The epic process of China "going global" has been underway for over a decade, but the events of late July 2007 may well be its defining moment. The stake in Barclays bank purchased by the China Development Bank - one of Beijing's state-owned "policy banks" - is significant in itself, but it also represents a high-profile reversal of the dominant perception of China's international economic role.
Since China's entry to the World Trade Organisation in 2001, foreign investors have salivated at the prospect of buying into a market with one of the highest savings-rates on the planet ($1.7 trillion sits in Chinese personal savings accounts). The Royal Bank of Scotland and the Bank of America (to name only two) have taken stakes worth billions of dollars in Chinese banks. But even a few months ago, the thought that China's own banking institutions might themselves undertake such bold action wasn't envisaged.
Kerry Brown is an associate fellow of Chatham House, and director of Strategic China Ltd. His most recent book is Struggling Giant: China in the 21st Century (Anthem Press, 2007)
Also by Kerry Brown on openDemocracy:
"China's top fifty: the China power list"
(2 April 2007)
The China Development Bank's acquisition of a minority share in Barclays was (as the Financial Times observed) well judged: modest enough not to appear threatening, in tandem with a similar stake from Singapore's state investment arm, Temasek. At the same time, other observers see the move as the latest in a worrying trend whereby the Chinese state - in the form of seemingly innocuous enterprises - is creeping ever deeper into western financial and economic institutions.
Go west, young man
The economic story about China told abroad over the past decade and more has been about the phenomenal amount of foreign direct investment (FDI) flowing into the country. As of 2007, this stands at over $700 billion in stockholdings. True, about 40% of that derives from the Hong Kong special administration region (SAR) or the British Virgin Islands, and therefore is very likely to originate in China. Yet even with this qualification, China's ability to attract FDI has been impressive; since 1992 it has regularly featured as one of the top three FDI destinations.
But has this FDI really served its main purpose? For several years, the Chinese government has been signalling that all the money washing into China has not brought the technical partnerships and know-how that were originally expected. 88% of China's hi-tech exports in 2006 were still made by foreign-investment enterprises, which operated largely by importing partly finished goods, using cheap labour to process them, and then re-exporting. China aspires to be a "knowledge economy", but in fundamental ways its current FDI regime has done little to help indigenous Chinese companies expand and develop. Chinese enterprises contain few global leaders, perform badly in innovation, and score low on brand recognition. The Chinese government knows that somehow that model has to change.
A big part of this "somehow" is the government's encouragement of Chinese companies - which has been expressed since the mid-1990s - to "go out". This is unprecedented in Chinese terms, for China has never in history been an exporter of capital. Even a century ago, it was British and European countries that invested in China (mostly through Shanghai, and mostly in the energy and raw-materials sector). China did send out people and goods in past centuries, but it didn't plug into the global economy that then existed.
That remained the case after the revolution in 1949 and throughout the early years of the People's Republic. Only in the 1980s, after the reform process inaugurated by Deng Xiaoping got underway and the Chinese economy opened up, did China start to invest in mining and raw materials (albeit in tiny amounts).
The new model
Today, things are moving at speed. China is the largest holder of foreign-currency reserves on the planet (it overtook Japan in early 2006); 70% of its $1.2 trillion is in US dollars, $400 billion of it committed to US treasury bonds. The rest lies dormant, attracting low rates of interest and subject to currency fluctuations. In 2007, China has set up an investment fund, with an initial $200 billion that it seeks to spend around the world. So far, it has committed $60 billion abroad, most of it in Latin America and Asia, with increasing amounts in Africa. But gradually, Chinese companies are starting to have an impact, through mergers and acquisitions, in Europe and the United States too. Chinese investment might still constitute less than 1% of the global stock, but that can only go one way - up!
Chinese overseas direct investment (ODI), however, faces the same problem as foreign direct investment into China: the fact that it is a highly politicised subject. FDI in China may have helped create a "non-state" sector, but - as many commentators have pointed out - the line where the state ends and the non-state begins in China can never quite be defined. Foreign investments in China have enjoyed high political status, but the very fact of dealing with the government and the Chinese Communist Party in China's uniquely politicised environment can complicate or undermine a "purely" business relationship.
This applies to Chinese ODI also. The regulations may have changed to allow Chinese enterprises to search opportunities abroad without government sanction, but it remains the case that any investment of significance (and at the moment, most Chinese investments are significant) will need government support. Moreover, many of the corporations making the biggest impact overseas - like the China Development Bank, or the Chinese energy companies that are currently making waves in Africa and the middle east - have direct connections to the government.
A number of cases illustrate this political problem. The China National Offshore Oil Company (CNOOC) effort to buy the United States energy giant Unocal in 2005 was blocked because the US was unwilling to accept a bid with what looked like a large amount of Chinese government money in a key strategic industry. The purchase by the Chinese TV manufacturer of Thomsons in France has proved disastrous, at least in the European market where the management styles of the two companies seemed to come from different planets. Chinese "investment" in MG Rover in Britain and ThyssenKrupp in Germany involved - in public perception at least - a wholesale transfer of assets back to China with little contribution to the local economy to balance it.
The Chinese have appeared to be transmitting the message that the shift towards ODI is a strategy to compensate for the failure of FDI to provide them with the technical expertise they craved. This, and the fact that the one-party, non-democratic Chinese state lies behind it, has not been exactly reassuring to China's prospective commercial partners overseas.
The great learning
But this is a constantly changing as well as complicated story. Other investments, like Lenova into IBM's PC division in the US, and Huawei's into Europe, seem to be both working and adding value. The precedent for the Barclays venture - the stake taken by China in the US equity fund Blackstone - was regraded by informed analysts (notwithstanding public criticism in China itself) as strategic and smart. Friedrich Wu, an expert on Chinese ODI based in Singapore, argues that Chinese money invested in low-performing factories in Europe and the US can work to the advantage of both sides. Most significant, Chinese enterprises which go abroad tend to absorb some tough, hard lessons about the important of corporate governance and company responsibility, which are fed back to China itself - thus assisting China in its great, long-term strategy of becoming a globally-oriented economy.
The Chinese are learning quickly. In many ways, they have to. The World Bank has made clear that China's economic development since the mid-1980s has been faster, and vaster, than in any previous case - including of Japan after 1945. China's development in ODI is set to follow the same pattern. Now it has the responsibility of explaining to the outside world why its enterprises are not a threat - and why people outside China should be sanguine about the role of the Chinese state in them. That will need imagination as well as hard work. But there is no turning back: the Chinese buy-up is underway, and the world needs to be prepared.