China Economy

Working with China is a far more productive strategy than exclusion

Tom Velk and Olivia Gong say the West gains nothing from bashing China. Rather, it should welcome its investment in commodity-producing assets in the form of transparent partnerships

PUBLISHED : Saturday, 27 October, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:00pm

It is hard to tell which society, Asian or Western, is imprisoned by the more retrograde ideas. Equally so, pleasant surprise is the result of hearing that new and positive attitudes take root in what was previously infertile political soil.

US President Barack Obama is asking the World Trade Organisation to censure China because it supplied US$1 billion in subsidies to its vehicles parts exporters. It's as if Obama wants the world to forget that only a short time ago he supplied General Motors with US$50 billion or more in taxpayer-financed subsidies. US presidential candidate Mitt Romney says China is a "cheater" that manipulates its currency's value so as to artificially stimulate export sales. Yet his own blind trust is invested in China National Offshore Oil Corporation.

Such irrational attacks on free trade by both parties, including the upside-down argument that consumers in importing nations should be denied bargains if they are "too cheap", reverse cause and effect.

The quantity of Chinese money, and hence its value, is determined by China's inflow of international money. When a Chinese exporter earns foreign currency (for example, dollars), it sells the foreign money to the Chinese government via the domestic banking system, and gets renminbi in exchange - thereby increasing China's domestic money supply. If Chinese internal growth is inadequate to absorb the excess money, inflation results.

A lower value for the Chinese currency means it will be cheaper for the West to make additional overseas investment. It also means the West can have cheaper, good-quality goods.

Hammering China produces no benefit. There is a strong likelihood that when Western demagogues demand an increase in the value of Chinese money, they are really insisting that China should depress its own growth by artificially choking its exports. China's won't do it, nor should it.

The logical counter-argument for China is to tell the West: "Make your own industries more efficient, and you would not need to import so much from us."

To pursue mutual benefits, China has taken to instructing the West (Canada is the current "student") on the true meaning of free trade: open markets must be open to investment capital.

The result is a new Chinese trade strategy: wider and deeper free trade. On the import side, China wishes to buy the producing asset itself, not just the product. The idea is to buy the entire forest rather than a load of lumber - thereby avoiding the volatility of current prices. It is the right plan if the need for the commodity is long-run, and when the buyer has plenty of cash.

Long-run deals like this are easier in a partnership setting. Currently, the West is unwisely hostile to the idea. Here is where a Canadian example is instructive.

China's ambassador to Canada, Zhang Junsai, said recently: "Business is business. It should not be politicised … If we politicise all this, then we can't do business." He was complaining that Canada's government was going wobbly on a deal to allow CNOOC to buy oil and gas producer Nexen.

Fears of Chinese political influence and that state-owned enterprises would not follow market rules are not well grounded. Canadian telecommunication giants recently sold communication and IT network infrastructure to China. China did not claim that its electronic "nervous system" was at risk, and the investment was allowed.

Free trade for capital means that China may use its economic might and its accumulated stash of dollars to buy equity in commodities and other goods. It may then better build up its own domestic economy, and prevent unrest that could disrupt the entire world. The West should not get in the way, since China's purchase of Western commodity assets, and resulting exports of the flow of product off those assets, will stimulate Western economies.

The correct Western response is a form of partnership. For example, elements in the US Congress fear that proposed investment by telecommunications equipment firms Huawei and ZTE poses a security risk. It would be better if, instead of China bashing, American politicians urge American technology firms to form partnerships with their Chinese cousins, keeping open mutual books, thus giving the deal more transparency.

Moreover, if Chinese capital is allowed into the West, and rule of law and mutual transparency is allowed, China will be expected to open its own economy to outside investors, who will come to town with healthy legal traditions, hostility to corruption, and free-market ideas. The process will advance China's evolution towards social and political accommodation with the rest of the world - a development that will benefit everyone.

The fact is the West has to live with China. It is a much better option for the West to co-operate with a politically evolving country than to fight it.

Tom Velk is a professor of economics and director of the North American Studies programme at McGill University. Olivia Gong is a finance student and research assistant at McGill