Since 1986, the Chinese government started implementing an open-door policy aimed at liberalization of the economy and acceleration of the economic growth through the encouragement of foreign direct investments (FDI) and technologies. The open-door policy promoted the transfer of Western know-how and international capital to People’s Republic of China (PRC). The combination of cheap labour and an active attraction of the FDI into the manufacturing sector led to the robust growth of PRC economy, which subsequently resulted in China’s gaining status of the ‘World Factory’. For the period 1983-2003 annual FDI growth accounted for 21%, therefore, China has become largest FDI recipient country in the world. In 2002, the share of foreign capital in total fixed assets of manufacturing industries was 25.3%.
As of 2017, PRC is the leading world economy, according to the latest rankings from Bank of America.
According to the World Investment Report Yearbook 2016 published by the United Nations Conference on Trade and Development, China was ranked the world’s third largest investor in the developing countries after the United States and Japan (investing from 123 to 128 billion US dollars).
According to the American Enterprise Institute report, the total outward FDI of PRC for the period 2005-2016 amounted to nearly 1.5 trillion US dollars. The FDI destinations were as follows: USA (153.8 billion US dollars), Sub-Saharan Africa (252.6 billion US dollars), Europe (227.8 billion US dollars), West Asia (224.8 billion US dollars), East Asia (192.8 billion US dollars), Middle East and North Africa (of 142.8 billion US dollars), South America (136.5 billion US dollars), Australia (92.8 billion US dollars), North America (61.9 billion US dollars).
Figure 1. Total volume of China’s overseas deals 2007-2017, billion US dollars
As states “The 13th five-year plan for economic and social development of the People’s Republic of China (2016-2020)”, the following industries present the main strategic directions of China’s development: fields of aerospace and oceanography, information networks, life sciences, nuclear technology and alternative sources of energy. In addition, development of new types of air and underwater vehicles, next generation operating platforms, integrated aerospace observation systems, quantum communications and safe and ubiquitous Internet of Things, accelerated development of synthetic biology and regenerative medical techniques as well as next generation nuclear power equipment, small nuclear power systems, civil nuclear analytical and imaging techniques.
Besides investing into traditional branches like raw materials, manufacturing and electronics, China’s investments activity also covers the financial sector. In 2009, Chinese businessmen already started “mining” bitcoins as a possible alternative to a new global currency, according to some sources. However, as of June 2017, in order to maintain financial stability and prevent possible money laundering, the central bank has still not accepted bitcoin. The moratorium on a digital currency withdrawal was extended. According to Bloomberg, currently China’s central bank is going digital. Most likely, that central bank is performing the assessment of its digital readiness for bitcoin payment system or is actively working on issuing of its own cryptocurrency. Perhaps, one soon announces news about that to the world community.
According to estimates, available number of bitcoins will be sufficient for about 120-150 years. However, the growing international interest, as well as the government support and active speculative operations with bitcoin, lead to a much faster depletion of free resources – in about 40-50 years. A steady growth in cryptocurrency’s exchange rate fuels the interest to it.
China has a centuries-old wise policy in many aspects. In particular, PRC constantly seeks to maintain the internal capital turnover and consumer demand. For instance, Chinese internet giant Tencent in July 2017 launched its own on-line payment system WeChat Pay to Europe, a Germany-based payments service provider. WeChat is a huge Chinese social media with over 938 million monthly active users. It is the most popular mobile application in China and other Asian countries with over 600 million active mobile payment users. First and foremost, Tencent is aimed at Chinese tourists coming to Europe that are accustomed to pay for almost any purchases and services via mobile applications, including WeChat Pay (Interfax).
Despite the fact that China is the largest investor to the US, bilateral economic ties generate tensions. US President, Donald Trump, who has long expressed the need to improve USA’s position as a superpower and strengthen its own industries, is seeking ways to repatriate capital invested abroad. The EU also supported this idea. The decline in China’s outward FDI for the past few years confirms negative attitude of some countries towards investment policy of China (Figure 2). The EU and US apply various economic and trade sanctions against China, starting with the tax increase and ending with restrictions on transactions and imported commodities. As a result of these measures, China could end 4-6% of GDP short, according to some analysts’ estimates.
Figure 2. China’s outward investment activity 2000-2016, billion US dollars
Source: The World Bank
Many countries’ (incl. the US) attempts to shift US dollar-nominated debt burden to renminbi or gold reserves may not lead to the expected outcome. At the same time, China that has the largest dollar reserves (3.05 trillion US dollars) is not interested in strengthening the yuan against other currencies. In a worst-case scenario, if China spends its huge gold reserves, it may trigger a global financial and credit collapse.
Even though the US President had admitted, that unsatisfactory aspects take place in bilateral trade relationships between the US and China, Heads of two countries agreed to restore trade relationships on G20-summit held recently on July 2017 in Hamburg.
It is noteworthy, that recession in the American economy is a result of increasing internal social gaps and ill-conceived social and educational policies, rather than the imbalance in the US-China economic relationship, in which China is the largest foreign investor to the US. As many superpowers known to the history of the humanity, the US have reached the peak of its power and global influence, and, in case the US government does not come to the optimal solution on mitigating the internal social pressure, there may be a long-term negative impact on the country’s economy.
JSC Rating Agency of the Regional Financial
Center of Almaty (Rating Agency of the RFCA)