be Resolved If We Follow China Economic Growth Policy

Unlike most of the developed world, China has its bank balance firmly in the black. Despite economic slowdown, the Chinese have been investing their money in foreign companies like there is no tomorrow. The United States, which often blocks such business deals, are watching these investments carefully. Europe, on the other hand, meets Chinese investment with little resistance even when public services are concerned. Everyone, however, is raising concerns about Chinese role in a countries domestic economy and policy making. Who has more to worry about?

The scenario is reminiscent of the 1980's, when Japan’s bubble boom economy saw the mass buying up of American firms. The last decade has seen the Chinese buying up everything from car manufacturers to electronics brands. Such household names as Volvo cars, MG cars, ThinkPad laptops and Weetabix cereal are now owned by Chinese parent companies. On a more political stage, China Investment Corporation (CIC), the country’s main sovereign wealth fund, has been actively looking to diversify China’s US $2 trillion worth of foreign currency holdings into stocks and company shareholder stakes rather then simply purchase U.S. Treasury bonds (They famously were courted to bailed out Lehman Brothers back in 2007). As of 2011, CIC holds in excess of an estimated US $10 billion worth of shares in some of the world’s biggest brands, including Apple, Coca-Cola, Johnson & Johnson, LVMH, Morgan Stanley, and Bank of America. Though these stakes are small, they are growing. The growth is causing many American and European business leaders and politicians to wonder if their problems with the ‘Made in China’ label are nowhere near as big as the ‘Owned by China’ label.

Whilst most of the investment from China has been limited to the private sector, some countries, particularly the U.S., have been keeping a close eye on the influx of Chinese investment capital. The U.S. government has not been afraid to block Chinese investment deals on the grounds of national security risk, particularly when public companies providing public services have been involved. Resource-rich Australia is another country following the "tough stance" strategy of the U.S., which back in 2009 resulted in a small diplomatic crisis between the two countries, as China felt cheated by the U.K.-Australian multinational Rio Tinto Group out of a better price for iron ore. The Australian government also blocked Chinese Huawei Technologies Ltd's attempt to tender broadband services in the country this year.

In credit-crisis Europe, however, there has been a different story. The Chinese desire to invest in government-owned companies and private firms providing public services has been met with little resistance. Back in 2009, CIC bailed out Songbird Estates, the owner of London’s privately owned financial district Canary Wharf, with US$1.3 billion worth of investment. The buyout made them the third largest shareholder of the world’s second biggest financial centre, the other two being Morgan Stanley and another sovereign wealth fund Qatar Holdings. Last year, CIC also bailed out GDF Suez, a French electricity company that provides services in nearly 70 countries, making it the world’s biggest independent utility company. Bailing them out with US$3.5 billion, equal to about 5% of the firm’s equity, gave the Chinese a 30% stake in the firm’s exploration and production division. In January, CIC took its largest outright stake in a public services company with a near 9% ownership in Thames Water, the main water provider for Greater London and its surrounding counties. These examples are just a small fraction of the Chinese public services investment in Europe. Every day, we see more reports of negotiations for CIC and other Chinese firms and further growth of existing stakes.

This has worried some European politicians about China’s growing influence within Europe. The European Union is China’s largest trading partner. More Chinese firms are registered on the London Stock Exchange than anywhere else outside of China. With Americans concerned that China will own their entire debt, Europeans are increasingly worried that Beijing is actually pulling the strings on their economy. However, with credit and capital in short supply, the political concerns of a few politicians have largely been ignored.

In my opinion, there are two ways to look at China’s trend towards public services companies. On one side, you could argue that the Chinese are simply looking for a secure investment. The likelihood of an essential water supply company failing (or being allowed to fail) is highly unlikely when you compare it to a private consumer products manufacturer. On the other side, you could argue that controlling the essential services of a foreign nation essentially allows China to control said nation politically. 

I think China is looking to do a bit of both. At the moment, the size of investments are still too small to have a ‘controlling stake.’ Thankfully, any disputes are settled under European law as opposed to Chinese law. Still, European politicians need to keep a careful eye on the growing influx of Chinese capital and ask themselves if they are prepared to pay the price for easy capital.

The investment practices could also be a two-way street that gives European firms a competitive advantage over American ones in China. American firms in China are doing well, but European firms are becoming more and more competitive. American consumer products manufacturer P&G generates 30% greater global revenue than its UK-Dutch competitor Unilever, but they are virtually neck and neck in China. American firms have also found it difficult to expand their controlling stake in Chinese brands beyond their permitted 49% hold in joint-venture companies, since Chinese government regulator blocks set a limit in a tit-for-tat response to American government blocking. Earlier this year, however, British alcoholic beverages multinational Diageo secured a 65% controlling stake in Chinese baijiu drinks company Shiu Jing Fang, the second biggest selling baijiu brand in China. This has been reported as the first-ever purchase of a major Chinese brand by a foreign company and has surprised many observors who expected the Chinese government to block the deal.

So the question is: does allowing Chinese ownership of public services companies, or bringing in much needed capital and improving trading conditions, outweigh the risk of Chinese control over economy and politics in Europe? The jury is still out for me on this answer. But it is a slightly better solution than America's right now. By limiting the investment of Chinese firms, America is limiting the investment they have access to. They make it harder for their companies to succeed in the world’s largest consumer market as their economy becomes more and more indebted to the Chinese with the continued sale of U.S. Treasury bonds.