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China’s sovereign economic development fund

by Brad Setser
June 20, 2008

It looks like one of the CIC’s mandates it to support the outward expansion of Chinese firms, particularly in strategic sectors.

Via SWF Radar and the Wall Street Journal comes news that the CIC is interested in being a part of a consortium of Chinese steel firms bidding for a Brazilian iron ore mining company.

A consortium made up of Chinese steelmakers and China’s sovereign wealth fund is entering the initial round of bidding for a stake in the iron-ore unit of Brazil’s Companhia Siderurgica Nacional SA, people familiar with the situation said Thursday. The group’s interest, though preliminary, shows the importance China places on securing supplies of ore and other natural resources amid the current commodities boom …. CSN, one of Brazil’s leading producers of both steel and iron ore, has invited bids for all or part of Nacional Minerios SA, or Namisa, its unlisted iron-ore unit. Major Chinese producers including Baosteel Group Co., Shougang Group and Shagang Group, as well as China Investment Corp., a $200 billion investment pool run by the Chinese government, are interested in the unit, one person familiar with the matter said. But the final composition of the consortium isn’t finalized yet, this person said.

If this story is true, the debate over whether the CIC’s mandate includes supporting the outward expansion of Chinese firms would be settled.

On one level, it would be positive for the global economy if China’s balance of payments surplus financed deficits elsewhere in the emerging world — not just deficits in the US and Europe. Redirecting some of China’s foreign asset growth away from the US and Europe could contribute to such an evolution, as would willingness on the part of those emerging economies receiving inflows from China to allow their currencies to appreciate. Brazil would use money borrowed from China to buy more US and European goods, helping the global economy to adjust.

On another level, it is a little hard to see how China can argue that the CIC is a purely commercial investor when it is actively supporting Chinese state firms. It is hard to see how a government fund that has to choose to finance the overseas ambitions of some Chinese companies and not others could be insulated from domestic political pressure. Moreover, the CIC is supporting one of the strategic goal of China’s state, namely helping — in China’s view — to secure a reliable supply of the mineral resources China’s economy needs. There is a fair debate over whether owning resources abroad truly is necessary to secure supply, or whether resources will always be available to the highest bidder. But China’s government seems to believe that greater Chinese ownership of mineral resources would help it navigate a world where China’s economy is much less self-sufficient than in the past. China only became a large net oil importer fairly recently.

Vertical integration is a common commercial strategy. But vertical integration supported by a government fund investment fund feels more like a scramble by states to secure access to strategic resources than pure commerce.

32 Comments

  • Posted by Dave Chiang

    Oh please Brad, an equity investment by the China CIC into iron ore mining is probably an excellent longterm profitable investment given the increasing scarcity of strategic natural resources. Just the other night the BBC did a report on China regarding resource investment across Latin America. China actually purchased an entire mountain range in Peru for its copper-ore deposits. In the report it said that China will be able to extract the copper-ore for about $400 per ton. The entire mountain range will be leveled for its copper-ore. The report mentioned that the going rate for copper-ore is about $8,000 per ton. China is actually paying the people who live at the base of this mountain range to move because it’s cheaper to move people and buy a mountain range than it is to buy copper-ore on the open market. That at least is more humane than the Bush Adminstration shooting its way into Iraq for that nation’s energy reserves.

  • Posted by bsetser

    I have a hard time accepting that financing the outward expansion of your state firms is “commercial”. Suppose the US government issued bonds to help co-finance an Exxon bid for West African oil fields. I wouldn’t consider that a commercial investment by the US government.

  • Posted by geoecon

    Brad,

    Good points. This looks like a good use of excess capital for investment not just in resources but in infrastructure and in expertise in civil engineering services.

    The gains here to make the point again are not just access to resources which are indeed available on the market, and will be purchased in large measure on the open markets of but investment in development, and in the expertise in and of “development.”

    Their planners have to be eyeing the “higher value add” services markets.

  • Posted by Laurent GUERBY

    Brad, what about USA government war in Iraq? Issuing state bonds to pay politically connected firm? Much larger scale than what China tries to do, far more blood too. What about USA heavy handed tactics to force intellectual property down the throat of everyone, how is that “free trade” and Disney and big pharma benefit?

    Anyway, back on more serious topics CNY vs USD, here are annualized rates of appreciation as of yesterday (my calculation based on bloomberg data):

    - past 12 monthes: 8.2%
    - past 6 monthes: 14.8%
    - past 3 monthes: 11.5%
    - past month: 18.1% (wow)

    Did you say CNY USD FX move were decelerating?

  • Posted by bsetser

    CNY appreciation has picked up, but my sense was that the pace of appreciation after the april stall was much slower than in the Nov-March period. Two days ago the 12m forward was pricing in 6% appreciation over a year. So I am a bit surprised by your calculations. But i had better look at what has happened today.

    p.s. I wouldn’t characterize issuing bonds to pay off politically connected firms as a commercial investment — or indeed an investment of any sort.

  • Posted by jin

    If the investment in a state steel firm could bring a decent rate of return, it makes perfect commercial sense. And it is not even about US…So…

  • Posted by Twofish

    bsetser: Suppose the US government issued bonds to help co-finance an Exxon bid for West African oil fields. I wouldn’t consider that a commercial investment by the US government.

    It wouldn’t be, but on the other hand if the state of California put its pension fund in the hands of a private equity firm intended to just that, it may be.

    We really do have to look closely at the terms of the deal. If the price, terms of sale are priced at roughly what a Western private bidder would pay for it then one can argue that it is a commercial deal. I think it is commercial in the sense that whether you see more or fewer deals like this depends on how much money gets made. One reason I think that CIC is at least interested in raw materials in Brazil, is that its investments in financial services in the US have been stinkers.

    One also has to keep in mind that the environment changes a lot according to external factors. A year ago, arguing that CIC should or shouldn’t do something because that is or isn’t done in the United States would be much stronger argument than it is now. Right now, people who see US financial practices as something to be avoided rather than copied probably have a much stronger voice than they did a year or even six months ago.

    This goes to a larger point in that if you think that China shouldn’t do something, you have to come up with much, much stronger arguments than saying than saying that US doesn’t do it.

    These things also go in cycles. I’m pretty sure that in about three to five years, China will do something stupid (since everyone eventually does something stupid), and it will be the US’s turn to say “ha ha.”

  • Posted by Twofish

    bsetser: p.s. I wouldn’t characterize issuing bonds to pay off politically connected firms as a commercial investment — or indeed an investment of any sort.

    All large firms whether in the US or in China are politically connected. There is just no way you can run a large company anywhere without an army of lawyers and lobbyists.

    From an ideological point of view, I don’t see what the Chinese government is doing as being much different from increasing tariffs on steel products or funding the EXIM bank. I don’t see anything wrong with the Chinese government funding projects to advance Chinese national strategic interests ***if those projects do indeed advance Chinese national strategic interests***.

    I have my doubts that low interest loans to steel companies to buy raw materials will do that. But since CIC tried things the “Wall Street way” and it blew up, I’m not going to be too much opposed to trying something different and seeing how this turns out.

  • Posted by Dave Chiang

    From Bloomberg,
    ” Paulson’s conflicting U.S. dollar policy, dubbed “double-tongued” by analysts at London-based Barclays Capital Research in a recent report. The U.S. wants a stronger dollar to curb inflation while lobbying Asia to boost its currencies. Traders are left thinking: “Huh?”

    Paulson’s basic argument about the yuan — and those of his predecessor, John Snow — also looks increasingly hollow.

    “An appreciation of the yuan is no panacea for either U.S. companies or Chinese officials,” Chandler says. “Chinese factory labor costs are about 1/30th of the U.S.’s. The modest appreciation of the currency barely blunts this arguably more significant competitive advantage.”

    “It’s complete nonsense,” Peter Levene, chairman of Lloyd’s of London, said in Kuala Lumpur.
    http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=aznZEEU4EyFc

  • Posted by Twofish

    Also one thing that makes Chinese corporations different from Western corporations is that Chinese corporations have huge cash reserves (in part because the banking system was a mess).

    From the description of the consortium, it doesn’t sound like CIC will be funding steel makers to go overseas, but rather that everyone will put some cash on the table, and if that’s the case it will reduce my concerns about the deal.

    What will be interesting is if they get a US corporation or major bank involved in the consortium? Suppose the buyout consortium includes US Steel and Goldman-Sachs? Would that make it better or worse? More commercial or less commercial?

  • Posted by Dave Chiang

    Wow, the US to impose up to 701% import tariff on Chinese Steel imports. Perhaps the Chinese won’t need as much iron-ore for processing into steel. Does anyone really believe that the Chinese are selling steel in the US by 701% under production cost?

    US steel industry wins trade case against China
    http://biz.yahoo.com/ap/080620/china_steel.html

    WASHINGTON (AP) — U.S. steel pipe manufacturers, who have been battling a surge in imports from China, won a major victory Friday when the International Trade Commission cleared the way for the imposition of stiff penalty tariffs for the next five years. The commission ruling means penalty tariffs ranging from 99 percent to 701 percent will be imposed on Chinese imports of circular welded pipe.

  • Posted by Twofish

    Also it sounds like there was a big meeting recently and major decisions were made.

    In the be careful what you wish for department…..

    I wouldn’t be surprised if the PRC sharply appreciates the RMB soon. Appreciating the RMB makes overseas companies much cheaper and part of the “big meeting” may have been a decision to appreciate the RMB in order to help companies buy up overseas companies at bargain prices.

    The idea that RMB appreciation is not an issue anymore may be because the PRC told Paulson that the RMB is about to move sharply upward.

  • Posted by bsetser

    I cannot complain too much about Pesek’s column as I was mentioned, but I do think he overstates the argument that Asia has decoupled from the CNY. Asian currencies have moved in a different way recently, notably the INR (PHP). But I suspect that has more to do with the fact that they has either appreciated ahead of the CNY (the PHP in particular) or the fact that coutries with current account deficits are squeezed much more by an oil shock than countries with surpluses. If China appreciated when oil was constant at a lower price i would expect a broader appreciation. Finally, the argument that exchange rate moves don’t matter b/c Chinese labor rates are so much lower is a total red herring, one not supported by close examination of the data. Look at how Chinese trade with Europe has responded to the CNY EUR — and for that matter, try to explain the slowdown in us imports from china (and the WSJ story of last week) without some reference to the CNY’s 20% appreciation v the $.

    2fish — lending money or co financing the companies is supporting them; the WSJ didn’t provide details, but the CIC seemed to be putting up cash so the firms themselves would have less need to put up cash.

    And there is a difference between lending money to a country that wants to buy something your countries’ firms produce through an exim bank and subsidizing an external investment by your countries firms. I grant that exim lending is non-commercial. it is often an outright export subsidy. But it isn’t government financing of an outward investment by a national champion, it is government financing that helps a national champion get business abroad.

    I grant that the state plays a much bigger role in China’s economy than in the US economy and that practices that are normal in Chinas own market (i.e. state financing of commercial investments) are gonna get exported to some degree, but i find it impossible to reconcile financing outward investment by natioanl champions in any way with the argument that the CIC is a purely commercial actor.

  • Posted by Twofish

    bsetser: But it isn’t government financing of an outward investment by a national champion, it is government financing that helps a national champion get business abroad.

    Can you explain why you seem to think that one is legitimate and the other is illegitimate? If the problem is that using cash to fund national champions overseas increases Chinese power and influence overseas, that doesn’t particularly bother me, and it certainly doesn’t bother the people in Beijing.

    My big concern is that it won’t, and you’ll end up with a big money losing mess. But I’d like to see the experiment, and if it works, and the US gets concerned that China is growing too powerful, there is nothing to keep the US from doing the same thing.

    bsetser: i find it impossible to reconcile financing outward investment by national champions in any way with the argument that the CIC is a purely commercial actor.

    I think it’s because you are looking at it from a framework in which the political and the commercial are in opposition to each other. It’s perfectly possible to do something that makes political sense (adds to China’s national power) and commercial sense (i.e. makes a lot of money).

    I don’t see any evidence that CIC is planning to do anything that would cause it to lose money (at least intentionally).

    Again, recent events have changed the argument a lot. Before mid-March, you could much more easily argue that there should be a strict separation between business and state, but when you have the Federal Reserve fund a private takeover of an investment bank, it becomes a lot harder from someone in the US to make the argument.

    Since then, any sort of advice that the US gives China on what it should or shouldn’t do or what the rules of international finance are have brought the reply “so why should we listen to you?” And if you argue that the Chinese government shouldn’t make these sorts of purchases then you really need to explain why not.

  • Posted by don

    DC: The problem is that Paulson used the term ‘the value of the dollar,’ which implies a single magnitude. But he is right on what needs to be done. The dollar is undervalued versus the euro and overvalued versus the yen and yuan.
    Brad: Chinese strategic investment doesn’t worry me so much. Let them discover how slim is the security offered by such investments when they get appropriated by the host countries. And when it happens, it wouldn’t surprise me to see that they behave just as well as the U.S. in similar circumstances.

  • Posted by Dave Chiang

    I would be surprised if the PRC sharply appreciates the RMB soon. A sharply higher yuan hurts low productivity Chinese farmers with cheap agricultural imports. It also impacts Hong Kong’s monetary stability that is pegged to the US Dollar. The Hong Kong Monetary Authority really does run its independent monetary policy, and they have made it perfectly clear that the Hong Kong Dollar will remain pegged to the US Dollar. The China PBoC takes seriously the impact of any yuan revaluation on Hong Kong. Remember the people in Hong Kong can legally protest on the streets if economic conditions deteriorate.

  • Posted by Rien Huizer

    Brad, Looking at the activities and responsibilities of CIC I am not even sure it considers itself an SWF. This entity is in my opinion a coordination and control function, within the state financial bureaucracy (MOF, POBC, SAFE, CDC etc). As more and more SOEs began to behave like true listed companies (with all the agency problems of that), the system of ministries overseeing their SOEs could not work. The lodging of the state’s residual bank holdings would fit such a mission for CIC.
    Likewise, CIC’s presence in a consortium for the acquisition of a large foreign asset maker imminent sense. It prevents Baosteel and Shougang to do things the central government would not like to do and compete against each other, but it avoids a decision making structure where direct formal links between de leadership (of course the informal links are very important) are necessary to maintain discipline . CIC is simply the caboose of the consortium, a modern incarnation of the party functionaries in the army. If it does not work in trade diplomacy, maybe some tinkering will be necessary. Australia is pretty hostile to this kind of investment (several pplications have ben rejected), but Brazil may be a bit more enlightened. You cross a river by stepping on stones, right?

    I guess that the model for CIC is really Temasek (which according to the Spore government is not an SWF in the sense of the current dicusions with the IMF, US Treasury and EU. But Temasek does it best to come across as commercial as they can. Pity LKY’s daughter in law is the CEO. Something about the Temasek Charter:

    ttp://www.mof.gov.sg/budget_2002/economic.html

  • Posted by Rien Huizer

    Brad, I was not aware of your earlier piece in CIC on RGE. Several suggestions of a CIC-Temasek analogy there. To avoid misunderstanding, that is not quite what I mean. Temasek is also a somewhat contradictory cocktail of business, disciplinarian and policy, but it has lots of subsidiaries/affiliates with real accounting and modern managements. It is also very big relative to the Singapore economy. CIC needs returns too (losses might be embarassing) but is very small and in its domestic mode it deals with Dodge City rather than Wallstreet) its charges and counterparies are far less modern (in a governance sense )so I guess it needs the internal dsiciplining function more than returns. And Lou has the perfect background to be a watchdog with a developmentalist slant. Come to think of it, a party secratary (or deputy governor) in does precisely that, even, or perhaps especially, in Guizhou..

  • Posted by Twofish

    Let’s be very clear about one thing. CIC is and for the forseeable future will be political in the sense that is will be managed in a way that serves to advance Chinese national interests as defined by the Communist Party of China, and that means that CIC will be used as a tool to increase China’s global political and economic interests. This is just a reality. The United States may not like it, but it has to react to this since there isn’t any chance that the US can change this.

    What makes this an interesting project is that China is clearly acting in a way so that large segments of the United States benefit from rising Chinese economic and political power (Walmart for example), and can be expected to support it. This is very different from the behavior of Russia or even Japan. China doesn’t want its rise to be zero-sum, and this isn’t out of altruism rather than self-interest. If there is a national consensus within the United States that China’s rise must be stopped then this makes it much more difficult for China to get more political and economic power.

    The question that Beijing in interested in becomes *how* can CIC best advance Chinese national interests, and there different people have different ideas. What makes this a difficult question is that some of the obvious ways of using CIC to advance Chinese interests won’t work. I’m not too thrilled about using CIC to establish control over strategic resources and very much opposed to CIC given below-market financing to SOE’s, because based on looking at people doing similar things in the past, my belief is that those activities do not aid in adding to Chinese comprehensive national power, and will end up being a drain on Chinese wealth and power. But I have an open mind about this.

    In particular, my personal belief is that to meet its political goals, CIC must remain commercial in the sense of adding wealth to the national treasury rather than subtracting from it, and that things such as promotions and funding decisions be made such that CIC makes a profit, and that people be rewarded when CIC generates wealth and punished when it doesn’t. This doesn’t create large contradictions with the political goals of CIC, since there are lots of different ways of making money. If it is choice between making money with strategic resources and making money with something else, then sure, it’s alright to discuss which industry is going to help China. The commercial constraints come in when its a choice between losing money and making money.

    The reason commercial constraints are important is because you end up with lots of principal-agent problems, and you don’t want to end up with a situation were CIC benefits its funded corporations and managers, but hurts the national interest. If you impose a “make money for us or we will fire you all” condition, then it makes it harder for the people running CIC to loot the company, whereas if you merely use vague concepts like “national interest” without controls, then the managers of CIC will act as if “national interest” means moving all of CIC’s money into their personal bank accounts and leaving the government with massive debts.

    So in this sense, not only are “political” and “commercial” not in conflict, but the requirement that CIC make money and the desire for the Communist Party to exercise control are not in conflict, since the requirement that CIC make a profit provides a means by which the Communist Party can exercise control over the management of CIC and align the interests of the management with the interests of the Chinese political leadership. The policy here is “if we get money and power, you get money and power.”

    The reason business and economics is vitally important is that the Chinese strategy for getting money and power requires that the game be non-zero sum. If more money and power for me means less money and power for you, then we can’t rationally cooperate, but if money and power are generated (which is the goal of business), then we can work in ways that help both of us.

    Having two groups of people stare each other in the eye and figure out how they can based interact in a way that benefits them both is almost the definition of commercial.

  • Posted by Alex

    “I would be surprised if the PRC sharply appreciates the RMB soon. A sharply higher yuan hurts low productivity Chinese farmers with cheap agricultural imports. ”

    I would completely disagree with your analysis. China has serious problems with inflation and large trade surpluses with the EU and US.

    The easiest way for China to deal with these problems would be a sharp upward spike in the RMB.

    So what if growth falls to 7-8%? Its a small price to pay for domestic and international tranquility.

    A huge spike in the RMB would also lower food prices to Chinese consumers.

    I’m not saying these price increases would stop but they certainly occur at a slower rate.

    I also agree with Brad

    ” But China’s government seems to believe that greater Chinese ownership of mineral resources would help it navigate a world where China’s economy is much less self-sufficient than in the past. China only became a large net oil importer fairly recently. ”

    It certainly can’t hurt China to invest in these things and it probably does give China’s industries more access to mineral supplies. Besides the commodity markets are booming, hardly a bad thing to buy from an investment point of view.

  • Posted by Twofish

    One other thing that this illustrations is that using national sovereignty and national security has its limits. If China were thinking about buy mines and mineral rights in the United States, then sure the US government can and in fact should stop that it if doesn’t think that it is in the US national interest. However, it’s really tough for the US government to use US national security interests as an excuse to block in deal in which China buys stakes in Brazil and Australia.

    In situations where you are dealing with small impoverished nations, you run into the problem that you have counterparties that aren’t able or willing to make a good deal and the problem of exploitation becomes a problem. In the case of Zambia or Uganda, you really have questions as to whether the government is acting in the Zambian and Ugandan national interest or whether they have the expertise to tell a good deal from a bad one. This definitely is not a problem with Australia, and I don’t think that it is a major problem with Brazil. Both those governments can and should say no if the deals that they are offerred are bad ones.

    (Also the problem of insufficient expertise isn’t only a problem in developing countries. The state of Florida and a lot of municipalities has run into huge problems because they didn’t have the expertise needed to run some of their funds.)

    Personally, the model I think that CIC should look very closely at is Calpers. However, I think that one thing that has changed in the last three months is that the financial problems on Wall Street have made the government concerned about having too little control over investment decisions.

    My own thinking on these issues is very heavily influenced by Von Mises and his ideas on the socialist calculation problem, which is a very good explanation about why central planning doesn’t work for national economies.

    Another point is that if CIC turns out to work well, there’s nothing that keeps the US from taking the $2 trillion in the social security trust fund and creating its SWF. I’m not worried too much about CIC “taking over the world.” I’m much more worried about CIC shooting itself.

    One other way of thinking about this which tells you how much things have changed in the last few months is that you can think of the holdings of the Federal Reserve as an SWF which is invested in real estate and financial services.

    Bernanke has crossed the Rubicon. The old rules are no longer constraints and everyone is busy trying to figure out what the new rules are.

  • Posted by bsetser

    Lots of interesting comments. A couple of quick points in response:

    a) I never suggested that the US should try to block the CIC’s aquisitions of Brazilian mines. I recognize the limits of US power; whether or not to welcome a CIC financed consortium of Chinese steel makers is a Brazilian decision. I also noted that this kind of investment could have positive spillovers for global adjustment.

    b) The CIC’s activities globally — in China, in Brazil, in Africa, in Europe and in the US — are relevant should the US be in a position of deciding whether or not to allow a consortium of Chinese SOEs with CIC backing to buy a US asset.

    c)I agree with 2fish’s point that the CIC is a political as well as economic actor that serves Chinese interests as defined by the CCP. I also agree that making money is one of those interests. The fact that the CIC’s “commercial” investments in blackstone lost money only increased the incentive to fund outward expansion by Chinese SOEs: China may well believe those deals are more likely to make money than capital injections into western banks/ stakes in PE firms … i only wish the CIC would not argue it is a purely commercial actor at the same time as it is making investments that serve additional goals, and that the policy debate in the US and Europe would treat such statements more skeptically. Many panels on SWFs start with the assertion that there are no examples of non-commercial investments by SWFs. p.s. the ‘commercial” nature of the blackstone deal is in quotes as there is a strong rumor that the China wanted to get credit for it in the SED in the same way China gets credit for buying Boeings.

    d) Rien’s argument that the CIC looks more like Temasek than the GIC is starting to ring true to me. I would tho note that a Chinese Temasek is much scarier to the rest of the world than a Singaporean Temasek. An organization that both manages SOEs, finances their outward expansion and buys strategic stakes abroad on the scale made possible by China’s current account surplus is a new kind of actor in the global economy and in global politics.

  • Posted by bsetser

    DC — your arguments that ag prices are a constraint on RMB appreciation are about 2 years out of date. Right now China doesn’t need to worry that a rising RMB will push rice prices down and hurt China’s farmers.

    Moreover, I have argued in the past that if that is a concern, China should follow the korean/ japanese model of protecting its rice farmers by keeping domestic market prices above world prices rather than setting the rmb exchange rate to keep China’s least competitive/ least productive sector in business. i am fairly pragmatic on this, not a doctrinaire neo-liberal.

  • Posted by Rien Huizer

    Brad, something has to do in China what Temasek does in Spore, i.e. act like an informed owner (I guess that is what 2fish meant by the comparison with Calpers) and that means hardening budget constraints (in the Kornai sense, see for instance Roland, The economics etc of Transition). You can do that in China by making the banks behave like banks, not welfare agencies for workers and their companies, and by keeping the companies from doing silly things like overpaying for foreign acquisitions or competing in standards committees (electronic technology) I guess one of the other upcoming and serious responsibilities would be to determine what the state will keep and what it will let go. Of course someone will also have to educate the public about investment, especially after a spot of trouble for many little speculators (one of those typically East Asian phenomena I still fail to understand).

    I am not so sure all of that that would be scary, it is just a matter of looking after state property better, being more rational about it and let banks do more dirty work. What else can you do when you want to remain in charge and modernize at the same time. Singapore’s lesson is that there are ways in which you can have a propsperous economy, participate in world markets, have a population that will not complain about lack of democracy (in the PRC’s case, is even fiercely nationalistic), and remain in power as an elite. As long as someone keeps discipline within the ruling class..I guess Americans will always have trouble with this.

    But I do not think that CIC will ever develop the proportionality of Temasek. As said, Temasek is enormous compared to anything else indigenous in Singapore. That is a problem, but fortunately, Temasek is not big in absolute terms. I do not expect CIC to become the centre of a giant monotithic conglomerate uniting all of the remaing SOEs and manipulating international financial markets, Just an entity that keeps SOEs on the straight and narrow, at home and abroad. At home by requiring the banks to be genuinely profitable (perhaps allowing for cycles) and abroad by riding in the same car with the SOEs when making acquisitions. Maximum control for minimum effort. I doubt the investment function is the main raison d etre for them. So what would be scary is to have a bunch of people who have studied all the mistakes the Russians, Koreans, Taiwanese, Singaporeans and even the Japanese have made, backed up by reasonably effective ways to make people listen. Perhaps that is still scary..

  • Posted by Dave Chiang

    your arguments that ag prices are a constraint on RMB appreciation are about 2 years out of date. Right now China doesn’t need to worry that a rising RMB will push rice prices down and hurt China’s farmers. – Brad

    Until 60-70 percent of the Chinese population is no longer working on rural farms, the argument that agricultural prices aren’t a constraint to revalue the yuan is flat wrong. And not all Chinese farmers grow rice. The rice growing region is mostly in southern Guangdong province. In northern China which has a similar climate to the US, farmers grow wheat, corn, and soybeans just like American farmers. The smaller scale of Chinese farms ensures that the US has a huge comparative advantage in agricultural production. Opening those farms markets to US produce would be politically destabilizing. Likewise the US imposes a 45% import tariff on Brazilian ethanol to protect US corn farmers from more efficient Brazil farming of sugar cane.

  • Posted by Dave Chiang

    The US also needs an civilian Industrial policy like all of the Asian nations have. The basic research for Toyota hybrid engine, advanced memory chips, flat screen technology was funded by Japan’s MITI government agency. The world’s largest contract chip company is TSMC which was established and financed by the Taiwan government. But don’t look over the shoulder, the Chinese government has established SMIC with billions in state capital to advance China’s semiconductor technology (ie. former Chinese President’s Jiang Zemin’s son is the company CEO). And almost every major industry in Singapore and Malaysia was directed and financed at some point by their respective governments. Of course, some do fail and some others succeed, but it helps alot to have a deep pocketed parent.

    The problem in the US isn’t a lack of industrial policy, the problem is that US industrial policy is directed solely at military technology. No one else in the world has a F-22 stealth fighter invisible to Radar. The US Navy has the quietest nuclear submarines in the world (ie. but only 3 Virgina class subs to date). No one in the world has a more powerful, high-technology military than the US which was entirely state-funded.

    US Neo-liberal economists can moralize all they want, it isn’t going to change how the real world really works. The Asian state-driven industrial model is being adopted by developing nations worldwide, and the US controlled IMF no longer has the power to prevent it.

  • Posted by Dave Chiang

    PS :-) Some nice pictures of the new Chinese-built Bullet trains in Beijing.
    http://bbs.hasea.com/thread-263222-1-1.html

  • Posted by Twofish

    bsetser: China should follow the korean/ japanese model of protecting its rice farmers by keeping domestic market prices above world prices

    I don’t really think so. Chinese agriculture is largely non-mechanized, which means that it’s productivity is low, but it also means that it can farmers can rapidly switch to other crops, and it makes sense for Chinese farmers to plant high-labor crops, low automation like fruits and vegetables than rice, and removal of WTO tariffs has pushed Chinese agriculture in that direction.

    The revaluation will impoverish farmers idea is an argument that doesn’t much much sense to me. If I’m a pig farmer, I want cheap feed grains from Kansas.

    DC: The US also needs an civilian Industrial policy like all of the Asian nations have.

    I don’t think so. Also China doesn’t have much of an industrial policy. Decision making is too fragmented. I think that is a good thing.

    DC: But don’t look over the shoulder, the Chinese government has established SMIC with billions in state capital to advance China’s semiconductor technology (ie. former Chinese President’s Jiang Zemin’s son is the company CEO).

    Which explains precisely why industrial policy is often a bad thing. Does a company get funded if Jiang Zemin’s son isn’t the CEO? What if it is doing biotech work? What about high performance computing systems used to price derivatives? What do we do if the company that is run by Jiang Zemin’s son turns out to be totally incompetent?

    As far as basic research and development, the US does fund a huge amount of research through the Defense Department and the National Science Foundation. One reason the federal government hasn’t gotten involved in financing startups, is that there hasn’t been a huge need to do so, since you have a strong venture capital community.

    DC: The Asian state-driven industrial model is being adopted by developing nations worldwide

    I don’t think there really is an Asian model. The Chinese and Japanese economies have nothing in common other than they don’t look much like the United States. Developing nations tend to have much more state involvement since often the state is the only entity with the resources to do industrial development and basic R&D, but that has sometimes turned out quite badly.

    The main reason that the US hasn’t tried industrial policy is less ideological than it didn’t work too well when people tried it in the late-1980′s. The story of Sematech is interesting here.

  • Posted by Howard Richman

    Brad,

    I think the following statement of yours captures China’s motivation: “Moreover, the CIC is supporting one of the strategic goal of China’s state, namely helping — in China’s view — to secure a reliable supply of the mineral resources China’s economy needs.”

    China’s more or less exclusive status as the buyer of Angola’s rapidly-increasing oil production is likely the model here. I don’t know anything about what is happening in Angola, but the Wikipedia article suggests that there is lots of government corruption. My guess is that China is involved in some of that corruption. I wonder if China is paying the world price for oil that it gets from Angola.

    Howard

  • Posted by Twofish

    Richman: China’s more or less exclusive status as the buyer of Angola’s rapidly-increasing oil production is likely the model here.

    It isn’t. Most of the companies that are involved in Angolan oil production are Western. China has a rather minor role in Angolan oil production and in African oil production in general.

    Richman: My guess is that China is involved in some of that corruption.

    When you fill up your car, you are involved in a lot of rather nasty things, that most people don’t want to think about.

    Richman: I wonder if China is paying the world price for oil that it gets from Angola.

    I don’t see why not. Why should a corrupt government offer discounts?

  • Posted by Howard Richman

    Twofish:

    Thanks for the additional info on Angola. I am just a beginner trying to figure out what is happening in Angola. I was extrapolating from the following in the Wikipedia article:

    “In 2004, China’s Eximbank approved a $2 billion line of credit to Angola. The loan is being used to rebuild Angola’s infrastructure, and has also limited the influence of the International Monetary Fund in the country.

    Growth is almost entirely driven by rising oil production which surpassed 1.4 million barrels (220,000 m³) per day in late-2005 and which is expected to grow to 2 million barrels (320,000 m³) per day by 2007. Control of the oil industry is consolidated in Sonangol Group, a conglomerate which is owned by the Angolan government….

    “Rapidly rising production and revenues from the oil sector have been the main driving forces behind the improvements in overall economic activity – nevertheless, poverty remains widespread. Anti-corruption watchdog Transparency International rated Angola one of the 10 most corrupt countries in the world in 2005. The capital city is the most developed and the only large economic center worth mentioning in the country, however, slums called musseques, stretch for miles beyond Luanda’s former city limits.

    “According to an American think tank, oil from Angola has increased so significantly that Angola now is the Chinese Communist Party’s biggest supplier of oil.

    The author of this Wikipedia article seems to be saying that a very corrupt Angolan government, that is in hock to China, is in control of Angola’s oil industry, not Western oil companies. It also seems to be saying that much, if not most, of Angola’s oil exports are going to China, not to the west.

    Angola is on the Atlantic ocean, not the Pacific. Normally, countries tend to export oil to countries that are closer in order to minimize transportation costs. Yet Angola appears to be exporting almost all of its growing supply of oil to China.

    Maybe you missed the fact that China bought influence in Angola through a $2 billion line of credit. It very well could be that Angola is serving as a model for a Chinese government trying to lock up foreign resources.

    Howard

  • Posted by Twofish

    The information in wikipedia appears to be incorrect, and I’ll fix it when I have a chance. China imports more oil from Saudi Arabia than Angola, and the US imports more oil from Angola than China does.

    http://www.eia.doe.gov/emeu/cabs/Angola/Oil.html

    China is working with Angola because the Civil War there ended in 2002, so it is open to Chinese companies unlike other nations that have been locked up by US companies a long, long time ago. Africa exports far more oil to the US than it does to China. You don’t hear much about that, because oil companies want to keep things quiet, and frankly most people would probably rather not know where their oil comes from.

    You have to go directly to primary sources rather than only rely on summaries. If you read summaries of facts you are going to be influenced by the opinions and views of the person that wrote the summary who is going to present the facts that support his case.

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