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Monday, August 23, 2010

The Neo Neo-Colonialists

Neo-colonialism is the term given to the involvement and dominance of modern capitalist businesses in nations which used to be colonies. Typically these were large corporations from the developed world taking advantage of resources and labour in the developing world. This, however, isn’t the trend which we are seeing today. What we are seeing is China’s largest firms becoming the first neo neo-colonialists – a developing nation’s firms dominating the economic affairs of other developing economies.

I’ve written before on how rising inflation in China caused by the increasing prices of factors of production (namely labour) represent the nation’s approach to the steep end of their long-run aggregate supply curve (see below) where any increase in output will result in a significant rise in the price level (see article: ‘China’s inevitable inflation’). Indeed, the reason for China’s foreign scramble for resources is obvious enough. China’s third-largest steel maker Wuhan Iron & Steel Group is in talks with ArcelorMittal, the world’s largest steelmaker, to develop overseas mining projects which would make Wuhan Steel less dependant on expensive imports of iron-ore. This is the latest in a string of moves taken by Wuhan Steel to achieve iron-ore self-sufficiency in ‘three to five years’ (Deng Qilin, chairman of Wuhan Steel). Wuhan Steel has acquired stakes in iron-ore mining firms from Brazil to Venezuela.

Wuhan Steel isn’t the only large Chinese firm with a voracious appetite for foreign firms. PricewaterhouseCoopers (PwC) said in a recent report that Chinese outbound merger and acquisition deals for the first six months of 2010 are at record highs, up by more than 50% over the same period last year. The report also said that the main targets of mainland firms were industries involved with natural resources – a trend that supports the view that the mainlanders are aggressively trying to shift their LRAS curve outwards to curb inflation.

The rate of growth of Chinese interests abroad is only quickening. In 2000, China-Africa trade surpassed $10 billion, this year it is likely to cross the $110 billion mark. The Chinese government is a vocal supporter of this neo neo-colonialism – on August 16th 2010, the Ministry of Commerce launched the China-Africa Research Centre which will (among other things) ‘help Chinese firms planning ventures in Africa with consultancy services’ (Fu Ziying, vice-minister of commerce).

The rest of the world should be at least a little concerned at this growing trend. With China snapping up foreign resources at breakneck speed, other countries’ firms may be cut off and face decreasing competitiveness due to the higher costs of imports of raw materials. This could have serious unemployment repercussions outside of China and could stunt the growth of other developing nations by giving China an absolute advantage in manufacturing. The only upside is that we’ll continue to be able to buy cheap goods from China. In light of these implications, perhaps the West shouldn’t be so aggressive in urging China to raise the value of the yuan – an action which would certainly expedite China’s rise as the first neo neo-colonialist.

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4 Comments:

At August 18, 2010 at 7:33 AM , Blogger lotusleaf said...

Wow! Lots of information and most of it over my head. Very well written Deep.

 
At August 18, 2010 at 8:40 PM , Blogger Sanjay said...

The Chinese Govt. is very smart and pro-active. During the recent recession China started cornering metals at break-neck speed. Copper, speciality steel, lead, titanium - it got snapped up by Chinese companies at rock bottom prices. The logic being, once the recession eases and the World starts buying metals, China would be the supplier!

 
At August 19, 2010 at 12:50 AM , Blogger manisha said...

Hey Deep
Very well written & obviously researched article! Will follow you now on this blog to know more about China' s economic strategies!
Manisha

 
At September 11, 2010 at 10:34 PM , Blogger Deep Vaze said...

Thanks!

 

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