China to reset global financial order with capital

China’s foreign direct investment (FDI) is projected to reach $120 billion this year, a sharp rise from the $2.7 billion in 2002. China will become a capital-exporting country after being one of the largest capital-importing nations for decades. The change will have an influence on the global financial system, says an article in the 21st Century Business Herald. Excerpts:

China has excessive capitals in some industries at home. China’s FDI only takes a small share of its $4 trillion foreign exchange reserve, most of which is spent on the US national treasure. China’s overcapacity industries are also eager to relocate to abroad. Its strong equipment manufacturing industries need to find new outlets. In this sense, the increase of China’s FDI is to export its equipment and redundant infrastructure constructing capacities.

Meanwhile, the emerging market countries have a strong demand for FDI. The Federal Reserve’s quantitative easing filled these countries with speculative hot money, while the money that ca n be invested in infrastructure constructions and industries as long-term investment is insufficient. China’s investment can fill this vacuum.

China’s export of capitals comes against the bigger backdrop that Chinese government is actively promoting the internationalization of yuan and participating in the reconstruction of a new global financial order.

China will take the lead to establish the New Development Bank with Brazil, Russia, India and South Africa this year. China has signed agreement with 20 countries on founding an Asian Infrastructure Investment Bank. The two banks, with their counterparts as the World Bank, dominated by the United States, and the Asia Development Bank, controlled by Japan, respectively, will become important channels for China’s capital export to the world. China’s capital export is hand in hand with its efforts in building a new financial order.

Some analysts predict China’s huge account surplus will decide the next economic expansion in the world, and China’s capital export will offset the influence of the tightening monetary policies of the major banks in the West. Whether the US and the other developed countries can absorb China’s huge surplus is a key of global recovery.

The question is if China can maintain its huge surplus for a long time. A likely scenario is China’s investment rate will drop at home with its economic transformation from manufacturing industries to service sectors. As a result, China may maintain its surplus while rebalancing its economy. China should make a good use of its huge saving, which is a tool in today’s debt-ridden world, for its own economy in the first place.

History tells the economic influence of one country does not lie in how many products it exports, but how much capital it invests in the world, and how its capital changes global economic rules and orders. China must reform the current unfair rules and order while exporting capital. This will be a long-term mission.