July 24, 2007 7:58 pm
In 2003, partly in response to a global controversy over the environmental destruction caused by China’s Three Gorges dam, ABN Amro and Barclays helped to found the Equator Principles, a code of conduct for lenders to infrastructure projects in developing countries. Now, in its determination to win a takeover battle for ABN, Barclays has invited the state-owned Chinese bank that funded Three Gorges to become its largest shareholder. This is just one of the controversies that will arise if the Chinese state keeps buying large stakes in foreign companies.
The China Development Bank could invest as much as €9.8bn in Barclays if the ABN deal goes ahead. The CDB finances the top priorities of the Chinese government: in addition to dams, nuclear power plants and the 2008 Beijing Olympics, it has just launched a $5bn fund to support Chinese companies investing in Africa.
Most Chinese banks have large foreign shareholders and it would be hypocritical to stop them investing in institutions abroad. The CDB will gain commercial expertise from Barclays and the UK bank may gain better access to China in return. The Chinese lender is not seeking control, and while Barclays should be wary of the reputational risks, those are a matter for its board.
But while investment by foreign states causes few problems as such, it is the potential scale of Chinese buying that causes concern. The vast foreign exchange reserves that China has accumulated defending its undervalued currency, the renminbi, are currently invested in US Treasury bonds. Buying shares such as Barclays could boost returns and reduce exposure to the dollar and US interest rates, but huge investments would be needed to make a difference.
China will struggle to copy state investment agencies such as those of Dubai and Singapore by taking large stakes abroad. Nobody is scared of those nations; of China they are afraid. China would be better advised to invest its money quietly in hedge funds, private equity or funds that track an index.
If there are many more deals like the $3bn investment in US private equity group Blackstone by China’s new state investment agency, they will become a political issue of the highest order. China’s trade surplus and exchange rate policy are bad enough, but if it is seen to be buying up the world economy with the proceeds, it can only end in hearings before Congress, public demands for protectionism, and ever louder demands for a higher renminbi. That is the last thing that China needs.
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