Western Governments are growing increasingly concerned by China’s creeping influence and aggressive behaviour, particularly towards Taiwan. But how do you rein in such a large country, and a lynchpin of global trade?
The answer could be simpler and safer than we think.
For the past 25 years, China has pursued a mercantilist policy. China sells us manufactured goods, and in return we pay China in financial assets. This includes thinks like government bonds, books of mortgages, stakes in Western companies, or JVs (joint ventures) in infrastructure projects; such as toll roads, telecoms networks, railways and power plants.
In other words, China has been hoovering up western assets. The scale of this is unprecedented. For example, China now owns roughly a trillion dollars of Treasuries, as well as hundreds of billions invested in European and US companies. Go to cities like Auckland or Vancouver and entire luxury apartment blocks are owned by senior Chinese government officials, as well as vast tracts of US farmland. Banks are full of trade finance for Chinese state-owned enterprises (SOEs), and our ports are awash with Chinese-owned ships. In Australia and Africa, almost every mine is at least partly owned by a Chinese SOE.
That gives us an awful lot of leverage. To rein in China, NATO and its allies should pass treaties that would allow us to seize those assets if China misbehaves. Just as with sanctions on Russia, this should include assets owned by Chinese SOE’s and senior Chinese Communist Party (CCP) Officials.
For example, if China beats up protestors outside of its borders, they should be able to sue for Chinese assets in western courts. If persecuted Chinese asylum seekers arrive, they should be compensated and resettled at a cost to the Chinese government. If China attacks or blockades Taiwan, the country should be able to sue for compensation and punitive damages in any western court. If China expropriates western investments or steals western intellectual property, those victims should be able to sue China in western courts and claim Chinese-owned assets.
And if China behaves really badly, we should take the lot, just as we did to Russia. Many over-indebted countries would relish the opportunity to walk away from their Chinese debts while not technically defaulting. Note that a technical default is generally determined by the US-based ratings agencies. Moreover, seizing all those empty flats in high priced cities like London, Auckland and Vancouver would be incredibly popular with locals. No one outside China is going to object to punishing China for bad behaviour.
In short, if China behaves, normal business resumes and relations can recover. If China messes with us, we simply confiscate those trillions of dollars worth of Chinese savings, representing decades of hard labour.
Thanks to Russia, the West has already discovered the resolve and practical tools to achieve this. Such a policy would require carefully drafted multilateral treaties across NATO and its allies. This is a project the UK could lead on, as it seeks to regain its standing after years of Brexit opprobrium.
For China, these investments are not something it can afford to lose. Many are owned or part owned by senior members of the CCP. And thanks to the one-child policy, China faces the steepest demographic cliff in the world. Over the next century, its population will go from 1.4bn to 500m as the country ages dramatically. China needs those global savings to pay for the demands of a rapidly aging population: healthcare, pharmaceuticals and pensions.
Could China simply sell its western investments and go its own way? Not realistically. Remember, Russia spent an entire decade trying to do this before its 2022 invasion of Ukraine. Even after a decade of preparation, it still lost billions in assets and trade relationships. Worse still, Russia also became an international pariah; sacrificing its global influence in order to hang out with the likes of North Korea and Belarus. China and Xi harbour strong ambitions to be a global superpower. Cutting itself off from the world’s biggest and most advanced economies to trade Bitcoin with Iran is not compatible with those ambitions.
Furthermore, China has shown no sign of going down this route. It is still running a mercantilist economy: investing heavily in western nations and running enormous trade surpluses. Ironically, it is the west that is discouraging Chinese inward investment on national security grounds. For example, the UK has just bought out China’s stake in Sizewell C and blocked it from acquiring our largest microchip factory. China by contrast remains as keen as ever to invest in western domiciled assets.
The reality is China needs the West to act as its pension fund. Chinese savings are simply too big to invest elsewhere. Alternative capital markets are neither deep, liquid nor creditworthy enough. Indeed, China’s investments in alternative economies such as Sri Lanka, Angola and Ghana have already ended in default; while Chinese SOEs have frequently had their mines and infrastructure expropriated across Africa.
Perhaps we should remain more open to Chinese investment, providing it is contracted on our terms. Because each time China does so, it gives us even more leverage. And if nothing else, such a policy seems a far safer and less costly approach than an arms race with the world’s biggest army.
The most potent weapon against China’s aggression is not a gun, a missile or a nuke. It is China’s own money. There is an old saying: ‘If you owe the bank a thousand, it’s your problem; if you owe the bank a million, it’s the bank’s problem.’
We owe China trillions. If they want to misbehave, let’s make it their problem.
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