Vladimir Rojankovsky, head of research at Nord Capital and Mark Thornton, a Senior Fellow at Ludwig von Mises Institute debate China’s purchasing power.
In an attempt to make ends meet austerity-hit Europe is selling off its assets to China. Was it purely a business deal? What long-term consequences will it have for Europe and the rest of the world? Tune in to find out.
Should we be alerted by the growing purchasing power of China when it comes to the assets in Europe?
Mark Thornton: First of all, this has been going on in China for a very long time. The Chinese are experiencing economic growth for several decades. They save incredible money and they’ve invested in their own economy, but they’ve also invested it around the world. And they’ve turned their attention more recently to Europe, because the stock prices are very high and the Europeans are willing to sell off a lot of their assets at these high prices. So, this is a trend that has existed for quite some time. It’s just now turned its attention towards Europe and the assets of Europe.
Vladimir Rojankovsky: China started buying the peripheral European countries’ debts back in 2011, for example, Greece bonds etc. At that time it was an invaluable support. So, Europe should not be worried by the Chinese activity, because it’s been fruitful and mutually beneficial cooperation.
Speaking in longer terms, what sorts of concerns are there?
Mark Thornton: Generally speaking, the Chinese companies and the Chinese Government want peaceful economic cooperation. They want to have access to transportation facilities, they want access to natural resources and to foreign markets. So, generally speaking, their purposes are legitimate and peaceful, and so on and so forth. The problem emerges when the political problems come in to dominate the decision making. So, that’s the only problem that I foresee – it is not the general proposition of what they are up to, but what they might be up to potentially.
Is the situation that bad, that the Europeans are ready to ignore the long-term concerns?
Mark Thornton: The Europeans are facing austerity, the economies are not growing, their governments spend way too much money, their taxes are too high, their national debts are too high. So, Europe has got some economic problems and one of the things that everybody does, it is not just Europeans, it is Americans, it is other countries, is that state and local governments have to consider privatization of public utilities.
They did that in Britain, we did that in the US. So, that is a common, although controversial, for sure, measure. But it is the one that ultimately does work in terms of reducing the burden of government. Every time they privatize a public asset, you not only do get money, but you tend to get a little bit more economic growth and you also get tax revenues, because those private entities now have to pay property taxes.
What are your thoughts on the position of the Chinese? How vulnerable or how strong is it?
Vladimir Rojankovsky: Investing in anything right now is a big risk, including the dollar assets, including treasuries and things like that. We have near zero yields right now and it is very difficult to find something that will bring you at least 5% or 10 % a year. If the investment does not deliver, people and countries need to look around and see other alternatives. It is very natural in the near zero environment.
Looking at how fast the Chinese invest now, does that mean that at this point there is basically no rival? The number of assets is limited and if China buys up everything, that means that there is no room for anybody else.
Vladimir Rojankovsky: I don’t know, but I’d prefer to give you an example of not so distant past. The Lehman Brothers collapse was preceded by a very long conversation with the financial companies from the southeast Asia, particularly the Korean Development Bank. Basically, the Korean Development Bank decided not to buy the Lehman Brothers and it was the last step in that story which started the world financial crisis. The Japanese, Korean and the Chinese banks and financial companies were immune, were safe from that and that’s why they have a buying power right now.
So, I'm trying to imagine if there is any alternative, and I tend to say “no”. We can think about Australia, but it doesn’t have any ambitions in terms of buying the European assets. Europe is too far away and Australia doesn't know exactly what to do with it. It can obviously buy the European bonds, but in terms of buying real assets, like airports, there should be some synergy.
Should the Europeans be more selective in terms of whom they sell their assets to or should they let the market decide?
Vladimir Rojankovsky: Obviously the market should decide. On the other hand, right now it is extremely important for any country and any nation, not just China, to diversify from a single asset investment policy.
Mark Thornton: I agree that the market should decide. But the cultural and regulatory environments in China are completely different than they are in Europe and the US. And so, I would urge both parties to proceed, but to proceed in a very open way, so that both sides completely understand the deal that they are making, because China and Europe are very different and it can lead to potential problems down the road.