Samizdata

There is some controversy at present about the moves by the UK government (and not just the UK, the government of little Malta is at it) to let Chinese-owned (ie, state-owned) businesses invest in the UK, buy shares of local firms, and the like. Iain Martin more or less says we should only let the Chinese do so if they accord equal freedoms to UK firms. At present, any non-domestic organisation wishing to do business in Mainland China (it is different in Hong Kong) is required to set up a joint venture with a local Chinese partner. In practice, it means making nice to the local, often corrupt, representatives of the Chinese communist party. The comment thread on Martin’s article contains its usual share of foreigner-hating buffoons but there are some intelligent observations as well.

A difficulty presents itself. First, the UK is already one in which the state owns a fairly large share of the economy, not just through the overtly public sector bit, but by national controls and regulations over all kinds of sectors, such as transport and energy. True, the UK is a democratic polity, but given the imperfections of democracy, and Britain’s membership of the EU, the accountability of politicians for what happens in the UK is, to say the least, limited. And so does it really make sense for Britons to get in a rage about sinister foreigners buying bits of the UK?  It is not as if we are operating in a world of unfettered capitalism. (Those who remember the late 80s when Japanese firms were buying Western assets will feel a sense of deja vu coming on when reading about another supposed menace from overseas.)

Then there are the exploits of what are called Sovereign Wealth Funds. Such funds, mostly run by energy-rich jurisdictions in the Middle East and Asia, are politically and legally opaque. We have seen how the heads of these large gobs of wealth have bought such “trophy assets” as football teams (Manchester City) and so on. State-owned EDF, the French energy conglomerate, is a big player in the UK energy market. (I note that one Samizdata commenter on a previous post about energy policy seems rather upset about this. The accursed French!.)

In fact, if we are going to ban investment into a jurisdiction such as the UK from entities deemed to be opaque, or the arms of oppressive regimes of various kinds, that is going to create quite a headache. These folks have a lot of the money. They may not, of course, have it forever. China’s property market is, shall we say, an unknown quantity. If the US fracking revolution continues, and the price of energy falls a bit, some of the prowess of the SWFs might decline. It might also be a smart idea if Western governments learned to live within their means rather than go begging for such sources of money to make up the deficit gaps, which is what is really going on here.

But then again, these issues might not be all that new. In the past, politicians of various hues have tried to reinstate protectionist controls on foreign trade by objecting to things such as “dumping”, for instance (evil foreigners selling us subsidised cheap stuff). If China wants to sell us cheap things, and we can save money by paying less for such things than we would otherwise, and invest/spend what we have saved on something else, I don’t really see the problem in that.

We should remember that China needs the West to grow to sustain the value of what it wants to buy abroad. Ironically, one of the best ways to keep pushing China down the path to real capitalism rather than the odd hybrid it has now is to expose its people to doing as much business abroad as possible. So long as Western leaders play their hands intelligently and push for more penetration of China’s markets as part of that process, that surely is in everyone’s long term interests.

From the Wall Street Journal today:

A $91 billion industrial project here, mired in debt and unfulfilled promise, suggests part of the reason why China’s economy is wobbling – and why it will be hard to turn around.  The steel mill at the heart of Caofeidian, which is outside the city of Tangshan, about 225 kilometers (140 miles) southeast of Beijing, is losing money. Nearby, an office park planned to be finished in 2010 is a mass of steel frames and unfinished buildings. Work on a residential complex was halted last Christmas, after workers completed the concrete frames. There is even a Bridge to Nowhere: a six-lane span abandoned after 10 support pylons were erected.

“You only need to look around to see how things are going,” said Zhao Jianjun, a worker at a plant that hasn’t produced its steel-reinforced plastic pipes for months. “Look north, west, east,” he said, gesturing to empty buildings. Chen Gong, chairman of Beijing Anbound Information, a Chinese think tank, says Caofeidian shows the flaws of the Chinese economic-growth model, in which the government plans investment and companies are expected to follow suit, regardless of market conditions. Chinese local governments are “driven by the blind pursuit of GDP,” said Mr. Chen.

There are reasons why I have doubted much of this “China will overtake the US and dominate the world” stuff and the details referred to above are part of it, though goodness knows state-driven mal-investment is hardly the preserve of China. Far from it. But there has been enough evidence around to suggest that vast sums of money poured into Chinese projects of this type will not bear fruit. And there will be a reckoning.