The China Barrier

Globalization is frequently described as the product of a borderless world. It conjures up an image of an idyllic world where ideas, goods, capital and people move freely across the continents. The reality, of course, is more prosaic. Thanks to the information revolution, ideas have moved relatively freely (excepting North Korea or Cuba), and decreasing transport costs and falling tariff barriers have eased the flow of goods.

More relaxed regulations have created a global capital market, but the movement of people in search of a better life has encountered massive barriers. Even the flow of capital is running up against an invisible blockade that runs along the state's territorial boundaries: it is called national security. The recent rejection of a Chinese company's bid to buy large chunks of an Australian mining giant offers the latest example of a bordered world.

The definition of national security has changed with the permeability of capital and technology. Both facilitate closer integration between countries as well as increasing the vulnerability of sovereign states. Aside from defense technology, foreign investments are also tightly controlled in energy and key minerals and telecommunication systems.

Chinese investments, though, present a different type of concern. Its 115,000 state-owned companies, especially its 150 mega-corporations, are often seen as entities directly controlled by the Chinese Communist Party. They are considered to be tools in the service of China's strategic objectives. Though the Australian rejection of the state-owned China's Chinalco's $19-billion bid to acquire a large chunk of Rio Tinto was presented as a "commercial" decision, it was most likely a decision based on political considerations.

Ever since the Chinese bid became public, there has been a media frenzy about Australian resources falling under the control of an authoritarian China, which also posed a military challenge to Australia. Ideological opponents, alarmed by the Rudd administration's accommodating approach to China, mounted a campaign against ceding valuable resources to an antithetical regime and human rights violator. Rudd's office is undoubtedly pleased that the decision to pull the plug came from the Australian firm rather than from the government committee that supervises foreign investment, enabling it to sidestep further criticism of its purportedly "pro-Peking" stance.

Commercial considerations about selling a major equity stake to the leading Chinese buyer of iron ore at a time of rising prices was certainly a factor, but fears about losing control of a prime national resource to a Communist government trumped all.

Similar concerns have sunk other important deals in recent years. For example, in 2005, the US cancelled a proposed Chinese national oil company's purchase of American oil major Unocal. Allowing a Chinese Communist Party-controlled entity hold over a strategic commodity such as oil was seen as a risky to national security. The recent effort by Huawei, China's military-linked telecom manufacturer, to secure a major telecom contract in India has similarly run into opposition from New Delhi's intelligence agencies. Such security concern in 2006 led the Indian government to deny contracts to a major China-linked port management company.

Recent experiences show that national security has not been the sole factor in restricting foreign investments. Economic nationalism, the desire to protect a nation's crown jewels or defend againt monopoly by another nation's enterprise, have prevailed over capitalist principles of profitability or efficiency.

Only months earlier, China blocked the sale of China's Huiyuan Juice Group for US$2.4 billion to Coca-Cola. As Huiyuan controlled over a tenth of the Chinese fruit and vegetable juice market, the government worried that ceding it to Coca-Cola, which accounted for 60 per cent of China's soft-drink market would give the US giant enormous power in another segment of the beverage market. Pre-emption of a future monopolistic threat from Coca-Cola could have been valid ground for rejection, but the real reason is believed to be Chinese reluctance to let a well-known Chinese brand go under foreign control — pure economic nationalism.

The rise of ideological and political barriers to Chinese investments are in sharp contrast to the increasingly open border to exports that allowed China to emerge as the world's factory and to build up its record pile of $2.9-trillion reserve. It certainly won't be a borderless world if China is denied a role as the world's investor as well.

Nayan Chanda is director of publications at the Yale Center for the Study of Globalization and Editor of YaleGlobal Online.