The Middling Kingdom

With China’s recent buying spree, it’s easy to think the country is taking over the world. But Beijing’s foreign investments may not turn out so well.

China has had an active month in foreign policy. In the span of a week, Beijing appeared to challenge the United States on two policy fronts. Five Chinese ships harassed the U.S. ocean-surveillance ship Impeccable in international waters, leading to much verbal sparring between the Pentagon, the People's Liberation Army, the White House and the Chinese Ministry of Foreign Affairs. Six days later, Chinese Premier Wen Jiabao told reporters that he was concerned about China's investments in the United States: "We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried." This required a series of soothing words from the Obama administration. Some commentators suggested that U.S. dependence on Chinese credit acted as a constraint on American action in the naval incident. As one Sydney Morning Herald columnist put it, "The U.S. might have decided to press its case. But it would then have to face the reality that its defense is crucially supported by the very country it wanted to confront."

Yesterday's newspapers should dissuade readers from thinking that China is only preoccupied with the United States. The New York Times breathlessly reported about China's massive internal investments to improve the competitiveness of its manufacturing and industrial sectors. The Washington Post detailed the global buying spree Chinese firms are now engaging in, securing natural resource investments in Australia, Iran, Venezuela, Russia and Brazil. And the Financial Times reported that China plans to accelerate its investments into Africa to the tune of $2 billion. Global assets seem cheap, and Chinese companies are going on a global buying spree.

One could be excused for thinking, in this kind of news environment, that Beijing is literally taking over the world. Some perspective is useful, however. There is no question that China is trying to turn this crisis into a series of opportunities. There is a question, however, whether these opportunities will actually be realized.

In the end, the sparring with the United States did not amount to much. Following the naval incident, the Obama administration responded with a mixture of soothing words and more forceful action. U.S. officials stressed their desire to continue military-to-military contacts to defuse such crises in the future. At the same time, in contrast to the 2001 spy-plane incident, U.S. officials did not apologize for the dispute. The navy dispatched a destroyer to the South China Sea to escort the Impeccable for the rest of its tour. These are not the actions of a bullied country.

China holds a massive amount of U.S. debt, but it is telling that markets were largely unmoved by Wen's statements. The reason is that China is equally dependent on the United States. By owning so much debt, Beijing has a vested interest in the U.S. economy. A JPMorgan Chase report concluded that continued Chinese purchases of U.S. debt were inevitable, because, "there is no viable and liquid alternative market in which to invest China's massive and still growing reserves." One Chinese regulatory official expressed Beijing's predicament more bluntly: "Except for U.S. Treasuries, what can you hold? . . . U.S. Treasuries are the safe haven. For everyone, including China, it is the only option. . . . We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

China's other investments are a clear signal of its rising influence and should not be discounted. Well, maybe a little. For all of China's internal investments, its domestic economy is still woefully out of balance, with too much investment and not enough consumption. In a move not seen since the Cultural Revolution, university graduates are headed to rural areas in search of employment. Without an expanding domestic market, China remains very vulnerable to global economic shocks-which is why the World Bank just downgraded their 2009 forecast for China's growth below the hallowed 8 percent rate.