The Contest of the Century

by Geoff A. Dyer

  Bosshard says he first started to take notice of China at the end of 2003, when Beijing agreed to build the Merowe Dam in northern Sudan, on one of the major tributaries of the Nile. The Sudanese government had been pushing the idea since the 1970s, and in the 1990s government delegations from Sudan toured Canada, Europe, and Southeast Asia, looking for financial backers for the project, only to return empty-handed each time. The World Bank also declined to get involved. Not only would the dam end up displacing tens of thousands of farmers who worked fertile Nile Valley land, but many governments were also put off by the Sudanese government’s record of human-rights abuses. Yet for China’s dam builders Merowe was a perfect chance to start taking their expertise global—expertise they had recently gleaned from the West.

  In the 1990s, construction began on the massive and controversial Three Gorges Dam, on the Yangtze, the biggest hydroelectric power station in the world. Given that the market for dams had dried up elsewhere, the competition to get involved in the Three Gorges was intense. In order to get some of the multi-billion-dollar contracts that were on offer, Western groups had to enter joint ventures with Chinese companies, and under the terms of those agreements, they were obliged to hand over some of their technology. A decade later, the Chinese dam-building companies had absorbed these technologies and were ready to export them back overseas. Chinese banks also offered huge financing packages to convince other developing countries to begin construction, forging a powerful partnership with the new generation of dam-building companies. China has single-handedly revived the international market for large dams. By 2010, Chinese companies were involved in 220 dams in fifty different countries around the world and were constructing nineteen of the twenty-four largest hydropower stations ever built. Bosshard did not realize it at the time, but he was one of the first people to understand the potential for Chinese finance and investment to completely reshape globalization. “They are pretty much everywhere now,” he says.

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  Mao Zedong was the central figure in the two events that produced the current era of globalization. The first was his 1972 meeting with Richard Nixon, which paved the way for China’s re-entry into the international community. The second was his death. Deng Xiaoping was then able to launch the market reforms in the late 1970s that turned China from a centrally planned basket case into an economic juggernaut. During the three decades in which China has been on this reform path, Beijing and Washington have both placed a large strategic bet on economic integration. China felt that it needed access to American consumers and technology if it was to advance its economy; America decided that the global economy would be much stronger with China on the inside rather than outside. What we now call globalization was born.

  China and the U.S. are approaching another critical crossroads in their economic relationship, which is as important as the 1972 meeting and will determine the future shape of the global economy. For the last three decades, globalization has been an American project, driven by American values, American capital, and American-led institutions. Peter Bosshard was one of the first witnesses of a new phase, in which Chinese finance and investment will play leading roles. The U.S. and China have to decide whether they now want to double down with a new stage of economic integration and cooperation. Down one road lies even greater interdependence between the two biggest economies on the planet, which will place restraints on their militaries and on other areas of competition. Yet down the other lies the formation of a two-track global economy, with a Western system revolving around the U.S. and a separate China-led economic sphere guided by Beijing’s priorities. Will globalization break in half?

  China’s economic influence is usually thought of as a function of trade, all those T-shirts, widgets, and iPhones it makes for the world. China is now the world’s largest exporter of manufactured goods, something that would have seemed preposterous to the officials who accompanied Mao and Nixon. In the process, it has displaced the U.S. as the largest trading partner of a host of countries, from Japan and South Korea to South Africa and Brazil, slowly turning the map of global commerce red. Trade is just the first stage, however. China is also now starting to become a global power in finance and investment. Until now, China has been a receiver rather than a giver of direct investment in factories and equipment. But that axis is shifting, as Chinese companies start to look overseas for investment opportunities and Chinese banks offer generous loans. The process began slowly in the late 1990s, after the government launched a “go out” strategy that led to a trickle of investments in mining and oil, and it is now gathering pace quickly in manufacturing and even services. As with so much else in modern China, the numbers will have an epic scale. Daniel Rosen, a China specialist at the Peterson Institute in Washington, D.C., calculates that if China follows the pattern of other developing economies, over the next decade it will invest overseas between $1 trillion and $2 trillion. This financial muscle will be one of the most important driving forces in the global economy over the coming decades. Corporate China’s new export market will be its own money.

  China is arriving at the same sort of inflection point that the U.S. economy reached in the 1890s. Before then, few American businessmen had even considered trying to operate abroad, as there was just too much money to be made at home. But eventually the lure of foreign markets started to become powerful. In the early 1890s, Senator Albert Beveridge of Indiana summed up the prevailing mood of a country ready to spread its commercial wings. “American factories are making more than the American people can use; American soil is producing more than they can consume,” he said. “Fate has written our policy for us; the trade of the world must and shall be ours.” Having reached a certain critical mass at home, many companies began to look for new markets and new investment opportunities overseas, particularly in the Americas. Before long, the United Fruit Company dominated banana production in Honduras, Guatemala, and elsewhere, to the extent that by 1925 it was the biggest employer in Central America. By the 1920s, American companies also owned 60 percent of Cuba’s sugar plantations, and dominated the hotel-and-entertainment scene in Havana. And it was in the late 1890s that Washington started to push for an “Open Door” policy in China, which would allow American companies to trade and invest in China, along with the European colonial powers. Before long, Buicks had become the car of choice for the Chinese elite, with the list of proud owners including nationalist leader Sun Yat-sen and Pu Yi, the last Qing emperor.

  As it contemplates this new stage in its development, the big strategic question for China is whether the U.S. should be at the forefront of its new investment plans. When Chinese companies survey the potential opportunities overseas, one instinct is to channel a large slice of this investment toward the U.S., which is still by far the largest economy in the world and the most powerful consumer market. America has a strong track record of consistent improvements in productivity, the real long-term guarantee of continued economic growth that companies are looking for when they make investment plans. It is basic business logic to go where the money is. As a result of shale oil and gas, the U.S. could be on the verge of a new energy boom, one of China’s key priorities. Yet several Chinese companies that have tried to invest in the U.S. have suffered bruising political battles in Washington over their ties to the Chinese government. In 2006, the Chinese state oil company CNOOC tried to buy an American group called Unocal and put forward an offer bigger than the one already on the table from Chevron, another U.S. group. But after a storm of protest in Congress about Chinese interference in the U.S. energy sector, CNOOC decided to withdraw, feeling completely humiliated in the process by the political drubbing it had taken. Events such as this have left many Chinese companies in a wait-and-see mode, trying to work out whether or not they are really welcome in the U.S.

  Even while they are testing the political mood in Washington, the Chinese also have a strong instinct to move in a very different direction, to use China’s financial heft to fashion an alternative pa
ttern of globalization that bypasses the U.S. The financial crisis was a profound shock for Beijing, revealing a level of dependence on the U.S. economy that left many in China deeply uncomfortable. Some of the Chinese officials who had supported close ties with the U.S. were dumbstruck to find that the U.S. financial system could have been so badly managed. The idea of trying to decouple China from the U.S. started to become more attractive. At the same time, it is part of the DNA of the aspirant great power to use its economic weight to begin shaping the rules and relationships that are at the heart of the global economy. China’s efforts to challenge the role of the U.S. dollar are part of this mindset. There is now a lobby in Beijing that wishes to use the coming wave of investment to generate a new phase of globalization in which all the roads—business, financial, and political—converge on Beijing. Xu Shanda, a Chinese economist, argues for the launch of a Chinese “Marshall Plan” in the developing world, loans and aid that would create their own demand for Chinese goods. Some senior policy makers talk about how China’s financial firepower could spark a new cycle of global growth among developing countries, with Beijing in the engine room, winning both new markets for China and new political partners, and all the time bypassing the developed markets of the U.S. and Europe. China is being tempted by the idea of post-American globalization.

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  To get a sense of what post-American globalization might look like, a good place to start is a small town called Açu, 175 miles north up the Atlantic coast from Rio de Janeiro in Brazil. Until recently, Açu used to be a small seaside village that attracted a modest crowd of weekenders to its long beaches. Now, it is a huge port with a two-mile-long pier and the ambition to be a strategic conduit between the Brazilian and Chinese economies. One of the world’s largest dredging ships was used to carve a huge dock from the sand dunes, so that it will be able to house the new generation of Chinamax ships that can carry 400,000 tons of iron ore at a time across the oceans. A Chinese vice minister who came to visit the project described it as “a new highway to China.”

  The Açu port is the brainchild of Eike Batista, Brazil’s most controversial businessman, whose spectacular rise and fall have become a potent symbol of the boom-and-bust cycles that have long scarred Brazilian capitalism. Batista made his first fortune as a gold trader in an area of the Amazon jungle that was undergoing a massive gold rush and which was a lawless place of legendary knife fights between the miners over who owned the precious metal. Over the last decade, he managed to ride the commodities boom that the China boom sparked, especially after he invested in a series of oilfields off the coast of Brazil in 2003. At one stage, his net worth was calculated at $34.5 billion, making him the seventh-richest person in the world. “Eike is a special kind of entrepreneur,” Brazil’s President Dilma Rousseff said during a visit to the Açu port project. “He comes up with extremely ambitious dreams and then seeks to fulfill them.”

  Once married to a Playboy cover girl and Carnival dancer, Batista once endorsed a new treatment for restoring the hair on his balding head, however, his wealth has demonstrated weaker roots. When Batista’s oil wells produced much less oil than he had promised investors, his heavily indebted companies started to face a series of cash calls that have wiped billions off their market value in 2012 and early 2013. Batista could be forced into selling many of his businesses, which also include mining and shipbuilding.

  Amid the scandals and schadenfreude that have accompanied the demise of Eike Batista’s business fortunes, it is easy to lose sight of the fact that he has been a genuine trailblazer in ways that will have a lasting impact on Brazil. Batista was one of the first businessmen in Brazil to harness demand and finance from China, the country which has emerged over the last decade as Brazil’s leading economic partner. “There is an endless market for us on the other side. China has endless pent-up demand,” as Batista puts it.

  One of the reasons America has maintained its dominant position in the world is that the size of its economy makes it a sort of customer of last resort, a constant source of demand that keeps the global economy ticking along. But China’s growing ties with Brazil are one example of the way that it is starting to play the role of economic anchor in important relationships at the heart of the global economy. Brazil is good business and good politics for China. It is a fast-growing market of 200 million people, and China is building ties with a country in the backyard of its potential rival, a subtle intrusion into the Monroe Doctrine. The Brazil connection is part of a series of new economic links that have the potential to shape a different growth axis for the global economy, one that bypasses the West.

  Brazil’s improved economic performance over the last decade, including the China-style growth rate of 7.5 percent in 2010, was partly the result of demand from China for its natural resources, from iron ore and copper to beef and soybeans. In the process, China has become Brazil’s biggest trading partner, overtaking the U.S. Batista was also one of the first in Brazil to understand the next phase, direct investment by Chinese companies. The Chinese group Wuhan Iron and Steel (Wisco) owns a large stake in MMX, the mining group he established. Before his troubles hit, Batista was talking to Wisco about an even bigger investment, a $5 billion steel plant in Açu next door to the port, which would have been the biggest ever Chinese investment in Brazil. Those talks may have floundered, but China has already become the biggest direct investor in Brazil in 2012, again outpacing the U.S. The investors have included car manufacturers and telecom companies, as well as natural resource businesses. “There is an enormous highway developing between Brazil and China,” says Batista, who set up a high-end Chinese restaurant in Rio de Janeiro, called Mr. Lam, with two giant terra-cotta warriors flanking the entrance. “The world should start paying attention to it because it is fabulous.” Batista might not manage to retain control of the Açu project, but there is a long list of potential investors lining up to finish the project that he started.

  Brazil is involved in another interesting example of this new Chinese strategy to move beyond America-led globalization, the plan to create a BRICS bank. “BRICS” was a concept first invented by Jim O’Neill, an economist at Goldman Sachs, who wanted a catchy title to capture the exciting investment opportunities in a diverse group of emerging countries—Brazil, Russia, India, and China (South Africa was added later). Since then, the idea has taken on a geopolitical life of its own. The leaders of the five countries now hold annual summits, and some have high hopes that the BRICS can become an important political voice. Vladimir Putin, the Russian president, believes the group can develop into “a full-scale strategic cooperation mechanism that will allow us to look for solutions to key issues of global politics together.” The leaders of the five countries are in detailed discussions to establish their own development bank, which would lend funds to other developing countries, providing a powerful alternative to the World Bank and International Monetary Fund. With China the driving force behind the project, the BRICS countries are discussing an initial capital injection of $50 billion.

  It is one of the ironies of the international system the U.S. created after the end of the Second World War that so many of its institutions are deeply unpopular in the U.S. On the American right, the visceral dislike of the United Nations is so intense that the U.S. Senate cannot pass any UN agreement, even if it is something the U.S. initially proposed. In late 2012, the Senate refused to ratify a UN treaty to promote the rights of the disabled that was based on American legislation. The World Bank and the International Monetary Fund are sometimes the butt of the same disdain, criticized on the right for their cushy perks and on the left as bastions of neoliberalism. But the reality is that both the World Bank and the IMF, which are based a couple of blocks away from the White House, have been powerful instruments for pushing an American vision of politics and economics on the developing world. Especially since the end of the Cold War, the World Bank and the IMF have been important conduits for the promotion of privatization and free trade, the
policies that have been the international priorities of the U.S. Treasury Department.

  Their impact goes well beyond economics. These Washington-based institutions have also used their influence to encourage ideas about governance which have a strongly American flavor: a push for greater transparency, accountability, and respect for the rule of law. That makes the World Bank and the IMF hugely important and often underestimated tools in the global battle for influence. If China’s banks really do start to undercut some of the authority of the World Bank, providing an alternative source of financing that comes with far fewer political and economic strings attached, that would have a significant impact on Washington’s ability to shape attitudes in the developing world. Beijing does not want to tear up the World Bank or the IMF; indeed, it is lobbying hard for a bigger say in how they are managed. But without any announcement or grand design, it is also quietly setting up an alternative system of global development financing that has the potential to make the Washington institutions less relevant. “I sometimes ask the Chinese why they are making such an effort to be more involved at the World Bank,” says a senior Brazilian official who used to work at the bank, “because they are at the same time effectively putting it out of business.”

  At the heart of most of China’s new economic relationships is one institution: China Development Bank. In the space of just a few years, it has become one of the most influential banks in the world. The state owns almost all the main banks in China, but CDB is different. Like the China Export-Import Bank, it is defined as a “policy bank,” which means that its objective is to support the overall economic goals of the government. China Development Bank is the sort of hybrid institution that can only really exist in Beijing, a branch of the Chinese state but for a long period it was also the political fiefdom of a very ambitious official from the Communist Party’s aristocracy. In the late 1990s, the bank was effectively bankrupt when Chen Yuan, a former vice governor of the Chinese central bank, became its chairman. His father, Chen Yun, was one of the most influential of the first generation of Communist revolutionaries and one of the “Eight Immortals,” the group of Deng’s contemporaries who acted as a parallel power structure during the 1980s and 1990s, and who pushed for the military to take control of Tiananmen Square in 1989. Under Chen Yuan’s leadership, CDB managed to follow a delicate path of supporting government goals while also being hugely profitable. Dragonomics, a Beijing consultancy, calls it “the bestrun bank in China.”