China sets out to buy up the world

  • Article by: THE ECONOMIST
  • Updated: November 15, 2010 - 5:01 PM

Despite some angst, the spread of Chinese capital should be beneficial.


Flags of China, Sweden and the United States at Volvo headquarters in Torslanda, Gothenburg, Sweden. Volvo’s new owner, Zhe­jiang Geely Holding Group, will help Volvo sell more cars in China.

Photo: Bjorn Larsson Rosvall, Scanpix via AP

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In theory, the ownership of a business in a capitalist economy is irrelevant. In practice, it is often controversial. From Japanese firms' wave of purchases in America in the 1980s and Vodafone's takeover of Germany's Mannesmann in 2000 to the more recent antics of private-equity firms, acquisitions have often prompted bouts of national angst.

Such concerns are likely to intensify over the next few years, for China's state-owned firms are on a shopping spree. Chinese buyers -- mostly opaque, often run by the Communist Party and sometimes driven by politics as well as profit -- have accounted for a tenth of cross-border deals by value this year, bidding for everything from American gas and Brazilian electricity grids to a Swedish car company, Volvo.

There is, understandably, rising opposition to this trend. The notion that capitalists should allow communists to buy their companies is, some argue, taking economic liberalism to an absurd extreme. But that is just what they should do, for the spread of Chinese capital should bring benefits to its recipients, and the world as a whole.

Not so long ago, government-controlled companies were regarded as half-formed creatures destined for full privatization. But a combination of factors -- huge savings in the emerging world, oil wealth and a loss of confidence in the free-market model -- has led to a resurgence of state capitalism. About a fifth of global stockmarket value now sits in such firms, more than twice that of 10 years ago.

The rich world tolerated the rise of mercantilist economies before: Think of South Korea's state-led development or Singapore's state-controlled firms, active acquirers abroad. Yet China is different. It is the world's second-biggest economy, and in time is likely to overtake America. Its firms are giants that are starting to use their vast resources abroad.

Chinese firms own just 6 percent of global investment in international business. Historically, top dogs have had a far bigger share than that. Britain and America peaked with a share of about 50 percent, in 1914 and 1967, respectively.

Chinese firms are going global for the usual reasons: to acquire raw materials, get technical know-how and gain access to foreign markets. But they are under the guidance of a state that many countries consider a strategic competitor, not an ally. Once bought, natural-resource firms can become captive suppliers of the Middle Kingdom. Some believe China Inc can be more sinister than that: For example, America thinks that Chinese telecoms-equipment firms pose a threat to its national security.

Private companies have played a big part in delivering the benefits of globalization. They span the planet, allocating resources as they see fit and competing to win customers. The idea that an opaque government might come to dominate global capitalism is unappealing. Australia and Canada, once open markets for takeovers, are creating hurdles for China's state-backed firms, particularly in natural resources, and it is easy to see other countries becoming less welcoming too.

Far from a threat

That'd be a mistake. China is miles away from posing this kind of threat. Nor is China's system as monolithic as foreigners often assume. State companies compete at home and their decisionmaking is consensual rather than dictatorial. When abroad they may have mixed motives, and some sectors -- defense and strategic infrastructure, for instance -- are too sensitive to allow them in. But such areas are relatively few.

What if Chinese state-owned companies run their acquisitions for politics, not profit? So long as other firms could satisfy consumers' needs, it would not matter. Chinese companies could safely be allowed to own energy firms, for instance, in a competitive market where customers could turn to other suppliers. And if Chinese firms throw subsidized capital around the world, that's fine. America and Europe could use the money.

Not all Chinese companies are state-directed. Some are largely independent and mainly interested in profits. Often these firms are making the running abroad. Take Volvo's new owner, Geely. Volvo should now be able to sell more cars in China; without the deal its future was bleak.

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