Outward Investment Flows and the Rise of Chinese Foreign Policy

The past 9 months may have been the most active ever for China’s foreign policy. Besides China’s recent support of an asset freeze, travel ban and arms embargo on the government of Muammar Qaddafi, and the country’s behind the scenes support for independence to South Sudan, China has recently taken steps to increase trade and investment along its most unstable borders, setting up a special economic zone in Kashgar, an economic trade zone along the border with North Korea, and a high speed rail corridor running through Myanmar and Laos.

Regulating trade in these border areas has necessitated clamping down on rampant black market activity and building market oriented institutions. And to some degree that might be the point. With Central Asia and the golden triangle being the major conduits for heroin into China, and North Korea being, well, North Korea, China has more to gain from strong markets along these border regions than simply access to resources. These investment zones are tests of how China can most efficiently deal with its troubled neighbors, and their future development is likely to be an excellent indicator of what direction Chinese foreign policy will taken in the future.

The situation has been most vivid on the border with Myanmar and Laos, besides being the main conduit for heroin into China, casinos just across the border (run by a Hong Kong company) have been linked to the kidnapping and blackmailing of Chinese citizens. China’s security bureau conducted a cross border raid into Myanmar in 2009, and has been fervently protesting a similar situation in Laos. Nevertheless, trade has shown real gains in cutting down the level of crime in the area. Investors from Yunnan have helped Laotians along the border area acquire agricultural technology to increase yields, as well as sell excess food in China where they can get a higher price. This has led many local farmers to substitute land previously used for growing opium (which is legal in Laos), for other agricultural goods that can be sold legally in China.

There has been little news from China’s cross border trade with North Korea, with the exception of the shooting of Chinese citizens in June of last year, but the importance of this new trade zone is clear from watching China’s relationship with Zimbabwe. Within three weeks of Zimbabwe passing a stronger indigenization law in February 2010, China requested the repayment of back loans (the law was later cancelled, while a similar earlier law is only loosely enforced). The Chinese government’s relationship with Mugabe has been strained, and when international pressure has come to bear on him China is said to have worked behind the scenes to force him to compromise. Only North Korea has a similar level of dependance on China for political and economic support, and watching how strained the two government’s trading relationship is could provide insight into when China is more likely to back multi-national efforts.

There has been some efforts to track China’s investment flows, but for practical reasons much of it has been limited to larger investments. The private sector though is a strikingly important part of China’s foreign policy. Chinese citizens living in Zimbabwe are said to have pushed political connections between the two countries, almost all of the investment along the Laotian border is private, and much of the push for the Kashgar special economic zone was the private sector dominated Kashgar Commodities Fair. Having a sense of how small business people are trading, whether they are trading legally, and what effect it has on China’s political class will be crucial to understanding the forces behind China’s developing foreign policy.