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.
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.
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.
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