In the first part of the 21st century, a changing world phenomena has been the amount of foreign investment originating from China. In many cases, the total amount far exceeds new asset allocation being made by individuals and companies coming from Europe and the United States. Chinese overseas investments have increased ten fold from 2005 to 2014. It is helping to alter the international balance of power, by securing for China new allies and greater access to needed natural resources.
The government of China is using a mix of foreign aid and various vehicles of investment to strengthen ties of trade and expand their influence in the emerging markets. Although the total sum might still be dwarfed by Western investment in many areas of the world, it is the scale of increase that should be viewed with interest and by some alarm. Chinese direct foreign investment globally, is now only eclipsed by the United States, since passing Japan in 2014.
Huge sums have been brought to bear beginning from Southeast Asia, but then expanding to Africa, the Middle East and Latin America. China has been able to use the largest foreign exchange reserves in the world at $3.43 trillion USD (United States dollar), to buy influence in many countries on a global scale that would have been unimagined by previous leaderships in the 20th century. The amount of Chinese foreign investment, topped $600 billion USD in the last decade alone.
China in many cases has been the investor of last resort, especially in areas that are politically and economically risky. Most Western investors who are far more worried about returns and the safety of their overall stake, have been replaced by the Chinese government.
The government of China often arrives, after a country has already defaulted on more traditional sources of loans and investment originating from Western institutions including the IMF (International Monetary Fund) and the World Bank. If the government is in opposition to the present world order dominated by Europe, Japan and the United States, China is often more than willing to extend aid to these type of countries.
In Latin America, Chinese investment has focused on three countries that have remained at odds with the West. They included Argentina, Ecuador and Venezuela. The government of Ecuador made the decision, to default on a number of debts beginning in 2008. This resulted in having their access to most sources of Western capital to be cut. China in the following years has provided capital in the form of investment and loans, that now equals near 25% of the GDP (Gross Domestic Product) of the country. Chinese state banks alone, have invested over the equivalent of $10 billion USD.
The equivalent of billions USD provided Ecuador needed funds for internal projects that include energy exploration and development, transportation, as well as other resource development. The Chinese also supplied the needed expertise in building infrastructure for oil, mining, and electrical plant facilities.
In Argentina for example, the money invested with the previous leftist government provided desperately needed funds for building new dams, nuclear power plants and railways. The Chinese were more than willing to deal with the financial problems of high inflation and a currency that would be eventually devalued.
They were buying influence in a region, that would permit them an opening in the long term economic development of the country. The change in government this month, will not alter that situation significantly.
Chinese banks that are run by the state, have been directed to lend the government of Venezuela more than $50 billion USD. It is helping to keep in power an increasingly unpopular socialist government, under the presidency of Nicolas Maduro. Even if this government is soon replaced, the massive amount of Chinese investment, will still guarantee the present supply of oil heading to Asian markets.
In Africa, China has made investments to guarantee access to natural resources, that will be needed in the future. They have become quite adept, at dealing with authoritarian governments with economies in desperate straits. These leaders are all too willing to make economic deals, so they can gain access to Chinese investment funds.
Direct investment from China has increased eight-fold from 2005 to 2014, equaling $3.2 billion USD. Total Chinese investment, increased twenty-fold to $32 billion USD during the same period.
Angola located in the southwestern part of Africa, has become heavily dependent on selling oil to China. To make sure that this flow of crude will be forthcoming, the government of China has made major investments in that country.
In a number of African countries, the low base of economic development, allows a relatively small investment to buy enormous influence. In Niger for example, a single Chinese oil company invested near $5 billion USD. This amount equals a large portion of the GDP of the entire country for a year.
In other parts of West Africa, Chinese investment makes up a huge proportion of all foreign investment. In Guinea and Sierra Leone it is near 70% of the total.
In three additional countries, that encompass Chad, Cameroon, and the Democratic Republic of Congo, Chinese investment makes up only about a third of the total amount, but a decade ago it was nearly nonexistent.
When the United States and Europe imposed sanctions on the increasingly despotic government of Zimbabwe, President Robert Mugabe turned to China for help. This allowed China to make major investments in the domestic coal and solar industries of the country.
China alone, now provides over 80% of all foreign investment in Zimbabwe. These will remain in place, long after the government of the country has changed.
The Chinese government can afford to take on substantial risk, when making decisions how best to expand influence in various countries. This explains the stake of nearly one third of all foreign investment that was made in Syria and the near 40% in increasingly unstable Iraq. Unknown to many in the West, nearly 80% of all investment coming from abroad in Afghanistan, originates from China.
Even when nations finally do become more democratic or open themselves to more market based economic principles, the scale of previous Chinese investment will continue to pay dividends for years to come. No matter what government comes to power in Myanmar for example, the role of Chinese capital in the economic development of the country will continue.
It can easily be said that the availability of Chinese money, has made the position of Western institutions and investors far weaker, since they are no longer the only source of revenue.
Developing countries no longer have to strictly adhere to the economic reforms and new labor standards being demanded by governments in the West. They also can largely ignore the many new environmental initiatives, that are being pushed by politicians in Europe and the United States as well.
Now that the Chinese yuan will be identified as a reserve currency beginning in October 2016, the economic clout of China in the emerging world will be enhanced. It will assist China in expanding the rapidly growing financial arm of their foreign policy, even further. China’s state owned development bank, has already surpassed the World Bank in international lending.
The largely Chinese controlled, Asian Infrastructure Investment Bank is likely to grow this advantage. Despite the opposition of the United States, this new institution has the support of 57 countries including many European countries. It will compete against institutions like the IMF and the World Bank, where American influence is more prevalent.
Russia since being slapped with Western sanctions for the annexation of Crimea and the invasion of eastern Ukraine, is looking to China for economic relief. China is the world’s largest buyer of oil and Russia has an abundant supply to sell. It has been a economically beneficial agreement for both sides.
Of course many of the investments and loans China has made, will be difficult for a number of these countries to repay. Since these nations have already alienated Western investors, they will be forced to comply with Chinese demands if they wish to receive additional aid.
Interest rates are usually higher than the global average and China has tied up natural resources in a number of countries for years. Ecuador is a prime example. Nearly 90% of the country’s oil exports, are now being used to finance loans that were made by China.
A number of countries have also found that Chinese economic imperialism, is no less benign than Western style control of the past. Chinese developmental projects including mining and manufacturing operations, are now also being accused of mistreating domestic workers. In many cases, the environmental record of Chinese dealings are appalling by Western standards. China has created its own rules, that are often far less stringent on administration and transparency.
The foreign influence of China in world investment, will only grow in the years ahead. There will be a continuing shift in financial power away from Western institutions and companies and more towards Asian ones, especially China. It merely reflects the economic reality that is increasingly favoring growth, in regions outside Europe and North America in the long run.