The Gift of Capital: The Rise of Eastern Investment or the Fall of an Economic Order
BY ARI MOSES
While Western banking institutions have traditionally dominated global commerce, Middle and Far Eastern nations are catching up as they develop stable economies with international presence. The rapid economic growth of BRIC (Brazil, Russia, India, China) nations, especially China, has recently enabled emerging powers to support struggling nations throughout the Eurozone and in developing nations in Africa and Asia with necessary capital.
The rise of this type of international capital investment has coincided with the increasing power and shifting strategy of sovereign wealth funds—investment funds owned, at least in majority, by a state. China is a key player in this arena–its sovereign wealth funds account for approximately one-quarter of global sovereign investment assets.
Over the past 15 years, many Eastern nations have established sovereign wealth funds, which act as investing bodies for the government, in order to protect their own commodity interests. Petrostates
dominated this trend until the turn of the 21st century, when Chinese state funds began pouring domestic capital surplus into foreign markets, especially commodity and currency sectors. China Investment Corporation (CIC) and China’s State Administration of Foreign Exchange (SAFE) have
invested over a trillion dollars into these markets and have outperformed investment banks, their western counterparts.
Effect of the 2008 Economic Crisis
After the 2008 Global Economic Crisis, debt-stricken Eurozone nations were desperate for an influx in positive cash flow. However, because banks or financial institutions were unwilling to grant risky loans to unstable regions, these nations had to look beyond traditional financial institutions for support. China’s SAFE and the CIC invested in these financially depressed nations by purchasing bonds and debt and by procuring equity from companies in need of cash.
By the estimates of some industry professionals, these firms purchased as much European sovereign debt as did the European Central Bank. By investing in debt, company stocks, and equity while they were cheap in a depressed Eurozone, Chinese funds yielded tremendous returns. Since 2007, the CIC has nearly tripled its principal of $200 billion into over $550 billion. Currently, China holds more foreign exchange reserves through its sovereign wealth funds than the next five nations combined, including the combined economies of the Eurozone.
Commodity Company Purchasing
In addition to Eurozone debt, state-owned enterprises have invested heavily in commodity companies. Gazprom, a state-owned natural gas producer in Russia and one of the largest companies in the world,
has purchased gas and oil firms across Eastern Europe and Asia in order to increase its size and power as a firm on the global market and to raise its influence over commodity prices. Over the past 10 years, Chinese state-owned oil giants PetroChina and Sinopec have acquired other oil firms and reserves across Asia, with investments in the billions.
More recently, the CIC has bought a sufficient portion in Urakali, a Russian producer of potash (an agricultural fertilizer), to gain seats on the company’s board, and the CIC is thus able to sway the commodity’s price to benefit the Chinese economy. The CIC’s acquisition of Urakali signals the changing foreign investment strategy of state-owned enterprises: sovereign wealth funds are now buying foreign
commodities in order to provide their own companies and people with market insight and advantage.
Shifting Foreign Policy
Transactions of this nature represent an aggressive shift in Chinese economic policy. China and other nations with sovereign wealth funds invest beyond their borders in order to strengthen their nation’s infrastructure, appeal to foreign investors for their private sectors, and enhance their nation’s prestige through demonstration of financial power.
However, the sovereign wealth funds of emerging Eastern powers are not simply injecting the capital into investments in pursuit of domestic interests—they are disestablishing the structure of the global
economy. These funds bypass global financial hubs in London and New York and pursue ventures independently, generating new powerful financial centers around the world and shifting economic power towards the East. No longer a passive actor on the global stage, China’s recent investment patterns signal the nation’s readiness to advance from a regional to international power.