China Model in Overseas Setting (One)—Why the country's investments overseas attract frequent criticism?

By He Qinglian on February 2, 2012
(Translated by kRiZcPEc)

In recent years, China has been making rapid moves in overseas investments. According to the report published by Price Waterhouse Coopers in mid-January, the total worth of assets Chinese companies acquired in 2011 surge to 42.9 billion dollars, a twelve-percent growth from 2010; the number of total transactions rose to a record high of 207 instances, an increase of 10% from the previous year. Judging from the data alone, it seems that Chinese capitals are hugely popular worldwide.

But in January this year at the Davos World Economic Forum, “China's urgent need to change its negative image in overseas investment” has become the topic of discussion. On January 26, Pascal Lamy, director general of the World Trade Organization, said at a discussion session in the Forum that: “The West has a skewed view of China which Beijing has to fix. The problem in non-Chinese public opinion is that there's a Chinese official behind every Chinese business person. That's the perception - that China is grabbing resources, that's what they are trying to do in new colonial something, that they're after technology, stealing. All these extremely negative views which overall translates into: this is a country that doesn't play by the rules.”

For a man of esteemed position like Lamy to make remarks like these at the Davos Forum, Beijing cannot and should not turn a deaf ear on them. Since 1979 when China started attending the annual meetings of the World Economic Forum, the role it plays has been a subject of major concern in the meetings. As the world increasingly anticipates “the rise of China”, the WEF gave China an unprecedented level of courtesy. In 2005, WEF President Klaus Schwab raised the idea of "Summer Davos of China" and in September 2007 the first Summer Davos Forum was held in Dalian, China. In June 2006, the WEF Beijing Office was officially established. With only economy on the agenda, as a group indifferent to the status of human rights and politics in China, the WEF's change of its attitude toward China, from the previous approach of working hard to show China its goodwill to present day criticism, could be seen as the vane of changes in the world's relationship with China.

As though to serve as a footnote to Lamy’s remarks, right at the time when the WEF annual meeting was underway, a subsidiary of the Shanghai-based Pengxin group got approval for its acquisition of sixteen dairy farms, including those owned by the Crafar Farms Purchase Group, in New Zealand and stirred up vociferous objection from farm owners there. Agri-journalist Richard Rennie commented that the New Zealand government has sold “In the past two years 36,000 hectares of agricultural land…to foreign investors”, a scale far larger than that of the Crafar Group, “We're talking tens of thousands of hectares bought by the Italians, the Germans, even the Brits and Americans. And yet we haven't heard a murmur from anyone.” He believed the wave of opposition triggered by the Pengxin acquisition reflected as a matter of fact the fearful feelings the population there has toward China.

To be fair, the criticism that Chinese investments overseas encounter is chiefly the result of the “China model”.

The main feature of the China model is to forge a money-power alliance between government and business through rent-seeking. Since this is the way with which businesses succeed inside China, the enterprises see nothing wrong with the practice, and natural they deploy it in overseas investment. For Chinese companies, the top priority of mergers and acquisitions is in the resources and energy corporations. Some of the countries in Africa, Middle East and Latin America are members of the “Club of Tyranny” just like China, which sees itself as the “invisible leader” of the club and, through close relationship with these authoritarian governments, invests massively in industries related to its national strategy such as petroleum, steel, mining, and railways. In sum, China often adopts the “government connection” approach when it invests in strategic industries abroad. That is to say, China’s giant state-owned enterprises would cooperate with foreign governments so as to obtain their support—a most powerful “pass” for these enterprises to exploit resources of the countries they invest in.

Yet this winning formula is repeatedly caught in trouble when used outside China. First of all, while authoritarian regimes exist in many countries in the Middle East, Africa and Latin America, the governments do not have control over everything. Besides, these countries are prone to political instability, the rise of opposition in particular often force the Chinese state-owned enterprises to adjust their overseas investment strategies. In the worst case scenario, many of their investments would be down the drain.

Take Libya for example, State-owned enterprises such as China National Petroleum Corporation (CNPC) and Huafeng Construction Co., Ltd. had strong ties with the Gaddafi regime and worked very closely with it. But in 2011 when the Arab Spring swept across Libya, the hundreds of millions of investment China had committed in the country became wasted. And Chad, one of the “friendly nations” top on China’s list of aid diplomacy, where CNPC invested sixty million dollars to establish the N'Djamena Oil Refinery, a joint venture which, as specified by the Letter of Intent, 60% of its sharesand thus the dominant positionwent to the Chinese company. The refinery came into operation in June 2011, precisely the time when the investment should produce returns. But the Chadian Ministry of Commerce and Industry suspended its production because of disagreement over fuel oil price, ordered that its director resign and declared its general manager a persona non grata who must depart from Chad. 

Second, China's overseas investments often incurred a cost of undermining the environmental and ecological safety of other countries. Just like the case of Africa, where Chinese investments mainly concentrated in oil exploration, timber extraction and dam construction. All these have very adverse effects on the local ecological environment. For instance, CNPC attracted a lot of criticisms from African scholars and Non-Governmental Organizations alike as it expropriated vast amount of land, destroyed the traditional livelihoods of the locals, caused displacement of residents of the north of the upper Nile river, and showed little respect to those living south of the river. Moreover, as a result of the Chinese government's indifference to human rights and its support for autocratic governments of African countries, Chinese businesses and people are not welcome there. The security risks for Chinese workers are increasing by the day as incidents of them being attacked by local armed groups have been of frequent occurrence, one such example was the kidnapping of 29 workers by an anti-government armed group in Sudan that took place in January this year. 

Adjacent to China, Southeast Asian countries, too, have growing resentment toward the country. Burma, where China invested 3.6 billion dollars to build a dam in Irrawaddy, its northern territory, which resulted in the displacement of many indigenous people and has been met with vehement opposition from the people of that country all along. With its strong position, however, China presses the Burmese government to clamp down on these protests. But the Government of Myanmar announced the suspension of the construction of the dam after Thein Sein, the new Prime Minister assumed office in September 2011.

Third, Labor relations of Chinese overseas enterprises are very poor. Chinese enterprises, no matter what kind of ownership they may be, believe that they could disregard labor rights and interests, so long as they have the backing of the government. Being accustomed to treating the workers this way, Chinese enterprises tend to be obsessed with this type of enterprise management model with the “Chinese characteristics”. As a result, these companies are hitting the wall in the countries they invest in and are entangled in continual labor disputes. I will write more in-depth about this topic in future.

All of the behaviors of Chinese enterprises overseas, whether it is rent-seeking (attempting to collude with the government), neglect or even destruction of the environment, or [deception] (such as the hundreds of China concept stocks suspended on the US stock market due to financial fraud), or the disregard of human rights of the workers, derive from the political system of the Communist Party and its value, i.e. the “China model”.

The bad comments countries have of the Chinese investment overseas is essentially the disapprobation of the China model, characterized by the worship of money politics, disregard of human rights and indifference toward ecological protection.