The Folly of Fearing China's Global Buying Spree

History and common sense tells us that the global spending spree by China’s state-owned firms will promote more progressive values in China rather than subvert western ones overseas.

The New York Times recently published an essay by Heriberto Araújo and Juan Pablo Cardenal derived from their book China’s Silent Army: The Pioneers, Traders, Fixers and Workers Who Are Remaking The World in Beijing’s Image. Titled “China’s Empire”, their alarmist Times essay argues that China is using the vast resources of its giant state-owned enterprises to pressure foreign governments to acquiesce to its agenda and value system.

Superficially the argument seems to have merit. After all, a giant economy like China’s, with control over trillions of dollars saved by its repressed people, can and does command deference from governments of societies in need of infusions of capital to sustain and revive their economies. It’s only natural that such government will tone down their criticisms of China’s human rights problems and even weaken some regulatory provisions as necessary to lure the desired influx of Chinese capital.

The Times essay cites the example of the agreement by the Danish-controlled territory of Greenland to allow Chinese firms to bring in workers at below-minimum wages to work on an epic project to develop the infrastructure needed to extract natural resources from the territory. The deal — which has yet to be concluded — is presented as an example of how China is using its economic clout to spread its values while subverting western ones. The authors seem to imply that letting in Chinese workers willing to work for less than the minimum wages of Greenland is a bad thing — presumably because it’s a subversion of Greenland’s higher living standards.

Even the authors acknowledge, however, that without China’s ability to sink billions into a project that may not pay off for decades, if ever, Greenland would remain what it has always been — a vast, inhospitable island near the North Pole with not a single highway into its vast interior. They also acknowledge that Greenland simply doesn’t have enough workers with the skills needed for the project regardless of wages offered. They even concede that only China’s state-dominated economy could have produced the immense accumulation of capital needed for the massive undertaking of transforming Greenland into a more economically productive land, with real highways and other infrastructure necessary to support significant populations.

I find it a bit ironic that the example was cited in an essay intended to show the dangers of opening the door to buyouts and investment deals with China’s state-run companies. If anything, the Greenland project — assuming it actually comes to pass — illustrates the major strength of China’s economic system. In a resource-hungry world in which cataclysmic changes to climate patterns are in the offing, the ability to direct epic amounts of capital toward massive projects may not only be desirable, but essential for the survival of modern civilization.

In the not-so-distant future a more habitable Greenland may become one of the more hospitable regions in the Northern Hemisphere, allowing million to migrate from populated coastal regions becoming submerged or regions becoming parched due to changing climate patterns.

As for the Chinese workers imported to do the job, it’s hard to understand how they’re being hurt. They’re coming voluntarily to enjoy what, in their minds, are well-paying jobs. Because they aren’t competing for jobs that locals want, the Greenlanders aren’t suffering as a result of their presence. If anything, they may gain in the future when the infrastructure projects give a big boost to economic activity.

Even run-of-the-mill Chinese buyouts of companies like the US Smithfield Foods or French Club Med — both examples cited by the Times essay — present financial boons for the sellers without any subversion of either the local economies or their government policies. Rather than prognosticating the ultimate fates of these companies, we have only to look to the outcomes of other major foreign buyouts. The best examples that come to mind are the many big Japanese buyouts of US companies during the 80s and 90s.

Japan’s Sony bought Columbia-Tristar in 1989 for the then-astronomical sum of $3.4 billion. There was much sensational media speculation about how Sony would subvert the studio’s culture by bringing in Japanese overlords and management concepts. None of that came to pass. Instead, Sony quietly kept pouring hundreds of millions more into its studio venture to expand and refurbish facilities and to bring new talent into the management.

It took Sony two painful and costly decades to nurture what became Sony Pictures Entertainment into one of the most profitable and respected Hollywood studios. Rather than imposing Japanese management over the studio, Sony ultimately brought over the American head of Sony America to become chairman of the Japan-based Sony conglomerate in hopes of infusing it with a bit more US-style dynamism. Unfortunately, as Sony chairman and CEO Howard Stringer presided mostly over Sony’s demise from the world’s leading consumer electronics company into an also ran falling behind Samsung.

Another high-profile Japanese purchase of an American company came in 1990 when Matsushita Electric (maker of Panasonic) paid $6 billion for MCA/Universal, owner of America’s oldest movie studio. Unlike Sony, Matsushita was impatient to turn its studio into a moneymaker in its own image. But the resulting culture clash proved disruptive rather than revitalizing. Five years later Matsushita threw in the towel by selling 80% of the studio for $5.7 billion — essentially a break-even price.

The buyout of Chrysler by Germany’s Daimler-Benz is yet another high-profile example of how foreign ownership doesn’t translate into subversion of local values, even when the subversion of Chrysler’s then bloated and inefficient corporate culture would have been the best possible outcome. Daimler paid $36 billion for Chrysler in 1998. It then proceeded to lose money year after year, with no end in sight, as its efforts at streamlining local management met with too much resistance. Eight years later, it essentially paid the private equity firm Cerberus to take Chrysler off its hands. And of course now Chrysler is again under the control of a foreign company, Fiat of Italy.

These examples show that the spectre of Chinese firms using their financial clout to subvert local values make for sensational headlines but isn’t borne out by real life. The more likely scenario is the foreign firm becoming a long-suffering surrogate parent obliged to keep investing time and money in hopes of coaxing better results from its acquisition. Rather than subverting local values, the buyer has little choice but to adjust its own expectations to local values. If it fails to do so, it has little choice but to walk away and cut its losses. If it succeeds, it learns what it can from the local acquisition while imparting its own best practices.

Given the benefits to the local economy, with little in the way of countervailing detriments, it’s little wonder that rational governments are willing to tone down criticism to lure Chinese investments. That may not be a bad tradeoff. In reality, criticisms have had a limited impact on the behavior of China’s governments. On the other hand, the steady increase in foreign interactions by China’s business leaders — who have close ties with its political leaders — are likely to translate into fewer offensive government actions that damage the ability of major Chinese firms to engage in buyouts and other overseas business transactions.

As a practical matter, encouraging increased international business investments by Chinese firms is the most effective way to ensure that the west has some meaningful points of leverage for influencing the policies and actions of China’s government. Once Beijing has invested billions into a local economy, it has a direct and substantial financial stake in seeking to build and maintain a positive image for China. That would ultimately translate into more policies calculated to win the favor of the outside world.