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.