China and Green Finance

Greening China’s Financial System: Synthesis Report
Zhang Chenghui, Simon Zadek, Chen Ning, Mark Halle

International Institute for Sustainable Development (IISD)
March 16, 2005

Making China more environmentally friendly is more than simply a matter of installing scrubbers on factories and catalytic converters on cars. There are systemic issues that run deep, and that must be addressed in order for real, long-term change to take place.

In Greening China’s Financial System, global sustainability guru Simon Zadek teams with Zhang Chenghui, Chen Ning, and Mark Halle to examine how China’s financial system can be revamped in order to enable and support the nation’s shift to a more sustainable economy. Beyond simply identifying the problem, though, the report also offers specific recommendations for change based on current practice in China and best practices from abroad.

For those looking for a realistic, system-wide approach to greening a polluted China, this is an essential read.

Mincing Words on Chinese FDI

China Invests (Somewhat) More in the World
Derek M. Scissors
American Enterprise Institute 
January 2014

In a deep-dive based on the data produced by the American Enterprise Institute and Heritage Foundation in their China Global Investment Tracker, Derek Scissors shows us how large China’s foreign direct investment effort has become and how fast it is growing. By the end of 2015, if all things go as expected, China will surpass $100 billion per year in funds invested overseas.

The numbers are large, but when measured against other capital flows in the past, not yet at a level which should concern average Americans. Indeed, there are significant benefits from such investments. Nonetheless, Scissors suggests, we should not assume all Chinese FDI is a good thing. He joins a growing chorus of voids suggesting that national security, the growing role of China’s state-owned enterprises, and genuine reciprocity should guide policymaker approaches to Chinese FDI as much as economic benefit.

Scissors does a superb job at laying out the key issues, and I especially liked his nuanced approach to SOEs. Disappointingly, he stops short of suggesting a framework that would allow us to distinguish Chinese investments that should be welcomed, and those that should be rejected. Reading between the lines (and in keeping with AEI’s economic approach), Scissors is more concerned about debating the laissez-faire end of the business community who would prefer that government simply got out of the business of regulating Chinese foreign investment.

A worthy roundup of the issue.

Where is Chinese Outbound Investment Going?

Investment percent gdp

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Executives leading China’s state-owned and private companies are, for the most part, new to the foreign direct investment game, and are thus likely to be conservative in their initial investments. One would assume, therefore, that those executives are likely to invest in those countries where the Chinese government enjoys strong relationships, carries some influence, and perhaps the government is prepared to provide incentives to make that investment.

Yet at the same time, Chinese firms are making high profile investments in Europe, Australia, Canada, and the United States where the specter of political opposition looms over every deal. Are companies stepping abroad looking for an umbrella from Beijing, or are they simply following business?

This is the question that Quan Li of Texas A&M University and Guoyong Liang from UNCTAD set out to answer in “Political Relations and Chinese Outbound Direct Investment.” Reviewing 346 instances of outbound Chinese FDI along with statistics from other sources, the scholars paint a compelling picture about where Chinese money is likely to flow in global mergers and acquisitions.

The patterns are not surprising, but what was surprising to me was the number: that nearly 350 Chinese companies are already players in outbound direct investment suggests that the comfort with those investments is growing. As that happens, expect cash-rich firms to get bolder with their acquisitions, looking more into North America as well as Africa, Eastern Europe, and Latin America.

Fixing Chinese Investment in the U.S.

 

united states currency eye- IMG_7364_web

Image by kevindean via Flickr

China’s Expanding Role in Global Mergers and Acquisitions Markets by Charls Wolf, Jr,, Brian G. Chow, Gregory S. Jones, and Scott Harold: Santa Monica, RAND, 2011.

Over the last four months I’ve been involved in a research project that delves into the nature of one of China’s most important industries. What set off this somewhat Quixotic effort was the question of whether Chinese investment abroad, and in particular in the United States, was a good thing or a bad thing.

As I pursue the question on an industry-specific level, the authors of China’s Expanding Role in Global Mergers and Acquisitions Markets take a different approach to the question. Rather than evaluate Chinese outward foreign-direct investment through based on corporate merit, they propose a framework for evaluating the desirability and risk implicit in Chinese investment.

Whether you agree with their conclusions or not, their book comes at a propitious time. The Committee on Foreign Investment in the United States (CFIUS), for all of its strengths, has some glaring weaknesses, not least that its processes are unnecessarily opaque. What Wolf, Chow et. al. offer the CFIUS and Congress is the first draft of a more transparent set of criterion by which to evaluate investment.

As close as RAND is to the US government, its conclusions are not a cipher for US policy. This book, therefore, should be seen as the starting point of a larger debate about where and how Chinese investment in the US should be welcomed, and where it should be restricted. As such, the book is a welcome and much-needed addition to the wider debate.

The MoC, the PBOC, and the RMB

China’s Exchange Rate Politics | Center for Strategic and International Studies.

In a study subtitled “Decoding the Cleavage between the Chinese Ministry of Commerce and the People’s Bank of China,” Charles Freeman and Wen Jin of the CSIS explain how those two ministries are the lead protagonists in the battle over both currency revaluation and the restructuring of the economy.

The scholars do not reach any specific conclusions, but they do lay out the respective views of the two agencies, their roles in the debate, and in so doing attempt to determine how the debate will translate into concrete policy.

If you read the headlines in China, the PBOC seems to be winning: the RMB is on a gradual devaluation path, and factory owners in eastern China (especially Wenzhou) are feeling the pain. What makes this study particularly interesting, though, is the hints it offers as to how currency policy might change in the face of major domestic dislocations.

What I like best about this short but sweet piece is that it properly frames the debate over the valuation of the RMB as a domestic Chinese debate, not a global one. The government is not a monolith, and Americans who seek the devaluation of the RMB have allies in China.

Will China’s Growth Provoke a Global Credit Crunch?

ceramic piggy bank

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“How The Growth of Emerging Markets Will Strain Global Finance”
in McKinsey Quarterly
December 2010

An interesting look at how capital demands in emerging markets have the potential to drive up interest rates and make it more difficult for some businesses elsewhere in the world to borrow capital to drive growth. The authors, two senior researchers at the McKinsey Global Institute and a McKinsey consultant in New York, suggest that a falling global savings rate could choke economies in the face of rising demand.

As a remedy, they call for governments around the world to re-balance their economies away from consumption and toward savings. If the authors have anything working against them, it is timing. At a point where governments are trying to stoke consumption as a way out of the global recession, speaking on behalf of austerity falls on deaf ears (Greece, anyone?)

Economists like Arthur Kroeber would have more fun dismantling the argument, but as a layman I can see two factors that inveigh against the authors, in China at any rate. First, much investment in China is badly spent, with some sectors taking in more capital than they need and others coming up short. Part of the answer then is not increasing savings, but finding incentives to deploy capital more efficiently.

Second, while Chinese savings rates are likely to decline, th question is whether those rates will decline faster than incomes are growing. China’s GDP is still relatively low. If you double China’s GDP and the savings rate drops from 50% to 30%, you still wind up with a 20% net increase in available capital. Again, the challenge is how to drive a unit of economic growth with greater efficiency. If you can drive efficiency in emerging economies, the capital will be there.

These thoughts aside, the article is worth reading for its treatment of global capital as a single, shrinking pool that is going to be increasingly stretched to serve the needs of the BRIC economies.

How to Fix a Broken Procurement System

If there is a better example of a procurement system run amok than that of the United States military, I would love to see it. The U.S. armed forces seem incapable of acquiring even the simplest items without turning the process into a money-waster, overpaying, or not buying the right thing in the first place.

But the Pentagon has no monopoly on complex and seriously messed-up procurement systems. Businesses around the world have these issues, and so do government organizations. That is why this book, Toward Affordable Systems II, is of interest well beyond the narrow confines of the military. In it, a group of analysts led by Brian Chow has developed a model for managing long-range procurement in the face of an uncertain environment.

Granted, this is not light summer beach pleasure reading, but if you deal with the issues involved in buying capital goods for large government organizations or complex, global businesses, this represents your state of the art.

How Good is the US Foreign Investment Review Process

The United States has a long-established system for reviewing foreign investments in the United States, a process that is understandably highly political given both self-interested protectionism and legitimate national defense concerns that grapple with the interests of entrepreneurs and shareholders seeking greater opportunity or a simple cash-out.

China’s growing hunger for offshore investments has already begun testing that process, in particular with Huawei‘s recent attempt to snap up the leftover assets of a bankrupt technology startup in California. Huawei’s application – filed after the fact – was rejected, and it seems likely that more Chinese companies will face challenges as they attempt to use acquisitions as a pathway to globalization.

At some point China is likely to want to cast a global spotlight on the U.S. foreign investment review process (and would have done so sooner but for the attention it would have brought to its own), and when it does, the Committee on Foreign Investment in the United States (CFIUS) will find itself under global scrutiny.

Following the 2006 controversy around Dubai Ports World and its attempt to acquire the U.S. port operations of P&O Steam Navigation Company, Alan Larson and David Marchick at the Council on Foreign Relations conducted a study on the U.S. foreign investment review process and the CFIUS in particular. The recommendations made in Foreign Investment and National Security: Getting the Balance Right suggest that the U.S. needs to ensure that the process remains sheltered from political and commercial interests, remaining a purely national security issue.

At its heart, though, the short book is a reasoned defense of what the authors clearly believe to be a fair process, if not quite a model for similar processes overseas. Their greatest concern is in the matter of transparency, and it is worth dwelling on that for a bit.

China is in the habit of rejecting foreign investments with greater frequency, an expression of an all-but-explicit national industrial policy that implicitly questions the value of foreign ownership of Chinese companies. That foreign firms continue to pursue acquisitions of healthy Chinese corporations in blithe ignorance of this policy implies either willful ignorance on the part of executives, legal counsel, and investment banks, or that it is time for China to be more transparent in the criteria it uses to evaluate foreign investments.

A fair case could be made that the CFIUS is less interested in transparency than it is in national security, and this is fair. But if the cross-border flow of investments and ownership are to continue between the world’s two largest economies and the ties that bind them to a common interest are not to be severed, the CFIUS must ensure that it offers the greatest transparency possible consistent with national security.

For this reason alone, Larson and Marchick’s work deserves detailed review.

An Economic Analysis of the Financial Records of al-Qa’ida in Iraq

In a short, somewhat technical, but incredibly fascinating book, a team from the RAND Corporation dissects the way al-Qa’ida gets and handles funds. This is the first detailed public look at how money flows through a modern terrorist organization. Whether any of this should have been declassified is up for debate, but the value to law enforcement agencies and military intelligence of this kind of information could be immense.

Global Imbalances and the Financial Crisis

This pdf book from Steven Dunaway at the CFR suggests that it is well past time to deal with the core problems that caused the crisis. Dunaway puts the onus in part on the G20 to ensure something like this does not happen again, but he is also realistic about the ability of trans-national bodies to attack the core issues. In the end, the matter lies in the hands of national governments.

Not a terribly comforting thought, particularly when one considers the institutionalize profligacy of countries like Greece. Nonetheless, Dunaway has done his homework, and his reasoning makes it mandatory reading.

The Gulf as a Global Financial Centre: Growing Opportunities and International Influence

Downtown Burj Dubai and Business Bay, seen fro...

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Two short years ago, we were saying that if you still wanted a job in finance, it was going to be either Shanghai, Mumbai, Dubai, or bye-bye. Is that still true? is the Gulf as a financial center as viable as its founders want it to be, or is it a Burj of Cards?

This pdf report from Chatham House was completed before Dubai ran into a little liquidity problem, and recovery will be slow as the Emirates rethink their path into the future. Nonetheless, the authors stray from boosterism and drive into the fundamentals underpinning the region’s future.

Those unfamiliar with the nature and size of the market for Islamic finance will find this a particularly enlightening read. For me, I’m betting Islamic finance becomes more common in Asia over time, even in the parts of Asia that have only small muslim populations.

Which, of course, begs one to ask the question: where do the People’s Bank of China, the Bank of Japan, and the Fed stand on the conduct of Islamic finance in their countries?