China’s behemoth global investment strategy
#18 in a series on THE FUTURE OF TIBET
Chinese, for all its subtlety, can be a blunt language. Two key terms, to “go out” and to “come out” reveal a simple desire for more. The directness of these keywords tells us much about what China wants, and how it hopes to achieve the national revival that Xi Jinping speaks of.
The “come out” rate is the term China uses, in its official statistics, for the number of yaks, sheep and goats that Tibetan nomads used to sell into the market economy. Only when those animals “come out” into the public domain do they become visible, legible, ennumerable to the scrutiny of the state. Only then are they monetised. Only then do the drogpa nomads of Tibet enter the cash economy. When the herds are on the pasture, they remain invisible to the gaze of the state, even though nomads have always regarded wealth on the hoof as the only true wealth, or nor in Tibetan.
The “come out” rate in Tibet has always been low, far below standard commercial agribusiness norms worldwide. This is a major reason why China, at the highest level, gave up altogether on the nomads, and herded them off their lands. From China’s perspective, the number one responsibility of the nomads was to prove they are productive, by selling as many animals as possible. The Animal Husbandry Bureau set standards, requiring roughly half of all sheep be sent to slaughter each year, and roughly one quarter of all yaks. That’s the official target “come out” rate.
But in practice the nomads always resisted, and there was little official China could do about it. They withheld their animals from market, not only because raising animals explicitly and solely for slaughter is unBuddhist, but for the very practical reason that animals on the green alpine meadow are true nor, a wealth that is a nomad family’s insurance policy, dowry, venture capital and social security. Since nomads have no access to bank loans or social security entitlements, or disaster relief payments after a blizzard that kills many animals, their only security is to keep as many animals alive as they possibly can. China has never understood this.
Now that the nomads have been removed, we don’t hear much any more about the “come out” rate. The displacement of nomads is accelerating. It used to be concentrated in Qinghai, but now the nomads of Kanlho, the Tibetan prefecture of southern Gansu, are internally displaced too. Here is what Xinhua announced 30 November 2012: “More than 737,000 nomads have been resettled out of the headwaters region of the Yellow River over the past five years as part of efforts to protect China’s “mother river” from over-grazing, according to newly revealed figures. The nomads, all ethnic Tibetans, now live in new settlement communities set up away from the threatened prairie and wetlands in the southern tip of Gansu Province in northwest China. Their herds were moved with them. “We want to give the grassland a break,” Wang Hongwei, a senior development planning official of Tibetan Autonomous Prefecture of Gannan, told Xinhua.”
A phrase that is much more popular is the “go out” strategy (走出去, zou chuqu). China goes out to the world, to buy the raw materials it needs. This includes land, farms, food, mountains of mineral ores, oil deposits, railways and the ports needed to ship them all back to China. China’s globalisation has its’ resource companies at the forefront.
China’s “go out” strategy was led by its oil and minerals companies, with state assistance at every step. Where necessary the state forcibly amalgamated smaller companies into bigger ones, to achieve economies of scale as fast as possible, even if it meant treading on the favourite wealth creation vehicles of provincial governments. The state was confident it could pick winners, and ensure they win by providing them with privileged access to finance, providing loans to finance their “going out”. The Chinese state inherits the confidence that the imperial court is the centre of the world, that China is naturally and inevitably the middle kingdom, restored recently to its rightful place as one of the richest and most successful of states. China’s state capitalist central planners speak a confident language of rational allocation, panoptic knowledge of what is needful, and of discovering the “laws” of what makes for success in any field. They have conquered the many disciplines and academic specialities needed to triumph over nature and over the competition.
The success of the fusion of state and corporate power, in going out to capture the best resource security deals for China is clearly stated by Gao Xiqing, head of China’s sovereign wealth fund, addressing his fellow Chinese in 2012: “Chinese overseas investment has grown from zero before reform and opening-up in the late 1970s into a behemoth today. It is projected that the total will reach US$ 500 billion during the 12th Five-Year Plan, which covers 2011 through 2015. Chinese companies are an emerging force on the stage of international investments. Due to the immensity of the country’s foreign exchange reserve and its fervent expansion of overseas investments, Chinese investors have had the world’s attention since the financial crisis of 2008.
“While the movement has gone quite well so far, we still faced many challenges. Some countries put up obstacles to Chinese investments via the legal or supervisory systems because of ideological or political concerns. Another major challenge for China’s new overseas investment drive is a lack of experience. First and foremost, we lack an understanding of investment products. One must be especially competent in handling the technical aspects, for even the slightest misunderstanding could easily result in losses.
“How can we identify good opportunities, develop projects or find suitable partners? How can we design an effective structure to manage investments, taxes and repatriation of investment income? How can we extract better terms and conditions from negotiations? Then comes a lack of understanding of foreign cultures and societies. Many investment activities cause cultural or societal friction in target countries. Some countries have developed complex feelings toward China as it has rapidly grown. Many people in those countries (not only supervisory organizations) look at China through culturally or ideologically colored glasses. The world still hasn’t entirely adjusted to the reality of China’s rise, nor is our rise welcomed everywhere. Some of our investors put on arrogant attitudes – as though they believed that everybody ought to be seeking them. This attitude is not good for China’s image. It will also negatively affect the investors’ ability to attract opportunities, and in the long term it will harm development potential. One big difference between Chinese overseas investment and that of developed Western nations is that we lack talent. These are only a few of challenges facing China as a newbie in international investment.
“Many new opportunities are appearing on the international market. For example, some high-quality assets have been devalued due to current market turmoil. Also, some sellers’ urgent need for cash means we can negotiate stellar provisions and agreements that would be difficult to obtain under normal circumstances. “
It was the Tenth Five-Year Plan of 2001, in which the Chinese government laid down a strategy for China’s large companies to “go out” abroad. At the turn of the century China faced up to its rapid transition from self-sufficiency in almost all minerals and energy supplies, to enmeshed interdependence on global sources. This coincided with the announcement, in 1999 of another renewed push to extract resources from China’s west, xibu da kaifa, opening up the great west to extraction. Both have been ongoing policies ever since. For sourcing resources essential to industrialisation, these policies are complementary; and both required strong intervention by central leaders, and massive investment.
But going out has been easier, and more profitable than opening up the west. Going out also offers astute Chinese investors extraordinary opportunities for profit, and for strategic acquisitions that enable China to control global commodity chains. The failings of South Africa’s undercapitalised Black Economic Empowerment program leave many indebted black enterprises open to Chinese takeover, or major controlling stakes, when unreliable dividends no longer suffice to repay the loans extended by white owners who sold out. China had opportunity to “negotiate stellar provisions and agreements that would be difficult to obtain under normal circumstances” in the turmoil of the global financial crisis of 2009. A booming BHP Billiton announced its intention to make a hostile takeover of RioTinto. To fend off its unwanted suitor, RioTinto hastily bulked up to such a size that made it difficult to swallow, by in turn buying out another major miner and processor of bauxite to aluminium: Alcan of Canada, just at the time corporate debt, of all kinds, turned toxic when the global financial system froze. There was a real possibility that RioTinto could collapse under the weight of its debts, or be snapped up by BHP at bargain prices. To avoid these fates, RioTinto turned to its one reliable partner, in China, the aluminium producer Chinalco, already a shareholder in RioTinto. This time Rio was offering a controlling stake in one of the three biggest mining corporations worldwide, in return for fast recapitalisation.
The deal fell through after a few months, when Rio discovered demand –mostly from China- was recovering, the crisis was easing, and Rio’s existing shareholders found objectionable the favourable terms that had been offered to Chinalco. Had China been able to move faster, it might have captured RioTinto, as China’s sovereign wealth fund, China Investment Corporation, well knows.
Moving fast, being alert to crises that are also opportunities, is on the agenda, as China scrutinises more closely the volatile dynamics of global capitalism. The unique partnership of corporations, state and ruling party power that drive China might seem too complex for such fast and decisive moves. But China’s state capitalism is increasingly capable of working in unison, and has much experience in dealing with national elites at a political level to obtain permissions and preferential access to resources, while Chinese corporations make their market moves.
China failed to persuade or push the nomads of Tibet to let their beasts “come out,” and the nomads are now paying the price. China’s fast track to wealth, including its insatiable appetite for meat, depends on being much more successful with the “go out” strategy, including massive imports of soy beans to feed all those pigs and other animals destined for slaughter.
 A Newbie’s Growing Pains, by Gao Xiqing, vice chairman and general manager, China Investment Corporation, Caixin Weekly, January 15, 2012