'You can always count on China to be good to its neighbours this time of year', observes Carl Thayer. 'The money is meant to send a message that China is the big sugar daddy of Southeast Asia and will outbid the US.'
The APEC Summit in Beijing witnessed the hosts committing US$40 billion for the Silk Road and the same amount for ASEAN infrastructure.
That China is providing development funds to formerly wealthier countries is itself remarkable. But the recent munificence highlights the deeper paradox: is China still a developing country or is it advanced? The answer, of course, is both. China identifies rhetorically with the South, even while it sends rockets to the moon. Such a large country with such awesome social disparities can simultaneously be developing and advanced. Its inequality does not hamper China's ability to export capital to richer countries; perversely, it enables it.
The reason is 'financial repression': legitimised diversion or confiscation of private wealth. Many countries employ this tool. China's repression follows the standard Asian formula of a controlled capital account, low deposit rates and (until recently) an undervalued currency.
With the breaking of the 'iron rice bowl', households were suddenly forced into precautionary savings for their old age. The result is an 'imbalanced' economy in which households save an unhealthy fraction of what they earn while government banks skim off these savings to gorge themselves, indulge SOEs and distribute largesse to other countries. The central bank also sequesters foreign exchange earnings as official reserves through exchange rate intervention, and the Government represses consumption with regressive taxes.
All of these measures shift value from savers and consumers to borrowers and producers. Some estimate the annual transfer at 5-8% of GDP. As a result, Beijing's fiscal condition looks robust (though the IMF disagrees), with the Government flush with cash while Washington DC has shutdowns.
Naturally, Chinese state funds deployed abroad come with an agenda. Beijing expects that over time, other countries will recognise that 'China is the giver of economic benefits, US staying power is questionable and they (must) accommodate Chinese interests', says Bonnie Glaser at CSIS. She continues, 'China's strategy is to weave together a network of economic interdependence. It is using the centrality of its power to persuade (them) that to challenge China...is simply not worth it.' And Chinese officials readily admit a main objective of its various development funds is to find outlets for surplus capacity. China's steel industry already exports 80 million tonnes, equivalent to India's total output.
This is in contrast to America's TPP. Min Ye makes some comparisons:
The TPP seeks to reduce the roles of governments in market operations and to restrict the importance of SOEs, Beijing's Silk Road plan relies on top-level government coordination and enhances the power of large state owned enterprises. TPP focuses on services, IPR and domestic regulations. The Silk Road strategy aims to facilitate large-scale infrastructure construction, energy sale and transport, and relocation of manufacturing industries.
Vladimir Yakunin, head of Russian Railways, has learned of Beijing's limitations and conditions. 'Russia has so far had little success in tapping Chinese funding for its corporate sector', writes the Financial Times, and the few deals 'were all tied to purchases of Chinese equipment.'
By contrast, commercial financing on market terms from private sources is America's forte. While Washington can punish Wall Street, it can hardly tell bankers where to lend or invest. Americans invest US$350 billion overseas annually yet, sanctions aside, a US president cannot significantly influence where in the world they invest. Xi Jinping, on the other hand 'dangles' US$1.25 trillion of outbound investment over the next decade, plus 500 million Chinese tourists. So Beijing certainly can direct state companies, though neither it nor Washington can commit the future agency of private actors.
It's also important to keep scale in perspective. China's official foreign exchange reserves are US$4 trillion; a single US company manages more. Global equity funds total over US$20 trillion and debt markets are bigger still. Beijing is extremely powerful, but its clout partly derives from its willingness to undertake financial risks that other states, and a much larger private sector, rejects.
The payoff of China's 'financial repression' strategy is uncertain in the long run, but today it buys geopolitical influence and explains Beijing's enthusiasm for establishing new multilateral lending agencies under its own aegis (it also has two very large export/development banks of its own). To be sure, there is much investment needed globally in infrastructure, not least in America. Governments inevitably must play a role in infrastructure building, and China should pursue quality opportunities abroad. If eventually, however, the financial returns on China's overseas development projects are poor, we might not ever hear the news. But we will see the consequences of misallocation and misadventure: high indebtedness, low returns for savers and pensioners, and ultimately lower living standards for Chinese citizens, who will foot the bill for Beijing's moneybags foreign policy.
Photo courtesy of Flickr user Jim Fischer.