The world is not enough – or is it?

June 2013 | EXPERT BRIEFING | BANKING & FINANCE

financierworldwide.com

During recent meetings in China, it became apparent that a host of issues was bubbling up for clients and colleagues working on cross-border transactions between China, the United States, Europe and more significantly of late, Latin America and Africa. There is a convergence of myriad concerns among business people on seemingly disparate issues.

We read and hear about many issues emerging in China, including labour tensions, the housing bubble, alleged currency manipulations, corruption, and uncertainty brought about by the recent change in leadership with the ascendency of President Xi Jinping as the President of China.

We all know too well the financial markets become particularly skittish in times of uncertainty. The real question is, are things so uncertain in China so as to chill investment or otherwise cause investors and investment to be highly cautious in its attitude toward China?

Presently, everybody is watching every move and every step of President Xi as he makes announcements and undertakes initiatives on behalf of China worldwide.

March 2013 was particularly extraordinary as all newspapers and networks blasted the airwaves with coverage of President Xi’s African initiative, highlighted by his visit to South Africa in a summit meeting with President Jacob Zuma of South Africa. The stated reason for this visit to South Africa was the BRICs Summit in Durbin.

Moreover, with the concurrence of the BRICs Summit, it was clear that full use of the trip would include utilising Chinese diplomats to publicise additional initiatives among the BRICs. The selection of South Africa for the BRICs Summit site was no accident, as South Africa accounts for a third of Bejing’s trade with Africa. President Xi was accompanied by a large trade delegation which had prearranged goals of signing trading agreements totalling billions of dollars.

The agenda was realised and signing ceremonies were arranged in a variety of locales on matters ranging from trade and investments to energy and education.

Most significantly, President Xi vowed to encourage investment and financial cooperation in South Africa in particular, and Africa as a continent. President Xi announced that 2014 would be the year of South Africa in China and 2015 would be the year of China in South Africa.

Each pushed the international community to “do more” in Africa. All exchanges between the leaders were cordial, smiling, ingratiating and not meant solely for implementing trade agreements.

President Xi said in his presentation at the BRICs Leaders’ Meeting “I believe that with concerted efforts of all participants, the meeting will be a successful one and take the solidarity and cooperation of developing countries to a new high.”

The centrepiece for stability and cooperation is the establishment of a BRICs bank, announced at the previous year’s summit. The concept is to have the BRICs bank pool funds for targeted infrastructure projects in key sectors while supporting and driving increased commerce between the BRICs and other emerging economies, in particular.

As we all know, emerging economies are global in scope. While a lot of attention has been placed on the economic implications of a BRICs bank, these initiatives should be studied and analysed more.

The initiatives are meant to place China at the centre of influence for all emerging economies, including the mammoth BRICs economies. There are plenty of statistics that envision the BRICs economies surpassing the US and other leading G7 countries in GDP. It has even been hinted that the BRICs bank will rival existing trade currencies. China is quietly and persistently projecting political clout through these economic initiatives.

This is coming at a time when China faces regional challenges, as we have seen in recent weeks. China has repeatedly taken the view that it should have the lead in negotiations involving North Korea. China constantly asserts its position as arbiter, mediator or other type of diplomatic peacemaker. The United States accepts this primarily due to geographical considerations. From the US perspective, it has always preferred to let China be the broker when dealing with North Korea. China’s interest in a stable North Korea has been analysed exhaustively, even though some commentators have concluded that China appears to be schizophrenic in its dealings with North Korea.

The other regional challenge comes from disputes over the Diaoyu Islands, from the Chinese perspective, or the Senkaku Islands from the Japanese perspective.

There are a number of regional players that claim interest in the islands but they are essentially irrelevant. Now the islands are a flashpoint in Chinese/Japanese relations. Much has been commented on, claiming oil and other earth minerals that may be assets of the islands. China has ascended on the world market and in politics, and wishes to exert its influence in the Asian sphere by de-emphasising its need for Japanese trade. In the recent rift over the islands, the sales of Japanese cars plummeted in China. Thus, it is clear the Chinese populace has accepted the view that the islands can be challenged from a trade standpoint. This has stronger implications for China politically because it represents a delinkage of the relationship which has been linked by trade and investment. Thus, the Senkaku/Diaoyu dispute should be analysed in a broader context.

As China expands economically worldwide, it enhances its political strength in its territorial disputes. Therefore, the question is: how will this shape the future? The short answer is that China wants to emerge worldwide to integrate its economy, and do so in way that yields more political strength.

One way to achieve this is to carefully deregulate its notoriously tight money control. As China’s monetary surplus has grown, it has been more comfortable loosening currency restrictions. Although the US dollar still accounts for over half of global currency reserves, the Yuan’s rise cannot be ignored.

The challenge internally for the Chinese leadership is that financial liberalisation will take away some of the preferred terms of riding out the financial crises.

So, pulling together these threads, the first optimistic question is to ask: what do these developments do in terms of creating new business opportunities? Second, what do these converging concepts do to undermine or otherwise make investors more cautious? Third, what would be the impact of a BRICs economy or more fluid and tradable Yuan?

These questions can be answered collectively because they are linked. As to business opportunities, China continues to be a voracious consumer of IT, IP, and related technologies that modernise its society. Some of these are in defence; some are in industrialising and modernising factories to create greater efficiencies. Many are in the biotech field.

So, business opportunities in these industries are a good opportunity to explore. The existing climate is still very tenuous and requires substantial protection against industrial espionage and vigilance in cyber security.

These are areas where ‘catching up’ in attitudes is necessary, as cultural and western values are not entirely compatible. Thus, when you are looking at business opportunities which involve technology transfers, all appropriate safeguards should be put in place.

On currency issues, successes cannot simply insist on the dollar or the euro as part of the payment scheme. More and more companies accept Yuan based transactions. Businesses need to address this trend. Special attention should be given to safeguard against currency manipulations and fluctuations. These risks exist in any transaction where pricing is designated in a given currency.

An inevitable question is how will China respond to international conflict situations such as North Korea and Japan?

We do know that China has a history of trying to steer clear of international disputes and controversies which it views as destabilising. This does not mean China does not exert influence either directly or indirectly. It means that China recognises war creates instability and is contrary to Chinese nature. The Chinese perspective is that they have borne the brunt of aggression and turn to World War II as the prime example. This perspective is a method of gaining clout in order to defend a territorial integrity while flexing muscle for national pride. China has no interest in direct confrontation with Japan. Like a chess game, there are too many unpredictable potentialities. The Diaoyu islands are a territorial issue and not an expansionist issue. China expects the United States to help pressure Japan from that standpoint. Thus the public administration pronouncements of US support for the integrity of Japan under the World War II treaty was embarrassing for China. It was better made privately.

In sum, the next decade will still prove to be one where China expands economically, but not as rapidly as we have seen in the past. Also, China will continue to emerge as a society that seeks its own political role through economic initiatives. China being a threat to the US’s role, it is more that China wants to be seen as a main political force and a partner with the US in global relations. Americans continue to have some advantages in negotiations – especially where the competitors were considered to be previous ‘imperialist aggressors’ and territory grabbers in the past.

Now, more than ever, political influence will grow with economics in Chinese policy making.

Malcolm S. McNeil is a partner at Fox Rothschild LLP. He can be contacted on +1 (310) 598 4173 or by email: mmcneil@foxrothschild.com.

Malcolm S. McNeil

Fox Rothschild LLP