China’s government took the first official step June 27 to inject $200 billion into a new sovereign company that will buy equity assets abroad. Beijing announced its plan in March to make more profitable use of $1.2 trillion in hard currency reserves, much of which are now kept in U.S. Treasury securities. The Finance Ministry will capitalize the fund, to be run by a former Finance official.
What will distinguish this Chinese fund is not just its size but that it will be a government entity. As its agents scout the world for lucrative investments, it will act to draw private enterprises into government control. It will enter the market to subvert the market.
Beijing’s foreign direct investment has focused so far on energy and raw materials to support its expanding industries. China would prefer to import from itself, owning its overseas supplies to assure security and avoid market fluctuations. Importing at the internal cost of production, rather than a price set by rising global demand, will give China’s industry another global edge.
The attempt by China National Overseas Oil Company (CNOOC) to buy the American energy producer Unocal in 2005 set off alarm bells in Washington. Unocal then accepted a rival bid from Chevron.
To avoid another such confrontation, the new Chinese fund initially may settle for minority stakes administered by front companies like the Blackstone Group, into which China’s new agency poured $3 billion just before Blackstone launched its initial public offering.
In the longer run, a state-run agency with such enormous reserves will likely try to use those funds to advance broader national objectives than merely a few extra percentage points of return on capital.
On June 26, China created an initial $1 billion fund to finance trade and investment by Chinese companies in Africa to advance ties with that resource-rich continent. The fund is part of Chinese aid promised by President Hu Jintao at a Beijing summit with African leaders in November.
Chinese state oil companies have expanded aggressively on the continent, signing deals in Nigeria, Angola and Sudan. After a 2004 Latin American tour, Mr. Hu promised $100 billion in investments for that region, mostly in energy, mining and infrastructure projects (the latter to help ship resources to China). These will be paid for with Chinese manufactured goods in classic colonial style.
Chinese investments have often gone to shore up radical regimes, thus becoming part of Beijing’s diplomatic offensive to build coalitions against American “hegemony.” At a Darfur conference in Paris the same week the Africa fund was launched, the Chinese envoy argued against imposing sanctions on Sudan for its genocidal policies.
Washington needs to shore up its own economic defenses in case Beijing turns its attention again to buying strategic American assets. Besides resources, China wants advanced technology and has shown interest in acquiring high-tech firms. Beijing has made no secret of its desire to obtain “dual use” technology with military applications, whether through trade, acquisitions or espionage. It protested new Commerce Department security measures on U.S. high-tech exports announced June 15. The measures are much weaker than originally envisioned, due to lobbying by certain business groups that seek to profit by helping China’s rise to great-power status. Beijing and its “business” partners cannot be trusted when U.S. security is at stake. Public authorities must be vigilant and have the authority to act to guard the national interest.
On June 29, the Foreign Investment and National Security Act of 2007 (S. 1610) was passed by the Senate on a voice vote. The work of Senate Banking Committee Chairman Christopher Dodd, it would strengthen the Committee on Foreign Investment in the United States (CFIUS). This multi-agency committee was created in 1988 to analyze foreign acquisitions of privately owned entities to determine their affect on national security. There is wide agreement — including a scathing 2005 report by the Government Accountability Office, that CFIUS has not done its duty, rubber-stamping deals without much serious investigation. Mr. Dodd’s bill is a good start, but Chinese reserves are likely to reach $2 trillion by the end of the 110th Congress. Stronger action is needed to keep Beijing from using its vast store of purchasing power strategically against the American economy in an attempt to shift the global balance of power.
Beijing is well aware of how foreign investment can be used in this regard, remembering how China was divided into spheres of influence by the imperialist powers of the 19th century. Last August, its Commerce Ministry set new limits on foreign investment that could transfer control of leading enterprises or traditional Chinese brands, threaten companies with more than 2,000 employees, or pose risks to “economic security” — not just military security. Beijing uses the term “comprehensive national power” to unite economic and military concerns, and Washington must think in the same way.
William Hawkins is senior fellow for national security studies at the U.S. Business and Industry Council.
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