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China’s economy: its greatest weapon or weak point?

David Snowdon of Business Monitor International looks at how China's increasing economic activity is inextricably linked to its security outlook.

Over the past 20 years China’s real GDP growth has averaged 9.9%. This has lifted its economy from being only marginally relevant to being one of the biggest drivers of global growth. Between 2000 and 2009, the Chinese economy grew from just 3.7% of global GDP (in nominal US$ terms) to 8.1%.

Over the next ten years, Chinese growth should moderate to an average 7.5%, but this will be sufficient to raise China’s share of global output to 14.9%. As chart 1 shows, this will result in a remarkable degree of convergence with the US - which itself should contribute only 19.4% to world GDP by 2019.

However, even with strong growth over the next 10 years, Chinese GDP per capita will still be just US$11,644 or 20% of the US level in 2019.

China’s attempts to buy some major Western firms have had only limited success due to political and national security considerations

In 2009, China was the largest investor worldwide in energy and power companies, and second largest for materials: resources accounted for two-thirds of all Chinese deals overseas. Western firms remain a key attraction for China, not only for the natural reserves they would bring but also the expertise that would be acquired.

But China’s attempts to buy major Australian and American firms have had only limited success due to political and national security considerations. The failure of Chinalco’s US$19bn attempt to take over Australia’s Rio Tinto has led to a move towards less ‘threatening’ smaller purchases, such as the US$3bn purchase by Yanzhou Coal Mining of Australia’s Felix Resources. With large scale investment in many Western natural resources companies off the cards, China has increasingly targeted investment in emerging markets, particularly Central Asia and Sub-Saharan Africa.

Central Asia has long been an area of interest for China on a geopolitical rather than economic basis. China fears Islamist infiltration from Central Asia with regard to the Muslim Uighurs of its westernmost Xinjiang province, which saw mass unrest in 2009. Beijing fears diaspora Uighur communities in Kyrgyzstan and Kazakhstan could provide logistical support for their China-based kinsmen. Beijing does not wish to see an expanded US military presence in Central Asia as it fears this could be part of a bid to encircle China, provide covert support to Uighur activists, and reduce Chinese influence in the region.

The chart shows the GDP per capita growth between 2000 and 2018 projections of developed countries (top line), China (middle line) and emerging countries as a whole (bottom line)

China has made loans to Kazakhstan and Turkmenistan while also making large investments in the region’s oil, gas and even uranium industries. This will not only satisfy China’s need for natural resources, but bind regional states more closely to Beijing. For example, a US$4bn loan to Turkmenistan to develop the giant South Iolotan gas field coincided with the Central Asian-China Gas Pipeline, a 2,000km link which was inaugurated in December 2009. The first pipeline will carry 13 billion cubic metres (bcm) of gas from Turkmenistan to China in 2010, while a second pipeline will push total capacity up to 40bcm by 2012-2014, and include exports from Uzbekistan and Kazakhstan.

Similar strategies have been employed in Sub-Saharan Africa. Prime Minister Wen Jiabao has suggested that US$10bn could be given in loans over the next three years – akin to the US$10bn loan given to Kazakhstan during its banking sector crisis – paving the way for investment. Indeed, some of the deals proposed are even bigger than those in Central Asia. The Niger-China oil project comes in at an estimated US$5bn, while investments of US$7-9bn are being proposed in Guinea.

There are a number of attractions for both sides in these deals. For the African states, China offers a source of both aid and investment, which is not immediately tied to governance reform or other political criteria. For China, the investment is most certainly a business decision, first and foremost. However, an important secondary issue for China is promoting its view of non-intervention in the sovereign affairs of other nations. Given China’s sensitivities surrounding the political status of Tibet and Taiwan, as well as the Uighur separatists, this remains a logical course of action.

While immediately attractive to both sides, it is arguable whether it would be in the longer-term interests of African states. There have already been reports of Chinese investors abandoning investment projects in several Sub-Saharan Africa states, and infrastructure investment being slow to materialise.

It is not just Western politicians who are likely to take note of China’s growing international presence, but also Chinese military planners

However, China’s investment in emerging markets does not preclude investment in developed markets. There are two main ways in which China can access Western markets.

The first is through ‘dollar diplomacy’, which is by no means limited to emerging markets. The speculation in late January 2010 that China would fund a massive bailout of Greece opens up the prospect of rising Chinese influence in fiscally fragile developed states, which could potentially be tied not only into Chinese loans, but agreements to sell infrastructure, technology or financial assets.

The second avenue is simply through purchasing Western assets which are not immediately as politically sensitive, including IT, logistics and supply chains.

The chart shows the percentage of global GDP between 2000 and 2018 projections of developed countries (higher descending line) and developing countries (lower ascending line)

Rising tensions ahead?

Chinese investment abroad – especially in the production of strategic commodities, but also in consumer industries – will continue to attract the attentions of foreign governments. Against the backdrop of China’s ongoing resistance to revaluing the yuan, and the persistently large Chinese trade surplus, there is still a major risk of protectionist measures being implemented in the trade policies of the West in addition to the restrictive investment policies. Doing this would certainly hurt China – which is reliant upon its export markets to absorb domestic production which does not yet have a market at home.

It is not just Western politicians who are likely to take note of China’s growing international presence, but also Chinese military planners. While China does not yet possess major force projection capabilities, it clearly has increasing aspirations in this direction. In recent years, US defence planners have expressed concern that Chinese economic assistance to Myanmar, Bangladesh, Sri Lanka and Pakistan is part of a broader 'string of pearls' strategy of establishing naval facilities to dominate the northern Indian Ocean and its key east-west trade routes.

In financial terms, there is likely to be little barrier to China realising these ambitions given the country’s limited defence spending at present. In 2009, the military budget was officially put at US$70.3bn, or 1.7% of GDP, and even if this number is an under-estimate due to hidden spending and differing purchasing power, economic growth alone will allow for a massive surge in spending. With defence spending at 1.7% of GDP, by 2019, an additional US$208bn per year would be generated for the military.

This would be more than enough to turn China’s current soft power and dollar diplomacy into a more credible hard power posture.

Read more: China, Asia
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