For the last 30 years or so, the economic relationship between China and the U.S. has operated according to a wonderful symmetry. America sent dollars to China, which used its vast foreign currency reserves to buy U.S. Treasury bonds, thereby pushing down the value of its own currency and making it possible to export inexpensive goods to the U.S. The U.S. bought those goods, sending cash back to China, thereby maintaining the virtuous circle.
It couldn’t last forever, of course. The U.S. can’t keep borrowing at its current pace, and China has started to worry about raising domestic wages and the value of the renminbi. So, as China and the U.S. begin to wean themselves from their mutual addiction to U.S. Treasury debt, a question arises. How will China begin to diversify its global investments?
Part of that answer lies in another mutually beneficial relationship—the need to rebuild an aging infrastructure in the U.S. and other developed countries. In an op-ed on Monday in the Financial Times, Lou Jiwei, the head of sovereign wealth fund China Investment Corp. explained China’s interest in such projects. “Central to international efforts towards promoting strong and balanced growth is the need to generate demand, not only in developing countries but, more importantly, in developed countries,” he said. “The imperative poses a critical question: where is new demand to come from? The answer lies in boosting investment in infrastructure—and China is keen to get involved,” he said.
“This is about China moving away from exclusively using Treasuries and other sovereign instruments to investing their surplus in other assets,” says Joel Moser, a senior partner in the energy and project finance department at law firm Bingham McCutchen in New York. The infrastructure market suits China in several ways. “It isn’t in the high risk spectrum and it doesn’t have the swings in value that many other assets have,” says Moser, also an adjunct professor at Columbia University’s School of International and Public Affairs. Sovereign and sub-sovereign governments in developed countries tend to be politically stable, and can levy taxes to fund projects.
The scale of the global infrastructure market suits China, which has an estimated foreign currency reserve of about $3.2 trillion. That amount may be headed lower as China’s slowing economy slows, but it will remain huge for quite some time.
How much of that money will China invest in infrastructure? Investment advisers often suggest that sovereign wealth funds have 10 percent exposure to infrastructure. That means China might conceivably make $300 billion or so available, although the figure could well be less. But China is only part of the picture. Other sovereign wealth funds in Asia are interested in the infrastructure market, too. In total, “global public investors can deploy more than $3 trillion, and we need to deploy capital in the U.S. to address our rebuilding needs,” says Gordon Goldstein, director of public policy and communications at private equity firm Silverlake Partners. The U.S. Chamber of Commerce estimates that the aging U.S. infrastructure translates into a $1 trillion annual economic loss, due to delays in getting goods to market.
Fixing that infrastructure is incredibly capital intensive. The U.S. Society of Engineers estimates that it would take $4 trillion just to bring the U.S. infrastructure up to snuff—and that doesn’t include investments in next-generation technology, either. It would cover costs such as upgrading existing airports, roads and bridges, such as the Tappan Zee Bridge spanning the Hudson River just north of New York City. That project alone could cost $10 billion to $20 billion.
The developed world will have to compete with emerging markets for some of that capital.
China has been making investments in the infrastructure of African nations for years, building goodwill as part of its effort to gain access to raw materials. The China-Africa Development Fund, a government run private equity fund in China, has invested $1 billion and is scheduled to invest $4 billion more.
Some experts believe that China also will invest heavily in the agricultural sector, buying land in Africa, Latin America, the U.S. and Canada. “I keep hearing reports that China is purchasing farmland, especially in Latin America. I have heard that China has every hectare of arable land under cultivation,” says Jerry Webman, chief economist at Oppenheimer Funds.
China’s interest in the infrastructure of the U.S may not be purely financial, even though it is expected to take passive, non-controlling positions as a limited partner, if only to minimize political resistance. It also is probably looking to glean some technological know-how that it can bring back to its domestic market, where the infrastructure market is growing fast. “They want to know how to use equipment, how to interpret results and use the results to run their operations,” Webman says.
An infusion of capital into the infrastructure of the U.S. and Europe could be just what those economies need to regain their stride. After the 2008 financial crisis, the government of China undertook a 4 trillion renminbi infrastructure program, boosting annual growth from 6.8 percent to 10 percent at the end of 2009, Jinwei said.
