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Business News/ Opinion / Online-views/  Growing financial clout of the chinese
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Growing financial clout of the chinese

How China's business investments abroad are growing rapidly and having an impact on the rest of the world

China saves far more than it needs for its domestic investment needs. Photo: BloombergPremium
China saves far more than it needs for its domestic investment needs. Photo: Bloomberg

China had its Bretton Woods moment at the end of June. Officials from 57 countries came together in Beijing to launch the Asian Infrastructure Investment Bank (AIIB).

This new financial institution is one part of a larger plan by China to challenge the Bretton Woods institutions such as the World Bank and the International Monetary Fund that are dominated by the US.

The AIIB will begin with $100 billion of capital, which it will undoubtedly leverage through borrowings. China will have a dominant 26% voting share in the AAIB. The New Development Bank to be headed by K.V. Kamath will have another $100 billion of initial capital.

The total development finance backed by China right now is around $375 billion, according to an article written by Gregory Chin of York University and Kevin Gallagher of Boston University in the beyondbrics blog of the Financial Times.

They have considered not just the development banks such as AIIB that are backed by China but also various bilateral funding deals signed with different governments as well as the Silk Road Fund.

Such development finance is not the entire story. Chinese private capital has also been seeking investment opportunities abroad. The stock of overseas corporate investment is now estimated to be around $750 billion—and it is growing rapidly. The stock of Chinese overseas investment could be more than that held by the US by the end of this decade.

It is important to keep two things in mind. One, China has to export capital because of its massive current account surpluses, but most of the money it sent abroad till recently was through its official foreign exchange reserves. Two, business investment was initially led by strategic investments in extractive industries, in regions such as Africa, so that China could strengthen its energy security as well as get access to other raw materials for its growing industrial sector.

There have been dramatic changes on these two fronts. While China continues to have massive foreign exchange reserves, its business investment abroad is growing rapidly. And while it continues to seek strategic investment opportunities, Chinese private-sector companies have also begun to step out quite aggressively to invest in sectors such as technology and consumer goods.

The upshot: the combined pool of capital that China has to offer the world—be it through development finance institutions, its central bank investments in foreign sovereign bonds or private-sector foreign direct investment (FDI)—is large enough to give it immense heft in global affairs.

Look at the numbers once again: $375 billion of development finance capital, $2.2 trillion of official foreign exchange reserves, another $500 billion in the China Investment Corporation and $750 billion of cumulative FDI.

The underlying economics is clear. China saves far more than it needs for its domestic investment needs.

The resultant current account surpluses have to be invested abroad—either through the central bank or new financial institutions or private-sector companies. The strategic choices for the rest of the world are, expectedly, far less clear.

How will the rest of the world respond to this growing Chinese influence on global finance?

In a recent article in the Economic and Political Weekly, Itty Abraham of the National University of Singapore writes that there have been two main responses from the US to the rise of China—the liberal internationalist view that seeks to understand how China can be accommodated in the world order and the more hawkish view that seeks to contain China because it is seen as an oriental Soviet Union. There are parallel debates in China whether it should adjust to the existing global order or become the new lodestar of a new era of stability in this century.

In 1967, French journalist Jean-Jacques Servan-Schreiber wrote a book that would today be described as a sleeper hit.

The American Challenge sold more copies than any other French non-fiction book till then. Its main argument was that Europe was living under the shadow of American economic domination. Servan-Schreiber predicted that the third largest industrial power in the world after the US and the Soviet Union would not be Europe, but US industry in Europe.

Servan-Schreiber wrote his book at a time when French president Charles de Gaulle was quite publicly challenging growing US economic clout even while students were protesting in the streets of Paris against the Vietnam War.

Growing Chinese financial clout through global institutions as well as overseas investment has broad parallels with the sort of issues that Servan-Schreiber dealt with in his book.

Strategic opinion across the world is almost split down the middle about whether to welcome what China is doing or to fear it.

Indian strategic thinkers are also grappling with this problem, of how to take advantage of the economic opportunities that China offers while being wary of its broader global strategic ambitions.

Meanwhile, one thing is sure: the next few years will see even more Chinese capital moving across borders to other countries of the world.

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Published: 03 Jul 2015, 01:04 AM IST
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