John Kenneth Galbraith would probably proclaim “I told you so” today as China’s economy morphs into a giant corporation.
The economist’s 1967 book The New Industrial State wasn’t about China, but the US and the Soviet Union. Yet recent moves in Beijing to invest massive government funds overseas, and the extent to which the US and Chinese economies are linked, were foretold by Galbraith, who died last year. Communist Party bigwigs will surely object to this China-as-a-corporation argument. It’s hard to conclude otherwise, though, as Asia’s No.2 economy gears up to spend hundreds of billions of public dollars taking stakes in icons of capitalism such as Barclays Plc. and Blackstone Group Lp.
It would be the ultimate irony to Mao Zedong and his ilk. China’s communism with a competitive exchange rate to create jobs for the masses, and its capitalism aimed at getting a better return on state money, are fusing into one. China’s communist needs now have the government subsidizing the capitalist aspirations of the West in the name of the motherland. China’s creation of a so-called sovereign wealth fund and the rush by others to do the same may amount to Thatcherism in reverse. Beginning with prime minister Margaret Thatcher, the UK has spent more than two decades selling national assets, assuming that private managers always do
better than public ones.
Now, here comes the Chinese state, whose economy has surpassed Britain’s, and it aims to buy companies. It’s a kind of nationalization beyond borders. Perhaps it’s the next step in the progression of outsourcing, where government control of industry is farmed out.
It’s a wonder the Cato Institute and the American Enterprise Institute aren’t up in arms. The not-so-invisible hands of cash-rich governments are about to turn laissez-faire capitalism on its head. Free-market champion Milton Friedman, who also died last year, probably wouldn’t be happy. Isn’t nationalization under a foreign flag still nationalization? A key question for Group of Seven members is whether to approve of China’s operating free markets abroad and not at home, where it censors the Internet and limits free expression. Talk about having it both ways in the age of globalization. Perhaps the views of free marketeers are being clouded by Chinese money’s ability to boost their share prices and bond deals. You have to wonder if this dynamic silences calls for China to let the yuan strengthen. China’s currency policy will benefit Wall Street hugely.
Such state-run funds will soon dominate finance. With an estimated $2.5 trillion (over Rs100 trillion) of assets, they already wield more cash than all the world’s hedge funds combined. The funds may expand to $27.7 trillion in 2022, according to Morgan Stanley.
That amount of money is bound to bring about the kind of intersection of corporations and government that Galbraith warned of 40 years ago. And it sure does open lots of new potential avenues for crony capitalism, not just from company to government but government to government. Think of it as backdoor deals going global. Of course, with China, you always need to ask a question: What would you do in Chinese officials’ shoes? China has some $1.3 trillion of currency reserves, much of it sitting in low-yielding government debt. It would be tempting to forget buying bonds when you can purchase the banks underwriting them.
China could invest its public wealth in education, health care and the environment, yet that’s unlikely with the current leadership. It doesn’t want to buy inflated domestic assets such as real estate, stocks or state-owned enterprises already awash with cash. And so, investing abroad would seem to be the best of many bad options. Here, one could argue that rather than reversing Thatcherism, China is endorsing it. Yet over time, government hands could be controlling far more assets than free-market enthusiasts would like.
Two obvious problems are already popping up: market uncertainties and geopolitics. Internet chat rooms are abuzz with recriminations about how China’s $3 billion investment in Blackstone is doing so far. Blackstone’s shares have lost almost one-third of their value since June’s initial public offering. Singapore’s Temasek Holdings Pte is arguably the prototype for the sovereign wealth funds that China and others are racing to create. Temasek headed an investor group that grabbed the Thai telecommunications company’s stock from the family of then-prime minister Thaksin Shinawatra. Things went downhill after Thaksin was ousted in a September 2006 coup. The unspecified loss contributed to a 29% drop in Temasek’s profit for the 12 months ended in March to S$9.1 billion ($6 billion). Clearly, chief executive officer Ho Ching, who is married to Prime Minister Lee Hsien Loong, has some explaining to do.
Geopolitical tensions are the other risk. Investors are concerned that global legislation governing state-owned companies may lead to protectionism and hamper acquisition plans. The US, France and Germany are trying to draw up rules to govern state-controlled investment funds. If you think hedge funds are a touchy subject in the halls of power, just wait until politicians really turn their attention to sovereign wealth funds. Galbraith didn’t exactly predict this state of affairs, though his scepticism of the meshing of markets and government is proving prescient. That’s especially true as China shakes up the global neighbourhood not with its cheap labour, but its wealth.
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