By Megan Bowman, UNSW

SYDNEY: 22 August 2013 - An important part of the CLMR research endeavour is dedicated to investigation of global state capital. In several essays on the portal and in recent CLMR working papers, CLMR Director Justin O’Brien, George Gilligan and I have explored the rise and spread of state capital from economic, political, and regulatory perspectives. It is clear that China has emerged as a key state capital actor in the current global milieu. What is not so clear is why this is so. This short essay adds an historical perspective to the state capital story by examining China’s trade and investment patterns through a longitudinal lens.

China has a long-standing tradition of external trade and for example in the 12^th-14^th Centuries enjoyed economic advancement and dynamism that far exceeded its Western counterparts. During this period China reputedly established a professional navy and vigorous international trade into India, Asia, Arabia and East Africa, as attested by Marco Polo.

However, with the rise of the 'bureaucratic mandarins' in 1477, Griswold asserts that China began a path of self-sufficiency that comprised 'cultural and economic inwardness, a closed and centralized political system, and an anti-commercial culture' (p.3). Indeed, for the 400 years from the 15^th to the 19^th Centuries, China’s economy mostly closed to the outside world and became primarily agrarian.

However, in the early 1840s foreign powers such as Great Britain pressured China to open its economy to international trade through a series of treaties that pried open ports to allow transactions with foreigners. For example, the 1842 Treaty of Nanking permitted foreign trade with China through five ports and stipulated a 5% tariff on almost all goods leaving and entering the country. Nonetheless, the scale of Chinese trade and production was relatively small until China’s 1895 defeat in the Sino-Japanese war, which precipitated the Treaty of Shimonoseki that permitted Japanese businesses to invest directly in China and to produce goods and services that could be sold within China and abroad. Soon after, this privilege was extended to other foreign nations via most-favored nation agreements. The result was that foreign capital financed China’s industrialisation by injecting funds into its telecommunications, railroad and shipping industries. By the early 20^th century, 48 Chinese cities had been opened to foreign trade.

These treaties as well as Chinese supplication after the Boxer Uprising in 1901 signaled an end to an era of conflict with foreign powers. As ports opened up and foreigners were allowed to invest and trade, China transitioned from a closed to an open economy. From 1900-1913 the total value of Chinese trade grew twice as much as it had during the 40 years prior; and China’s trade growth was faster than the world average in the first three decades of the twentieth century.

Mitchener and Yan from the National Bureau of Economic Research (NBER) similarly demonstrate that China experienced a tremendous growth in trade during the first three decades of the 20th century; and that indeed this period was comparable with the present period of globalisation. Specifically, the exogenous shock of World War I had dramatically raised the price of Chinese exports and increased the demand for its goods abroad. For example, China’s exports to the U.S. grew at an annual rate of 6% before World War I, but boomed after the war started, growing at approximately 27% per year; similarly, exports to Japan grew at 5.8% per year pre-war and then jumped to 17.4% per year after 1913 (p.5). Trade costs declined when the war ended in 1918, which in turn led to a rise in China’s terms of trade and further growth in its export sector, particularly in exports of unskilled-intensive manufactures, mining, and agricultural products. Indeed, while the war disrupted trade in many other parts of the world, it created 'new markets for Chinese goods that had previously been served by producers in belligerent countries' (p.3). Mitchener and Yan’s archival data reveals that China’s total trade as a share of GDP almost tripled during the period 1903-1928.

This kind of increase was not experienced again by China until the late 1990s. In the meantime, Chinese policy makers were cooperating with foreign oil companies regarding access to offshore oil and gas fields within China’s sovereign seas. China entered into production sharing contracts with US oil companies (such as Mobil, Chevron and Exxon) in order to explore and access Chinese offshore oil and gas resources; and the prime commercial entity established by the Chinese government at this time for these purposes was the China National Offshore Oil Corporation (‘CNOOC’) Ltd. It is perhaps ironic to note that these commercial realities precipitated intense internal political debate regarding China’s potential loss of control over strategic natural resource assets in a context of hidden foreign political agendas; similar concerns have been echoed by US constituents vis-à-vis US assets nearly 40 years later. Indeed, in 1977, two years before China’s history-changing ‘Reform and Opening to the Outside World’ strategy, the Beijing Review proclaimed: 'We do not allow foreign capital to exploit China’s resources nor do we run joint enterprises with foreign enterprises, still less beg them for foreign loans'. 

Nonetheless, China’s ‘Reform and Opening to the Outside World’ policy was instigated in 1979, and apart from domestic economic and law reform, a key element was increased trade with foreign nations and FDI into China. Unlike China’s earlier opening in the 19^th century, this strategy was unilateral and voluntarily initiated by China.

Several commentators argue that, at this time, the Chinese viewed inward and outward FDI very strategically. Howson asserts that inward FDI was seen 'as a way to attract hard currency financing for China’s bankrupt state-owned or controlled assets, and gain additional benefits like foreign technology, management know-how, distribution and marketing skills, and foreign sales channels for hard currency earning exports.' (p.76) Other authors contend that Chinese outward FDI was motivated by, amongst other things, the need for strategic assets (such as brands and marketing networks), supplies of raw materials and energy for its role as a world factory, and also a desire for technological and managerial skills and financial capital.

In the early 1990s, China began to look beyond FDI to international capital markets to raise finance for its state assets. At this time China started issuing stock in state-owned enterprises (SOEs) to both domestic and foreign investors buying on the foreign exchanges of London, Tokyo, New York and Hong Kong. However, China did not make any bold moves to ‘go global’ until the late 1990s. In the years prior to that, Chinese SOEs made only tentative forays into Hong Kong and Southeast Asia; and only shell companies operated in the West to facilitate simple foreign trading activities.

The situation changed radically in the early 2000s when China initiated its so-called ‘going out’ or ‘going global’ strategy (the Chinese word is ‘zouchuqu’ which literally means ‘go out’). This strategy was launched in China’s 10^th Five Year plan in 2001. President Jiang Zeming announced to the sixth national congress of the Communist Party that the ‘going out’ policy included increased outward FDI, undertaking construction and engineering projects abroad, and exporting labor services. It is difficult to catalogue exact policy measures due to a lack of publicly available information; however, initial measures included relaxation of investment restrictions abroad and increasing financial support for corporate champions.

Importantly, from 2002 Chinese SOEs began actively seeking to acquire foreign assets and equity interests as opposed to merely trading in global commodities and raw materials. This strategy continues today with recent high-profile ventures such as CNOOC’s failed bid for Unocal in the U.S. (2005) and subsequently successful acquisition of Nexen in Canada (2012); Beijing Lenovo’s acquisition of IBM’s PC unit (2004-5); Shanghai Automotive’s purchase of Korea’s Ssangyong Motors (2005); and the multi-jurisdictional penetration of Huawei Technology services into 45 of the world's 50 largest telecoms operators since late-1990.

Indeed, data compiled by Husted and Nishioka reveal China’s rapid export growth and international market pervasion since initiation of the going global strategy. In 1968 China’s share of the world market was essentially 0%; in 1998 it had less than 2% of the world market share; and by 2010 China ranked first in international exports with a world market share of 10.4%. The result is that 'China has a market presence in virtually every country in the world; this presence has grown in almost every market in recent years.' (p.567)

The huge increases in China’s economy and its foreign reserves are testimony to strong underlying growth trends; and China’s global investment pervasion is expected to continue into the future. For example, commentators predict that by 2020 China will have replaced the US as the world’s largest economy with 20.08% of global GDP. In the same period the US share of global GDP is expected to fall to 17.44%. Regionally, the G7 share of global GDP is expected to fall to 33.30% in 2020 and the Asia 7 share to rise to 33.18% in 2020. Specifically, China’s share of Asia 7 GDP is estimated to reach over 60% by 2020.

If these estimates are correct then: (a) China is likely to be the dominant economic power globally before the middle of the century; and (b) dramatic regional shifts in the global political economy are likely to occur. History demonstrates that economic shifts influence change in other arenas such as foreign policy, strategic alliances and multilateral regulation. These realisations provide compelling reason to continue our multi-perspectival investigation into the rise, scale and impacts of state capital in the global arena with particular focus on China and the Asian Century.

CLMR acknowledges the financial support of the Centre for International Finance and Regulation (for project Enter the Dragon: Foreign Direct Investment and Capital Markets, E002), which is funded by the Commonwealth of Australia and NSW State Government and other consortium members (see www.cifr.edu.au).