China Invests in Europe and North America

For years, China's interest was in importing capital and technology. Now that flow is reversing, as a matter of interest.

In this video, Jin Liqun, the head of China Investment Corp., China's sovereign wealth fund, discusses topics that my MBA students and I discussed last week, including:

Very Worried About the Euro - China invests a lot in the Euro in part because it is overinvested in the US dollar. But as the Euro devalues, and as the economy of Euroland (China's biggest export market) weakens, there is plenty to worry about.

China Favors a Eurobond Solution - This is becoming the conventional wisdom, i.e., a Euro breakup would be a calamity that German interests cannot tolerate. The alternative to a break up is more federalism, with Eurobonds the lever for fiscal unification of a sort. That's the deal that Germany is about to make with Spain, namely German capital to Spain for the recapitalization of Spain's banks, in exchange for German say-so over Spain's budget.

China is ready to participate in buying Eurobonds, in exchange for more favorable trade terms and technology transfers. This will likely take the form not only of Chinese sovereign investment, but commercial investment by Chinese state-owned-enterprises.

China's Slowdown is Intentional - China's export competitiveness is suffering as labor costs rise. But those rising wages are puting more purchasing power in the hands of migrant workers, thus shrinking the income gap in major cities and between coastal cities and inland cities. This is good for social harmony, he says.

That said, and as noted earlier here, this creates even more urgency for China to climb to value curve and move away from such reliance on the export model.

"The only way out is to move China upwards on the value chain," he says. My view is that China is going to rely on the export model for a long time, as climbing the value curve requires progress on fronts described here.

Exporting Chinese Capital - It's in the interests of China and its industry to globalize, which means (among other things) investing abroad in hard, operating assets, as well as financial assets, e.g., Eurobonds.

My MBA students and I discussed this at length, referring to the Japanese experience of relocating manufacturing to target markets, for various reasons not the least of which is managing currency exposures, and political exposures.

"The European companies have very good management...," Jin says. This is the corporate governance issue. China announced last week that it is moving to allow private capital to invest in state-owned-enterprises. This is a mega development, on par with the opening up of China 30 years ago, because it acknowledges the need for Chinese companies to become more globally competitive.

"...and the have good investment environments...," Jin continues. China needs to diversify into end markets as a matter of capital risk management.

The UK Might be a Winner in This - "...the UK is less affected by this [Euro crisis], but they are more open to [Chinese investment]..."