Tuesday 25 October 2016

Flood of Asian cash is just beginning

Published 06/12/2015 | 02:30

Children dressed in uniform sing after raising the national flag at the Beichuan Red army elementary school in Beichuan, southwest China's Sichuan province
Children dressed in uniform sing after raising the national flag at the Beichuan Red army elementary school in Beichuan, southwest China's Sichuan province

Ireland is already benefiting from the rise of Asia and could benefit more, but the region presents risks too.

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Having spent the past two weeks in China and Japan, let me share some thoughts on the opportunities and threats that the world's most dynamic region present for Ireland.

By far, the biggest opportunity is not trade or tourism (though they are significant), but Asias new multinational companies. If Ireland can replicate with Asia the success that it has achieved in luring so much American foreign investment to Ireland, the country will be prosperous for as far into the future as one can see.

The opportunity is huge, because the amount of money flooding out of Asia is huge, and growing fast. The countries that are increasing outward investment the most are the big developing economies.

China stands out above all others. What is now the second largest economy in the world has grown at a furious pace for four decades, and now, its global footprint is expanding almost as rapidly. That footprint will continue to grow and deepen, not only because that is the natural order of things when a country's economy becomes so big, but also because "going global" is now an explicit objective of the one-party state.

The manner in which the communist party's diktats are taken on board by everyone the length and breadth of the country was brought home by officials, business people, academics and others constantly bringing up Beijing's "One Belt, One Road" initiative, designed to create a 21st-century version of the ancient China-Central Asia-Europe silk road. They did so, despite nobody being clear about exactly what the strategy entailed.

Chinese companies are going global in ever greater numbers. Collectively, their outward investment has tripled in just five years. Ireland has been among the beneficiaries. Two Chinese investments into Ireland recently are of particular significance.

Two weeks ago, the global tech giant Huawei announced it was beefing up one of its three research and development centres in Ireland. Fifty additional jobs will be created. In numbers terms, that is not much, but the type of investment - in high-value-added activities in a high-growth sector by a leader in its field globally - is significant for two reasons.

First, because it could herald much more investment by that company in the future; and second, because other Chinese companies pay heed to what one of their most cutting-edge counterparts does.

It was clear to see why on a visit to the company's headquarters in the southern province of Shenzhen last week. On that single campus, there are 45,000 people employed. Across the rest of China and in 170 countries worldwide, the company has another 125,000 employees. It is growing at a rapid pace: in revenues, payroll and spend on research and development.

If companies like Huawei are just the sort of investment that Ireland wants from the East, and has traditionally received from the West, we need to get used to another kind of investment.

Most people I spoke to about the globalisation of corporate China made the point that Chinese companies are more reluctant than Huawei to set up their own subsidiaries. Instead, they prefer to acquire existing companies when entering foreign markets.

That is what is happening with the second of the two significant recent investments made in Ireland by the Chinese. Avalon, a very successful indigenous aircraft leasing company, is being bought by the sprawling HNA Group. It is paying €2.6bn for the stake.

Foreign takeovers of existing companies add much less to an economy in the short run than do big, plant-opening announcements by the likes of Apple and Pfizer. That is because they don't necessarily mean that the acquiring company will decide to take on more employees or increase the amounts spent on training, research or productive capacity in their new acquisition.

That said, such investments usually do bring benefits, not least in terms of the cash the Irish owners receive, which they can reinvest in other businesses, or in setting up new ones.

It is also worth adding that corporate China's preference for acquisitions over "greenfield" style investments may change in time. Chinese companies are in the early stages of multinationalising. With the passing of time, they are likely to become bolder in their investment strategies as they grow in confidence and experience. As that happens, they can be expected to set up more of the new factories and offices that we in Ireland have grown familiar with, thanks to our experience of American multinationals.

But the rise of Asia is not just an opportunity, it also has the capacity to threaten. China's economy is showing all the fragilities that come with massive and rapid increases in borrowing. A crash would have ramifications for the entire global economy.

Nor is a much larger Chinese corporate presence in Ireland without political risks. Because of the close involvement of the Beijing authorities in companies' decision-making processes, it is not beyond the bounds of possibility that more investment would make Irish governments vulnerable to unwelcome external pressures.

But it is the possibility of violent conflagration accompanying the rise of China that gets most attention, particularly here in Japan.

The growing clout of Beijing has raised fears that the balance of power in the region will be blown apart. As that happens and the security environment deteriorates, the chances of war rises.

This scenario was articulated recently and influentially by a Harvard academic in the Atlantic Monthly, a highbrow US magazine. Graham Alison's essay - The Thucydides Trap - sets out his research on 500 years of world history, which finds that in "12 of 16 past cases in which a rising power has confronted a ruling power, the result has been bloodshed".

Both the American and Chinese presidents have referenced The Thucydides Trap in recent speeches, and both have rejected it. It is to be hoped that the lessons of history have been learnt and that the enormous costs of going to war (both countries are nuclear powers) will ensure that reason prevails.

Given how they have behaved towards each other over recent decades, and the vast ocean that separates them, there is reason to be optimistic that the old and new superpowers can accommodate each other.

But the dynamic in relations between China and Japan is very different from that between China and the US. As a much smaller country than the US, there is a palpable fear in Tokyo surrounding the rise of their huge and very near neighbour.

From the Chinese side, a deep historical resentment exists towards Japan. In the wars of the 1930s and 40s, there were more Chinese causalities than any other country bar Russia. Many of the deaths were caused by imperial Japanese forces, which very often behaved with a genocidal barbarity. This factor, and China's much longer historical sense of its own centrality to the regional order of East Asia, mean that it will eventually expect its much smaller neighbours to accept its hegemonic position and show due deference.

It is hard to see Japan accepting such a position. The Japanese are a proud people, perhaps too proud. Many will readily concede that they have a superiority complex when it comes to their neighbours. That mindset, in combination with Beijing's perception of how relations among Asian states should function, does not augur well for the future.

For now, Japan's dependence on the US to guarantee its security has prevented an arms race. But if Tokyo comes to doubt Washington's commitment, it could feel that, given the impossibility of matching Chinese conventional forces, going nuclear is its last resort.

War between two of the great civilisations of Asia (and the world) would be a global catastrophe.

Sunday Independent

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