The People’s Money

CHEAP AND EASILY available money provides the context for China’s transformation, and this transformation is the extraordinary story of our time. As the world was getting richer and money was moving around, China, having embraced economic reforms, was preparing to become more integrated into the world economy and thus to harness the openness of the rest of the world. In fact, throughout the late 1990s and early 2000s—roughly between the Asian financial crisis and the global financial crisis—cheap money spurred consumer demand, which, in turn, drove the growth of Chinese exports and channeled investment into China. The country’s economy expanded at a remarkable pace, and by the first decade of the new century, it had regained the position within the world economy that it had lost almost one hundred years earlier.

Indeed, at the beginning of the twentieth century, China boasted one of the largest economies in the world, with a 9 percent share of global gross domestic product (GDP) in 1913.¹ Two world wars, a major war with Japan, and a long civil war wreaked havoc on the economy. When the People’s Republic of China was established in 1949, the whole country was in tatters. Although it was still a significant exporter, if not a major one (ranking thirtieth in the world) in the 1950s, all this began to change when Mao Zedong launched the first Five-Year Plan in 1953.² The Maoist doctrine of self-sufficiency, implemented during the Cultural Revolution (1966 to 1976), left China largely isolated from the rest of the world. Its international trade dwindled, as what imports there were (such as commodities and semimanufactured goods) went to feed the country’s autarchic industry and exports slowed to a trickle. In 1977, the sum of China’s imports and exports was less than $15 billion, and its share of world trade was a mere 0.6 percent. The country’s economy was decimated, and its share of global GDP had shrunk to just over 2 percent.³

China was even more isolated from international capital markets. With the exception of short-term trade credits, it did not borrow in international commercial markets or from international financial institutions such as the World Bank. It did not receive foreign aid from bilateral agencies. It did not receive foreign direct investment and did not invest abroad.⁴ When the Communist Party took power in 1948, China issued a unified currency—the renminbi—to replace the variety of regional currencies that had been in use until then.⁵ To make imports cheaper, the central government fixed the renminbi’s exchange rate at an artificially high level. The result was a highly overvalued currency and a dual currency market where the official rate was much higher than the unofficial one.

With China nearly impenetrable by the non-Chinese, it was difficult for foreign experts to predict how the country would develop over the long term. In a 1975 report on its economic conditions based on an extensive visit, a group of American experts agreed that the country could advance significantly because of its ability to expand industrial capacity and output. But they maintained that it would not move into the group of leading economies. “Even if the People’s Republic succeeds, and it almost surely will, in further outdistancing most other large LDCs [less developed countries] by the year 2000, it can hardly make up the enormous gap between itself and the countries in the front ranks…. Peking will need much more time to achieve industrial parity.”⁶ And a couple of decades later, in 1999, the Economist argued that China’s economic growth and modernization could not be sustained unless gradualism in reforms was replaced by “shock therapy.”⁷

China proved them wrong. In 2010, it dwarfed Japan as the world’s second-largest economy, and it is now on the verge of overtaking the United States (by some measures, it has already done so). Over the last thirty years, a confluence of internal and external factors, sustained economic reforms, and a policy of openness have spurred economic growth on an unprecedented scale. The country’s large population has provided cheap labor, helping it to harness the benefits of the expansion of the world economy. Artificially low interest rates have enabled its state-owned enterprises to borrow cheaply. (State-owned enterprises are those with a sole or majority state owner.) Adjustments to the exchange rate have kept its exports competitive. Foreign direct investment, encouraged since the onset of economic reforms in the 1980s, has brought in skills, technology, international best practice, and exposure to external markets—and, of course, capital. Between 1978 and 2015, China’s real GDP grew about thirtyfold to almost $11 trillion. This makes up 15 percent of world GDP.⁸ Annual income per capita increased from about $300 in the early 1980s to approximately $8,500 today (in nominal terms).

It’s hard to overstate how unexpected and unusual China’s transformation was, in both its speed and its scale. In the past, a country’s development—the shift from low-value to higher-value industries, the increase in income per head, and the improvement in overall living standards—always took at least two generations; China achieved it in less than one. It has come as a surprise even to the Chinese themselves (Deng Xiaoping had more modest expectations, reiterating that “if we can make China a moderately developed country within a hundred years from the founding of the People’s Republic, that will be an extraordinary achievement”⁹). I often ask Chinese officials whether they could have predicted such a successful outcome thirty years ago, and the answer is always no. Once I posed the same question to a former Japanese deputy finance minister who was a careful observer of China. Without hesitation, he answered: “Not in my lifetime.” Against this prediction, the country became the great success story of our time.

One real puzzle, however, is that the country’s currency has not kept up with its extraordinary development. Although China is now a superweight in the world economy, the renminbi has limited circulation outside its borders and limited liquidity. Most of China’s exports (about $2.7 trillion a year ¹⁰) and imports (about $2.3 trillion a year¹¹) are invoiced in dollars, and dollars are exchanged to pay for them. This is the case for goods that the country trades not only with the United States but also with most of its trade partners. China is a global power with a “dwarf” currency.

How has China managed to grow so quickly, and why has its currency not kept up? In this chapter, I will take a closer look at the country’s extraordinary transformation, exploring where it has come from and what it has managed to achieve. I will argue that this has been possible because of the parallel opening of the world economy and the country’s ability to become part of the expanding global markets where the dollar is the dominant currency. China has a unique development model and is in the middle of an ongoing transformation from a system based on economic planning to a more market-oriented economy—“market socialism” in Deng’s words.¹² Trade and investment are the forces that have been driving the country’s development. In the following chapter, then, I will look at how the dollar system and financial repression have facilitated this development—and how they are now starting to hold the country back. The downsides of having a dwarf currency are beginning to show.

In the late 1970s, China started to embrace a strategy of trade liberalization and to reverse years of isolation, autarky, and self-sufficiency. Some signs that it wished to open to the rest of the world were already evident in the early 1970s, with President Nixon’s famous visit and the rapprochement with the United States. But it was when Deng Xiaoping came to power after the Cultural Revolution that the conditions for the rapid growth of China’s foreign trade were set.¹³

In the early 1980s, Deng announced the opening of special economic zones, and in 1988, Premier Zhao Ziyang unveiled a coastal development strategy. What followed was a combination of strategy and luck, as China’s successful opening up and its exploitation of international trade overlapped with the extraordinary integration and expansion of the world economy that followed the end of the Cold War in the early 1990s. The Chinese authorities eagerly exploited this opportunity, pushing the state-owned firms (more on these in chapter 3) to meet the demand for cheap consumer goods and intermediate goods. The country’s coastal provinces became one big export platform. As demand grew, so did exports, helping the growth of China’s economy. Dollars—the currency used to settle all these transactions—began to flow in. In 2001, the country formally entered the world economy and became a member of the World Trade Organization (WTO). Joining the WTO gave a further boost to China’s exports.

Emboldened by China’s new global position and greater market access—and also needing to come into compliance with WTO standards—Premier Zhu Rongji began pushing reforms through—in particular, the downsizing of the state bureaucracy.¹⁴ Tariffs were significantly reduced, and the authorities agreed to eliminate trade licenses, which had previously restricted cross-border business to only a few favored firms.¹⁵ The authorities also agreed to adopt international standards for intellectual property rights protection and for the treatment of foreign businesses operating in the domestic economy. To this day, problems remain in the implementation of the WTO rules, especially with regard to intellectual property rights protection and the treatment of foreign companies. Nonetheless, China has made significant progress in reducing tariffs. The average bound tariff rate—the most-favored-nation tariff rate that is part of a country’s commitments to other WTO members—is now 9.2 percent, compared to 34.4 percent in India and 30.7 percent in Brazil.

The effects of this transformation are all around us. Having turned into one of the largest exporters and manufacturers, China is now the main trade partner for both the United States and Europe. In 2014, it traded approximately $5 trillion worth of goods and services, comprising over 10 percent of world trade.¹⁶ Compare these numbers with China’s contribution to world trade in 1990: $115 billion dollars, or less than 2 percent.¹⁷ Trade is now an important engine of China’s economic growth. The sum of its exports and imports of goods and services amounts to around 47 percent of its GDP; in 1978, this share was less than 10 percent. For Japan, India, and Brazil, for instance, trade accounts for approximately 25–30 percent of their GDP.¹⁸

Just as Great Britain was from 1850 to 1900, the United States was from 1900 to 1960, and Japan was from 1960 to 1990, China is now the world’s largest producer of ordinary consumer goods (accounting for about one-third of the world’s total production), such as home electrical appliances, toys, bicycles and motorcycles, footwear and textiles, computers, cameras, mobile phones, watches, machine tools, and even Christmas ornaments. It is the leading trade partner for 124 countries.¹⁹ Seventy companies on the Fortune Global 500 list are Chinese (up from only eleven in 2002).²⁰ The country’s firms have become world leaders in a number of sectors. In electronics, for instance, they account for approximately 75 percent of the global output of smart phones and more than 85 percent of that of personal computers. “Made in China” goods, especially those at the lowest rank of the consumer goods market, have come to epitomize the transformation of the world economy at the turn of the last century and at the beginning of the new one.

Although only 15 percent of China’s total exports these days come from labor-intensive sectors such as textiles and footwear, cheap labor remains at the heart of the country’s economic success. For instance, with wages and other labor costs of approximately $4.46 per hour, its car industry has an advantage over car producers in countries where labor costs are much higher. In developed countries, labor costs per hour in the car industry range from $35 in the United States to $45 in Japan to almost $60 in Germany and France. Even an emerging-market economy such as Mexico faces higher costs, at $6.48 per hour.²¹ As a result, China now has the world’s largest auto industry, with almost 25 million vehicles produced in 2015—a huge increase since 2000, when a mere 2 million were produced.²² It is now well ahead of its competitors in terms of production volume. In 2015, a bit more than 12 million cars were produced in the United States, just over 9 million in Japan, less than 6 million in Germany, and approximately 5 million in South Korea.²³

Much of China’s advanced production involves export processing, and as a consequence, semifinished or finished components from other countries make up a significant share of imports.²⁴ For example, Apple outsources the production of iPads and iPhones to Foxconn, a company headquartered in Taiwan that has thirteen factories in mainland China, the largest of which is based in Shenzhen. The firm imports device components, assembles them into finished products, and ships them out to markets in North America and Europe.

It is, however, China’s imports of energy and commodities that, above all, give a sense of the country’s industrial transformation. It is now the world’s largest total energy consumer, accounting for nearly half of the world’s growth in energy consumption over the previous decade.²⁵ Its oil imports are the fastest growing in the world (a stark contrast to the 1980s, when it used to export oil), and it consumes approximately 12 million barrels per day—more than any other country outside the Organization for Economic Cooperation and Development but behind the United States, which consumes almost 20 million barrels per day.²⁶ Demand for commodities is driven by heavy industry’s need for gasoline, electricity, iron ore, copper, and other natural resources. In 2014, China produced 823 million metric tons of steel, compared to 128.5 million metric tons in 2000. Japan came in a distant second with 111 million metric tons of steel output, followed by the United States with 88 million metric tons and South Korea with 72 million metric tons.²⁷

Despite the immense growth in manufacturing, this sector employs only about 30 percent of China’s total labor force; approximately 35 percent of China’s working population is still employed in agriculture (the service sector accounts for the other 36 percent).²⁸ The proportion of agricultural employment is very large and suggests that, despite its huge effort to modernize, the country still has a long way to go to overturn and upgrade its economy. This is how economies develop and modernize: they expand the relative weight of manufacturing and services—the secondary and tertiary sectors—as they reduce that of the primary sector (mainly agriculture and fishing but also mining and extraction). As China continues along its path of development, the share of employment in agriculture will drop, and the shares in manufacturing and services will go up (the increase of the latter is likely to be stronger than that of the former). In the United States, only 1 percent of the labor force is employed in agriculture. The service sector, on the other hand, absorbs most American workers (almost 80 percent), whereas manufacturing employs less than 20 percent. This distribution is common to most advanced countries, where technological innovations and organizational improvements have significantly reduced the number of people employed in agriculture relative to other sectors—in particular, services.

One of the major consequences of this shift away from agriculture has been the urbanization of the country. Industry and services tend to be concentrated in urban settlements; thus, people continue to move from the countryside to cities. Like Europe at the time of the Industrial Revolution, China now hosts some of the largest and fastest-growing cities in the world. Take Shenzhen. According to the official census, it is a huge city of 10 million people—the locals double that figure to account for immigrants that are not officially registered—and China’s sixth-largest city; it is much bigger than any large city in Europe or North America (London and New York have approximately 8 million inhabitants each). Many of these cities have grown so fast that they have outpaced global awareness: as I was driving through Shenzhen during one recent visit, I could not avoid wondering how many people in Europe or the United States have ever heard of it—or of the neighboring, equally giant cities of Guangzhou and Dongguan.

Nowadays more than 50 percent of China’s population lives in cities, a huge increase from only 20 percent in the early 1980s. Hundreds of millions of people have moved to urban centers to work in manufacturing and services, and with China’s continued urban expansion, these large cities will become even larger. Albeit different in relative size, such urban development can be compared only with the growth of London and Manchester at the time of Britain’s Industrial Revolution in the nineteenth century.

During China’s transformation, capital was, in fact, the least important consideration; the country’s export-heavy strategy meant there was always a surplus in the trade balance (in other words, it always produced more than it could consume), and the individual savings rate was high. What it needed (and to some extent still needs) was knowledge, technology, and skills. The authorities therefore started to encourage foreign companies that were eager to participate in China’s expanding domestic market to invest in the country. The opening of the country to foreign capital began in 1979–1980, with the implementation of the joint venture law and the establishment of the special economic zones.

And, indeed, with a system in place to ensure that there were plenty of dollars to drive the country’s development, dollars began to pour in. Foreign direct investment has increased almost without interruption since the early 1980s—and this despite increasing awareness abroad of corruption and weak governance. Throughout that decade, China received an average of $1.8 billion a year in foreign direct investment. These sums soon surpassed the amount China was borrowing from the World Bank, making foreign direct investment a far more important source of foreign capital.³⁰

China receives more foreign direct investment than any other developing country (and, of all recipients, is behind only the European Union and the United States).³¹ A cumulative total of more than $2 trillion flowed into the country between 1990 and 2010. These days it gets an average of $128 billion a year in foreign direct investment.³²

In the early 1990s, as part of the bevy of reforms to prepare for and support China’s application for membership in the WTO, the government started lifting restrictions on foreign investment in sectors such as retailing. As a result, major multinational companies (Nike, Benetton, Giordano, and Baskin-Robbins, just to name a few) began production operations in Beijing, Shanghai, and Shenzhen and also opened shops in the country’s main cities, attracted by the large domestic consumer market. Investing in China became a key element of the business strategy of most multinational companies.

The increase in foreign direct investment has also helped China’s manufacturing sector get more integrated into regional and global supply chains. Multinational companies headquartered in Europe and the United States have invested in greenfield plants and opened production facilities and factories; for example, both Germany’s Mercedes-Benz and Britain’s Jaguar Land Rover have factories in China. The country is now part of the global business system of a large fraction of U.S. and European multinational companies across different sectors—including Apple, Coca-Cola (with 41 bottling plants and almost 50,000 employees in China), Volkswagen, Bosch, and Adidas, to mention just a few. Firms with foreign stakeholders account for approximately 28 percent of China’s overall value-added industrial output.³³

Foreign multinational firms have made critically important contributions to China’s transformation across industries. The interaction with and exposure to leading-edge technologies—and the need to comply with international quality standards and good practice—have contributed to the country’s productivity growth and modernization. These benefits extend beyond the production of goods and services to include, increasingly, far more advanced operations, such as research, design, and innovation. In other words, foreign capital has not only supported China’s development but also better equipped domestic firms to compete in international markets.

With more foreign companies operating in China, joint ventures between Chinese and foreign firms also sprang up. The outcome of these partnerships, and of the large amount of foreign capital inflows, is reflected in the strong growth of exports of foreign-invested firms. The share of these exports within China’s total exports increased from a mere 1 percent in the mid-1980s to nearly 50 percent in recent years.³⁴ These partnerships are particularly relevant in the high-tech and high-value consumer product sectors that produce, for example, DVD players, LED and plasma TV screens, high-end electronics, and microwave ovens. By the mid-2000s, Chinese firms with foreign stakeholders accounted for almost 90 percent of exports in these sectors. Partnerships and joint ventures with foreign companies have also been critical to the development of the country’s large automobile sector. For instance, in 2014, Jaguar Land Rover, in cooperation with China’s Chery Automobile Company, launched a $1.1 billion project and opened the first production center in China. Mercedes-Benz, in a joint venture with Beijing Benz Automotive Ltd., has been manufacturing cars in the country since 2004. Joint ventures with Chinese firms have also helped foreign companies expand into the growing domestic market. Such joint ventures, for example, account for approximately 30 percent of total auto sales for Volkswagen and General Motors.³⁵

But investment no longer flows just one way. Chinese companies have also become active abroad and have started acquiring stakes in companies around the world. The turning point came in 2005, when Nanjing Automobile Group acquired MG Rover, a British car company with a well-established brand. This acquisition showed definitively that China could be an equal partner in global markets.

Chinese investment abroad started on a small scale soon after Deng Xiaoping came to power in 1978. Already in his seventies when he took charge, Deng embarked on a series of official trips abroad. In November 1978, he visited Singapore and “glimpsed a vision of China’s possible future,”³⁶ and a few months later he went to the United States—the first Chinese leader to visit since 1949.³⁷ Both trips made a huge impression on him and perhaps evoked earlier memories—he had spent several years in France as a student.³⁸ According to the official Chinese narrative, these trips provided the inspiration for and marked the beginning of China’s “go out” strategy. “From then on,” China’s government literature says, “China said ‘good-bye’ to isolation and stepped onto the path of ‘opening to the world’ and ‘opening to the future.’”³⁹

In China, opening up is a popular term for pursuing reforms, learning from good practice, modernizing the country, and engaging with the rest of the world while developing—in the words of current leader Xi Jinping—“socialism with Chinese characteristics.”⁴⁰ Opening up extended to firms, which were encouraged to invest abroad (even if, in the early days of the reforms, they still needed direct approval from the State Council to operate overseas). The State Council designated 120 state-owned enterprises as “national champions” that would lead the internationalization of Chinese enterprises and provided them with high-level political support and financial subsidies in order to achieve this.⁴¹

In 1997, President Jiang Zemin unveiled a new phase of the country’s opening up in a speech to the Fifteenth Congress of the Chinese Communist Party, in which he advocated the active participation of Chinese companies in foreign markets and foreign countries. “Implementation of the strategy of ‘going out’ is an important measure taken in the new stage of opening up,” said Jiang. “We should encourage and help relatively competitive enterprises with various forms of ownership to invest abroad in order to increase exports of goods and labor services and bring about a number of strong multinational enterprises and brand names.”⁴²

China’s “going out” (or “going global,” as it is also called) is a multifaceted policy initiative that was devised to encourage its commercial firms to establish partnerships with foreign companies, to acquire stakes—usually minority stakes—in companies abroad, or to bid for contracts (mostly for large infrastructure projects).⁴³ This initiative combines commercial and diplomatic goals and is consistent with the four motivations usually cited in the economic literature as driving companies to invest abroad: access to valuable commodities or energy; interest in more efficient, lower-cost processes; expansion into new markets; and acquisition of new assets.⁴⁴

First of all, the authorities aimed to facilitate Chinese companies’ access to oil, energy, and commodities and to satisfy the country’s growing demand for primary resources. Most investments of this type were in resource-rich developing countries. Altogether, in the years between 2011 and 2014, Chinese oil companies spent approximately $73 billion to purchase oil and gas assets in the Middle East, Canada, and Latin America, and to invest in exploration operations ⁴⁵ and more than $90 billion to secure bilateral oil-for-loans deals with several countries (including Russia, Brazil, Venezuela, Kazakhstan, Ecuador, and Turkmenistan). China National Offshore Oil Corporation has been particularly busy since 2001, making acquisitions in countries such as Angola, Brazil, Equatorial Guinea, Indonesia, Kenya, Burma/Myanmar, Nigeria, and Uganda. In 2011, it acquired Canadian oil sands producer Opti Canada for $2.1 billion after the latter filed for bankruptcy protection.⁴⁶

Going out was also a way to introduce market-driven practices and help the money-losing state-owned conglomerates turn into modern and efficient enterprises. As Jiang pointed out in his speech to the Fifteenth Congress: “We should form large internationally competitive companies and enterprise groups through market forces and policy guidance.”⁴⁷ For the authorities, going global and pushing state-owned enterprises into international markets in order to make them more competitive were part of the overall reform of the state-owned companies (more on this in the next chapter).

In 2004, there was a clear shift toward the third motivation—access to overseas markets—especially in the engineering and construction sector. The going out policy guided expansion into new markets and established an international presence for many Chinese firms. In some cases (as with oil companies), overseas investments were driven by the need both to acquire resources and to expand into new markets. In recent years, companies have focused more on the fourth motivation, using their financial resources to merge with or to acquire significant stakes in overseas companies in order to upgrade their nonfinancial assets (such as technology, brand, and market share). For example, in 2010, Zhejiang Geely Holding Group, an automotive manufacturing company headquartered in Hangzhou, bought the Swedish company Volvo Cars for $1.5 billion. Through this acquisition, Geely acquired Volvo Car’s well-established international brand, technology, and global distribution network—as well as its serious financial troubles. In the three years before the acquisition, the company had lost an average of $1.8 billion per year before taxes, and net sales had declined by almost 20 percent.⁴⁸

China also has a fifth, somewhat unique motivation for investing abroad: to acquire friends and commercial advantages around the world through financial diplomacy. Its state-owned enterprises tend to be more sensitive to national strategic priorities than to pure corporate priorities.⁴⁹ This makes them more willing than private firms to direct their investments toward foreign countries that do not have a strong record of public institutions, good governance, and positive sovereign ratings. For instance, in 2014, China signed a $2 billion deal with Zimbabwe for the construction of a coal mine, power station, and dam, secured against Zimbabwe’s future mining tax revenues. Similarly, Chinese-backed loans to Russian companies are estimated to total $30 billion, many of them secured by oil shipments to China.

Such a preference is counterintuitive and conflicts with the established theory that in foreign direct investment a high level of political risk correlates with a low level of attractiveness. Investing in countries with poor economic and political governance is a risky strategy, as it exposes China—like any other investor—to the possibility of substantial losses, especially at times (like now) when low oil and commodities prices increase the risk of default for some oil-producing countries. Venezuela, for example, with 95 percent of its exports in oil, has been through significant hardship since 2014, and GDP has been down by almost 6 percent since the beginning of 2015, whereas inflation is more than 100 percent. Therefore, during President Xi Jinping’s visit in January 2015, China agreed to invest $20 billion to help the country—on the top of $50 billion in credit it had extended since 2007.⁵⁰

Propelled by these five interrelated motivations, China began to expand its presence overseas after joining the WTO in 2001. Membership in the WTO provided the context and the regulatory framework, and even the legitimacy, for its “going out” strategy. This, coupled with the simultaneous easing of foreign exchange controls and more active assistance for firms with overseas expansion plans, spurred a strong surge in the country’s outward foreign direct investment, which grew from $47 billion in 2001 to $110 billion in 2008 ⁵¹—still, however, considerably less than the overall stock of inward direct investment (almost $400 billion that same year).⁵² The 2008–2009 global financial crisis slowed things down, but China’s overseas direct investment rebounded by 2010—notably, that directed toward developed countries where the crisis had created interesting investment opportunities and had weakened the political barriers preventing foreigners (especially Chinese) from “buying chunks of the country.”⁵³ Strong foreign direct investment is poised to continue: the Thirteenth Five-Year Plan, for the period 2016 to 2020, like the previous plan, encourages Chinese enterprises to “go abroad”—as part of the “two-way opening up” of attracting foreign investments and investing overseas.⁵⁴

Where does Chinese overseas investment go? Excluding the large share that continues to go to tax havens (especially the Cayman Islands and British Virgin Islands) and through Hong Kong to other destinations, Asia is the most important destination. In 2014, the country’s total direct investment in Asian countries was $116 billion, about a quarter of its total.⁵⁵ Within the region, again excluding Hong Kong, Singapore is the largest recipient, followed by Vietnam and Pakistan. In recent years, there has been an increase in the flows to Burma/Myanmar, Indonesia, Cambodia, and Thailand. Outside Asia, Germany, the United States, and the United Kingdom are the largest recipient countries, with 12 percent, 9 percent, and 5 percent, respectively, of total Chinese foreign direct investment since 2003.

Among the industries that are attracting the most Chinese investment, the service sector—including trade and finance—stands out, with almost 60 percent of the total. Investment in manufacturing is also significant, with almost 40 percent of the total, whereas investment in agriculture is tiny. Investment in the service sector is concentrated in high-income countries, consistent with the investment motivation that focuses on the importance of acquiring market share and nonfinancial assets such as innovative technology and international brands. On the other hand, the majority of Chinese investment in the natural resources sectors (metals, coal, oil, and natural gas) goes to low-income countries.

Over the years, Chinese companies have acquired stakes in a number of businesses abroad, from banks to shipping companies. In 2015, their merger and acquisition activities overseas totaled almost $67 billion, with 382 total transactions—a 21 percent and a 40 percent increase, respectively, from the previous year.⁵⁶ However, Peter Nolan argues that these firms have not taken part in major acquisitions (the acquisition of Volvo Cars, at approximately $1.8 billion, is tiny)—and even their efforts to acquire companies in developed economies have often ended up in failure.⁵⁷

The exception that confirms the rule is the 2004 acquisition of the struggling personal computer division of IBM by Lenovo, a computer technology company based in Beijing. Lenovo paid $1.25 billion for the acquisition, which included the business that manufactured the ThinkPad laptops, and absorbed $500 million of IBM’s debt. The deal was hugely symbolic: an obscure Chinese company had managed to acquire an iconic American brand. It also propelled Lenovo onto the international stage, making it the third-largest computer manufacturer in the world by volume. The Financial Times welcomed the deal as “a symbol of a new economic era.”⁵⁸ However, the low profitability of IBM’s personal computer division in an increasingly competitive market raises the question of whether the acquisition would have been more politically controversial if the target company had been more successful.⁵⁹ In the same league is Geely’s acquisition of money-losing Volvo Cars: the takeover of this iconic Western company would have been politically more controversial if Volvo Cars had been a profitable company. In any case, Nolan convincingly argues that the acquisitions that the large Chinese firms have made are small in scale, compared with the deals that the world’s leading companies routinely make. For instance, around the time of the Volvo Cars deal—for $1.8 billion—SABMiller, the multinational brewing and beverage company headquartered in London, announced the $10.4 billion acquisition of the Australian brewing company Foster’s.⁶⁰ More recently, in 2015, SABMiller was taken over by Anheuser-Busch InBev NV in a deal worth $106 billion.⁶¹ In February 2016, ChemChina offered to buy the Swiss agricultural giant Syngenta for about $43 billion; if the deal goes ahead it will be the largest foreign acquisition by a Chinese company and could mark the beginning of a new era of larger deals for Chinese going abroad.

Chinese overseas investment has recently turned to the banking and financial sector. Once again, however, these acquisitions have been of limited size. In December 2014, for instance, the Chinese brokerage firm Haitong Securities acquired the investment banking arm of Portugal’s defunct Banco Espirito Santo in a €379 million deal. A few months later, in February 2015, the Industrial and Commercial Bank of China finalized the $690 million purchase of a controlling stake in the UK arm of South Africa’s Standard Bank. For the first time, a Chinese bank now has a significant trading floor operation in London.⁶²

Many countries—industrialized and developing alike—have expressed concerns about being too closely entangled with China through commercial and financial links. They worry about the exploitative attitude that is often displayed by Chinese firms and the loss of key technological capabilities. In addition, as episodes like Chinese National Offshore Oil Corporation’s losing bid for Unocal show, there is strong political resistance in Western countries to letting state-owned Chinese companies acquire significant stakes in strategic domestic companies.⁶³ The influence of the country’s Communist Party in the governance of these state-owned companies is a major source of discomfort for Western governments and their citizens,⁶⁴ who feel that China’s strategic interests are often at odds with their interests and those of their neighbors.

Over the years, China has become the world’s largest provider of development finance, and this has created even more anxiety, especially in the recipient countries, around the way Beijing deploys development finance. This support comes, in some cases, with particularly favorable conditions and “no strings attached,” which often translates to de facto support for undemocratic and repressive regimes.

Figures are murky, but sources estimate that in 2009 and 2010, for instance, the China Development Bank and Export-Import Bank of China signed agreements to lend approximately $110 billion to governments and enterprises based in countries such as Russia, Venezuela, and Brazil. China is also estimated to have supplied more than $119 billion in loan commitments to Latin American countries and firms since 2005. In 2010, it loaned Latin America more than the World Bank, Inter-American Development Bank, and U.S. Export-Import Bank combined.⁶⁵ It also provided $10 billion in repayable long-term loans to Africa from 2009 to 2012—and during his first overseas trip to Africa in March 2013, President Xi Jinping pledged to double this to $20 billion by 2015. In November 2013, the head sovereign risk analyst of the Export-Import Bank of China announced that by 2025, “China will have provided Africa with 1 trillion dollars in financing, including direct investment, soft loans and commercial loans.”⁶⁶

This financial diplomacy has helped Beijing’s relations with many developing countries and has cemented China’s role as an alternative to U.S.-led economic diplomacy and the “Washington consensus.” Although many countries welcome China’s investment as an important trigger for their own development, some have expressed concern about getting too close to China, as they see the imbalances in the relationship—in terms of economic size, financial resources, and geopolitical standing—and therefore the potential risks.