Via The Economist, an interesting article on state capitalism’s aggressive global reach.  As the report notes:

IT IS FITTING that China’s national symbol should be an animal that spends 16 hours a day eating bamboo. China is an energy panda that is obsessed by the question of where its next mouthful of bamboo will come from. The Chinese elite sees the world in terms of brutal competition for limited resources. And it has no truck with Western ideas about relying on the market. (“Western countries can feel secure purchasing oil internationally because they created the system,” says one diplomat. “China did not.”) China is utterly convinced that it needs to use all the elements of national power—its companies and banks, its aid agencies and diplomats—to get its rightful share.

China’s obsession with going out in search of raw materials has been growing for almost two decades. In 1993 the country became a net importer of oil. In 2003 it interpreted America’s invasion of Iraq as a grab for oil. And in 2010 it became the world’s biggest consumer of energy. This obsession has dominated foreign policy and reinforced state capitalism. A country that had been turned inward for millennia has started popping up everywhere, and has found that it can change the rules of the game. An economy that had been focused on domestic growth has engaged in a flurry of international acquisitions.

China has been striking deals across the world, often in difficult places that are shunned by the West, in order to lock up supplies of oil and other raw materials. It has an estimated 10,000 workers in Sudan alone. It has provided Russia with a $25 billion export-backed loan to help Rosneft and Transneft to supply it with 300,000 barrels per day of crude, for example, and signed a $1.7 billion deal with Iran to develop parts of the North Azadegan oilfields. China National Petroleum Corporation is one of only two companies to win contracts to develop Iraq’s oilfields. And in December Pakistan named the Industrial and Commercial Bank of China to lead a consortium that will finance a $1.2 billion natural-gas pipeline from Iran to Pakistan.

State capitalism has been at the heart of all this activity. State companies have funded four-fifths of the foreign direct investment. State banks have woven a web of soft loans. And government bodies such as Eximbank, China’s foreign-aid bank, have made no bones about their enthusiasm for tying foreign aid to commercial advantage. One of China’s favourite tools is oil for infrastructure. China offers to provide poor countries with schools, hospitals and the like (usually financed by soft loans and built by China’s infrastructure giants) in return for a guaranteed supply of oil or some other raw material. Eximbank supplied a $2 billion low-interest loan to help China’s oil companies build infrastructure in Angola.

The axis of statism

Trotsky always insisted on the impossibility of “socialism in one country”. The same logic applies to state capitalism. State-capitalist powers inevitably look outward as well as inward. China is the world’s biggest exporter as well as its biggest energy consumer. Russia and the Gulf states are energy superpowers. But they are also conscious that they are newcomers in a global market that was created by America and Europe. So they frequently stick together, striking deals among themselves and forging ever closer ideological links.

China and Russia have found it easier to get on with each other as state capitalists than they ever did as communists. Over the past decade they have increased bilateral trade, concluded a range of economic and trade agreements and forged a new political institution in Central Asia, the Shangai Co-operation Organisation. Energy giants such as Gazprom and PetroChina are intertwined in various convoluted ways.

China has also strengthened its links with the Middle East. The old Silk Road is being rebuilt. In 2009 the Middle Kingdom became the biggest single importer of oil from the region and the biggest single exporter of manufactured goods there. The two biggest investors in China’s Agricultural Bank are the Qatar Investment Authority ($2.8 billion) and the Kuwait Investment Authority ($800m). And China is becoming a popular destination for Middle Eastern businesspeople and tourists: every year the region sends 200,000 visitors to a single Chinese city, Yiwu in central Zhejiang Province, to go shopping. The city does a roaring trade in hijabs, prayer rugs and electronic Korans.

More people are also taking the road in the other direction. The UAE is home to 200,000 Chinese, and Dubai boasts one of the world’s biggest Chinese malls, DragonMart, built in the shape of a dragon, with 4,000 Chinese businesses.

After King Abdullah of Saudi Arabia ascended to the throne in 2005 his first visit abroad was not to America, his country’s longstanding ally, but to China. President Hu, for his part, is a frequent traveller to the Middle East.

This “axis of state capitalism” is gaining an ideological edge as the emerging world goes from strength to strength, America pulls in its horns, Europe implodes and the G20 takes over from the G7. Politicians across the region feel sure they have a formula that can combine economic dynamism with order, taking in the best of capitalism (those sleek modern corporations and clever wealth funds) without unleashing the havoc that devastated Russia in the 1990s and threatened to consume America in 2007-08. Proponents of this ideology revere Lee Kuan Yew as a founding father, see America as a wounded giant and dismiss Europe as self-indulgent and lazy. But they also admire Silicon Valley and Google, MIT and General Electric, Harvard Business School and McKinsey.

The power of the axis is easily exaggerated. The Russians resent the fact that their former junior partner in the communist enterprise, China, has become so successful. They are also suspicious about China’s activities in Central Asia. China, which has more than 20m Muslims, worries that the Gulf states may export radical Islam as well as oil. Some Africans fret about China’s enthusiasm for building roads and railways across Africa, just as the Europeans once did. But Fu Chengyu, the chairman of China National Offshore Oil Corporation, points out that the Chinese are rooting around in Sudan and Angola only because the Western companies have nabbed the best oilfields. They are adding to the global supply of oil while putting their own people at risk (dozens of Chinese oil workers have been killed or kidnapped).

Xenophobia plays a part, but state capitalism is also finding it hard to evangelise. Indeed, many state capitalists are in denial about it. Mr Putin pooh-poohs the whole idea. “If we concentrate on certain resources, we do it only to support the industry until the companies stand firmly,” he insists. The Chinese argue that their free-trading credentials are as good as those of any other WTO members.

China’s ability to make huge strategic investments, even to the point of creating entire new industries, puts private companies at a severe disadvantage

State capitalism may not turn into a popular movement, in the way that communism and socialism did, but it nevertheless confronts Western policymakers with some difficult questions. How can you ensure that business deals involving state-backed companies are fair? In 2005 CNOOC’s unsolicited bid for Unocal, one of America’s largest oil companies, briefly shifted the American government’s attention from the Middle East to China. Politicians thought it was a thinly disguised takeover of an American company by the Chinese government, part of a wider plot to control the world’s oil supplies. The House of Representatives voted 398 to 15 for a non-binding resolution against the purchase. Six months later politicians were up in arms again when DP World, a company owned by Dubai’s government that has ports in almost 30 countries, tried to add six American ones to its portfolio. DP World backed down.

Western worries

The tensions that were on display in those dramatic six months continue to operate. Western businesspeople are increasingly concerned about Chinese trade policies. Two years ago the heads of 19 of America’s biggest industry associations wrote to their government to complain about China’s “systematic efforts” to build its domestic companies “at the expense of US firms and US intellectual property”. In July 2010 Peter Löscher, the chief executive of Siemens, and Jürgen Hambrecht, then chairman of BASF, personally complained to Wen Jiabao, the Chinese prime minister, about the way that Western companies were being forced to hand over intellectual capital in order to gain access to China’s markets. The American Chamber of Commerce in China in its 2010 survey reported that a third of its member companies in China felt that they were being held back by discriminatory policies.

Western policymakers are worried, too. Charlene Barshefsky, America’s trade negotiator at the time when China’s entry into the WTO was being considered, fears that the rise of state capitalism may be undermining the post-war trading system. China’s ability to make huge strategic investments, even to the point of creating entire new industries, puts private companies at a severe disadvantage.

Peter Mandelson, a former EU trade commissioner, thinks that “the huge and very real benefits of globalisation are being undermined by the distorting interventions of state capitalism from one direction and by the anxious politics of an increasingly defensive and fearful developed world from the other.” The European Union has hinted that it may block future takeovers of European companies by Chinese state-owned enterprises on the ground that all SOEs are, in fact, part of a single economic entity. And Western policymakers routinely complain that China’s refusal to let its currency appreciate to its “natural” level is in effect subsidising China’s domestic industry, penalising American and European companies, destroying American and European jobs and fuelling dangerous global imbalances.

It is easy to overstate the case against state capitalism. State capitalists harm mainly their own consumers when they subsidise exports, and they depress their own country’s overall competitiveness when they pour money into state champions at the expense of the rest of the economy. But they have been playing increasingly rough in recent years: witness China’s willingness to imprison three Rio Tinto executives for supposedly taking bribes, and Russia’s treatment of BP. Learning to live with state capitalism will be a serious challenge for the rest of the world.