China’s rise and“ Go Out”policy

What drives China’s rise to“Great Power”

China increases investment in beleaguered European countries

Chinese money finds its way to Korean high-tech firms

:: China’s rise and “Go Out” policy

What drives China’s rise to “Great Power”

SHIM Sang-Hyung Senior Business Analyst of POSCO Research institute

n the winter of 2006, a documentary film broadcasted by China Central Television (CCTV) aroused an echo within Chinese society. It was a twelve-part documentary, titled The Rise of the Great I Powers ( ), with the rise and fall of great powers since the 15th century as its theme. This documentary compares the emergence and development of great powers, from Spain and Portugal to Germany and the US, as a lesson for China. Through this documentary film, China, which gained economic confidence with a more than 10 percent economic growth rate for four consecutive years, seemed to instill its people with the dream of “Great Power.” The last episode introduces what all great powers have in common: they focused on science and education, established political and economic systems suitable to their countries, and led modernization under the initiative of the government.

013 Summer 2011�POSRI Chindia Quarterly The program concluded on the following notes: the What draws our attention is not the replacement of great powers degree of China’s success in the globalization of the yuan, or how soon is an inescapable law of it might reap fruits from its efforts, but history; the great powers rather China’s meticulously planned emerged not by chance, but preparation for the future. by seeking their paths rationally. It also added that the correct path should be aligned with the peace of all mankind. All in all, it was a quite meaningful finale. Not long ago, during the discussion session at a forum with Korean experts on China, the president of one medium-sized Korean company with a fairly large presence in China raised his hand and spoke his mind: foreign trade is settled in yuan in China, so he has to change yuan to US dollars and then dollars to Korean won, burdening him with a huge exchange commission. Many people engaged in Korea-China economic cooperation say that if a yuan settlement system were introduced in Korea, many Korean companies would benefit from the system.

○● Path to economic superpower

The word jueq̌Ｉ ( ), which describes a high mountain, means “to rise” in Chinese. The word has a somewhat intimidating connotation. China’s current foreign policy approach can be summed up by the phrase “rise in peace ( ),” even though the two words, peace ( ) and rise ( ), are a bit contradictory. China, already the world’s second largest economy, is no longer able to stay the course of ta�o gua�ng yǎng hu ( ), meaning “hiding one’s capacities and biding one’s time,” as it used to in the past. The international arena is somewhat perplexed in the face of China, which claims the coexistence of the two contradictory values

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of socialism and a market economy, and which utilizes somewhat unreasonable means and remarks, refusing to make concessions when it comes to its core national interests. People often wonder, “Can we blindly accept China’s political and economic systems as a new paradigm?” or “Can we expect peaceful leadership from China, and feel safe despite its insistence on the protection of its own interests without offering persuasive reasoning?” Unlike the international political and economic arenas, which are losing their balance, the Chinese economy actually seems to be steadily rising toward “Great Power.” There are various reasons many people predict that China will continue its long march to great power. China’s growth engine seems strong, with its large population of 1.3 billion people. The top 20% of China’s population, with an average annual household income of more than 100,000 yuan, plays a major role in the current consumption expansion. Additionally, the middle class, the 40% of the population who earn RMB 50,000-100,000 annually, will become a valuable contributor in China’s future consumption expansion. The Chinese government has been making steady, large-scale investments in the western regions, where the average GDP per capita was around USD 2,500 last year, far short of the national average GDP per capita of USD 4,300. The infrastructure built through such investments will result in an increase in the exchange of personnel and goods, helping the region maintain the momentum of growth. When key Chinese industries under state control, including telecommunications and electric power, open to the private sector and to foreign countries, they will surely serve as a basis for enormous growth. Leading Chinese companies that have just started venturing abroad will soon become accustomed to utilizing global resources and capacities, and will eventually gain confidence in the global market.

015 Summer 2011�POSRI Chindia Quarterly The hidden Chinese inferiority complex toward the West, which James McGregor pointed out in his book, One Billion Customers, began to disappear when Chinese companies landed in the birthplace of capitalism with grand fanfare. (As of March 2011, 198 Chinese companies were listed on the US stock exchanges.)

○● Rising monetary power and globalization of the yuan Even though potential economic growth factors underpin the long-term growth of the Chinese economy, the most important factor to the rise of China as a “Great Power” is the globalization of the yuan. Regardless of the different processes they took in becoming powerful nations, all Great Powers have something in common. To become hegemonic powers, especially in recent times, countries have needed monetary and military power, as well as the power to provide an ideology and values that can control the world. The authority that China exercises quantitatively as the world’s second largest economy does not yet equate to monetary power, or true economic power. In other words, China must become the key currency country, with leverage on the world economy, to have monetary power. For China to enjoy the status of being the key currency country, it must possess the capability and responsibility to overcome any global economic crisis. The Chinese yuan is now challenging the dollar. As the US-led monetary system wobbles after the global financial crisis, the yuan is gaining power. In 2008, China set up a task force to prepare for the globalization of the yuan under the People's Bank of China, and on July 1 of 2009, China launched a pilot project in five cities, including Shanghai and Guangzhou, to use the yuan for settlement of cross-border trade with Hong Kong and Macao. At that time, China’s swift move toward the yuan globalization surprised the world, but the possibility of the expansion of the yuan trade system was met with pessimism. Things have changed now. Beginning in June 2010, China expanded the system to cover 20 Chinese cities and

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foreign cities around the world, and the trade volume settled in yuan rose from RMB 3.59 billion at the end of 2009 to RMB 506.3 billion last year, a 141-fold increase in only one year. As one survey suggests, about half of Korean companies have been asked by their Chinese partners to settle their trade in yuan. This shows that, as a trade superpower, China has already laid the foundation for the globalization of the yuan. Moreover, as China gradually expanded and opened its capital market, the sale of yuan-denominated financial products was allowed in Hong Kong. Then, yuan-denominated bonds were successfully issued by foreign companies and international financial institutions, such as the Asian Development Bank.

○● Meticulous preparation and execution After the US-China summit in January 2011, the US supported adding the yuan to the IMF Special Drawing Rights (SDR) currency basket. G-20 nations also agreed on the addition of the Chinese currency to the SDR basket at the G-20 financial ministers meeting, held in March 2011. Though an exact timeline was not specified, such a move will surely give impetus to the globalization of the yuan. Needless to say, there is a long way to go for the strictly state-controlled Chinese financial system to satisfy the requirements for becoming the key currency country: adoption of floating exchange rates, independence of the Central Bank, and liberalization of capital inflow and outflow. These challenges are intrinsic to the fundamental system of the Chinese economy. Moreover, China gaining the trust and approval of the international community to exercise monetary power over the global economy seems far off. This is why some people predict that it will take more than 30 years for China to become the key currency country. China’s efforts to globalize the yuan, however, are being carried out with the goal of settling more than half the cross-border trade with emerging

017 Summer 2011�POSRI Chindia Quarterly countries in yuan in three to five years. It is also expected that China will expand the offshore yuan market in Hong Kong, further develop and distribute necessary financial products, and eventually open mainland China’s financial market.

○● China’s determination What draws our attention is not the degree of China’s success in the globalization of the yuan, or how soon it might reap fruits from its efforts, but rather China’s meticulously planned preparation for the future. In the short-term, it will be difficult for China to lead new international norms on global issues such as environment and energy; to create new values through innovation in industry and competition, and enable itself to disseminate such values; or to provide a new dominant ideology tantamount to freedom, peace and the protection of democracy. Despite internal troubles, China’s growth has been powered by the setting of new goals and directions in every sector of economy and society every five years, and by the disclosure of its progress to its 1.3 billion people. China is moving toward its goals on schedule and according to plan: from the advancement of industry structure and the promotion of green growth, to the expansion of soft power through the enhancement of creativity and innovation, and by the securing of military power. China is actively and rationally seeking a path to become a great power, as referred to in the last episode of The Rise of the Great Powers. China is perhaps pledging to itself to rise to “Great Power,” rather than proclaiming it to the world.

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China increases investment in beleaguered European countries

KIM Deuk-Gap Senior Researcher of Global Studies Samsung Economic Research Institute (SERI)

hina has recently set out to “save Europe” by providing generous funds. This is because the European Union is one of China’s biggest export markets, accounting for about 20% of C China’s total exports. Stability in Europe is highly important to export-dependent China, because a weak euro reduces the competitiveness of imports from China to Europe, hurting China’s economic growth. That is why China has been actively investing in Europe for the last two years, since the sovereign debt crisis broke out in Europe. In 2009 alone, the number of new investments made by China in Europe increased by 30%. Unlike in the past, when it focused on the Big Three (Germany, France and Great Britain), China has recently turned toward economically distressed European countries, such as Greece, Ireland, Portugal and Spain.

○● Increasing purchases of European bonds At the end of December 2010, China’s foreign exchange reserves totaled

019 Summer 2011�POSRI Chindia Quarterly USD 2.847 trillion, more than double The Korean government and Korean Japan’s USD 1.096 companies need to capitalize on Europe’s sovereign debt crisis as an trillion. This number opportunity to tap into the European exceeds a reasonable market. level, and the Chinese government is mulling over the management of its reserve holdings. The Chinese government has so far been investing in US treasury bonds to ease pressure on domestic prices and to reduce international pressure on the appreciation of the yuan. At the end of December 2010, China’s holdings of US Treasury bonds totaled USD 895.6 billion, accounting for 21% of US Treasury bonds held by foreign countries. In the past, only a quarter of China’s foreign exchange reserves were held in euro-denominated assets. Now, China reportedly holds about 10% of the bonds (EUR 700 billion) issued by the 17 euro-zone countries. In the meantime, China is diversifying its overseas investments, replacing its investment destinations with Asian and European markets. In particular, China is accelerating the pace of government bond purchases in European countries on the brink of financial collapse, including Greece, Ireland, Portugal and Spain. By doing so, China intends to avoid the brunt of American pressure to appreciate the yuan, while making more profit from higher-yielding European bonds instead of lower-yielding US Treasury bonds. China also has an underlying intention to extend its clout in the international community. In the private sector, Chinese companies are also increasing investment in Europe. Chinese foreign direct investment into Europe only accounted for 5.3% of the total Chinese FDI in 2009, but the figure is on the rise. Over the last five years, China’s FDI in Europe has surged by more than 15 times.

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○● Greece: a gateway to Eastern Europe Chinese Premier Wen Jiabao visited Greece early in October of 2010. It was the first visit to Greece by a Chinese Premier in 24 years. During his visit, the Chinese and Greek governments and various companies signed 13 economic and investment deals worth tens of billions of dollars. What caught the most attention during Wen’s visit was his remark that China was going to buy new Greek bonds. He also announced that China would set up a Greek-Chinese shipping development fund, worth USD 4.5 billion, to help Greek shipowners buy Chinese-made vessels. Such measures might hurt Korea’s status as the top winner of new ship orders from Greece. Focusing on the strategic importance of Greece as a gateway to the Balkans and to emerging European markets, China plans to invest tens of billions of dollars in shipping, tourism, and telecommunications. For instance, Cosco, China’s largest shipping operator, won a long-term concession worth EUR 3.4 billion to run two container terminals at the main Greek port of Piraeus. This bid was made to ship Chinese products to the Balkans via Greece quickly. Chinese companies are also taking interest in the privatization of OSE, Greece’s heavily indebted state-owned railway. Chinese telecom giant Huawei is providing telecommunications facilities to Greek telecom company OTE, while China Artek concluded a trade agreement for marble with Iktinos Hellas Marble Industry, a Greek construction company. Chinese real estate company BCEGI Group plans to build large-scale hotels and shopping malls at Helios Plaza and Piraeus. In addition, Chinese telecommunications manufacturer, ZTE Corp., pledged to give support for the opening of a Confucius class at Athens University.

○● Plans to use Ireland as a manufacturing base In June 2010, a high-ranking delegation led by Li Changchun, a member of the Standing Committee of the Political Bureau of the Communist Party of China (CPC) Central Committee, visited Ireland. This was the highest-

021 Summer 2011�POSRI Chindia Quarterly level visit in the six years since Premier Wen Jiabao went to Ireland in 2004. The delegation visited Ireland to discuss a construction project for an exclusive industrial complex for Chinese companies. Ireland’s Prime Minister, Brian Cowen, promised full support for the project at a meeting with the delegation. Chinese companies plan to invest EUR 50 million to build a large-scale industrial complex in Athlone, central Ireland. The project gained final approval from the Greek government in July 2010, and was dubbed “Beijing-on-Shannon” by local papers. This project involves bringing in 20,000 Chinese workers to build a new school, a railway station and hundreds of factory units and apartments on a 600-acre plot of land. The Irish government expects that the plan will create 8,000 new jobs for the Irish people. Once the complex is completed, Chinese companies will enjoy the lowest corporate tax rate in Europe (12.5%) and non-tariff incentives. The project is a win-win strategy for both “cash-strapped” Ireland and “market-hungry” China. At present, 115 Chinese companies are in Ireland, a two-fold increase from 45 companies ten years ago. Thanks to this project, even more Chinese companies are likely to invest in Ireland, making it China’s leading manufacturing base.

○● More cash into Spain The European debt crisis started with Greece, moved on to Ireland and Portugal, and then finally to Spain. It is fair to say that the fate of the euro zone depends on Spain. Spain is now wrestling to contain its ever-increasing budget deficit. According to Moody’s, Spain’s central government must raise EUR 170 billion this year; including the share to be raised by local governments, this amount totals EUR 200 billion. In 2011, the total production of government bonds in the euro zone is estimated to stand at EUR 824 billion, 10% of which was issued by euro

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zone governments in January alone. If Spain fails to raise the money, it must apply for support from the stabilization fund of the European Union and the International Monetary Fund, as Greece and Ireland have done. Given that Spain is the fourth largest economy in the euro zone, the bailout fund for Spain is expected to be larger than the combined bailouts for Greece and Ireland. China, as one of the biggest investors in Spain, holds about 10% of Spanish government bonds. Spain is now more desperate than ever for China to purchase its sovereign bonds. Chinese Executive-Vice Premier, Li Keqian, and a delegation of more than 100 officials and businessmen visited Spain from January 4-6, 2011. Even though he is not the chief of state, he had a series of high-level meetings with the Spanish king, various ministers and other high-ranking officials. In an interview with leading Spanish daily newspaper El Pais, Mr. Li supported Spain’s economic reform and promised to buy more Spanish government bonds (an estimated investment of EUR 6 billion), suggesting China’s growing role in stabilizing EU’s financial market. In addition, China has signed 16 trade deals with Spain, worth EUR 5.7 billion, in the sectors of banking, communications, IT, tourism, energy, transport, and agriculture. Among these, what draws the most attention is Chinese state oil company Sinopec’s investment in the Brazilian unit of Repso, Spain’s largest oil group. This deal, worth USD 7.1 billion, will promote cooperation between the two nations in the energy sector.

○● Europe welcomes growing Chinese investment Political circles in Europe generally welcome the expansion of Chinese investment in the EU. In particular, financially stressed nations are anticipating green-field and portfolio investments from China’s private sector. For this reason, European politicians were enthusiastically engaged in promotional campaigns for their countries at the Shanghai Expo. But not everyone is happy about China’s ambitions. Because Chinese

023 Summer 2011�POSRI Chindia Quarterly investment in Europe is mainly led by state-controlled companies, banks, and investment funds, countries such as Germany and France are cautious of China’s political intentions. Some argue that the EU should closely examine foreign direct investments, as the US, Australia and Japan do. In December 2010, Antonio Tajani, Vice-President of the European Commission and Commissioner for Industry and Entrepreneurship, showed his concerns over China’s strategic purchase of EU assets and called for a supervisory body within the EU to review the acquisition of European enterprises by foreign corporations. Such a supervisory body would prevent China from buying major European corporations en masse in the midst of the financial crisis. Others have different opinions. For instance, Joaquin Almunia, Vice- President of the European Commission and Commissioner for Competition, emphasized that EU member countries should open their doors to Chinese investment in exchange for China’s purchases of European government bonds.

○● Korea should invest more in Europe Europe’s sovereign debt crisis offers a golden business opportunity for investors with abundant capital. China, with the world’s largest foreign exchange reserves, tries to expand its influence within the European market by investing in European countries, including Greece, Ireland, Portugal, Spain and Italy. China is also expected to devote itself to building logistics and production networks in Europe for Chinese companies by building infrastructure at the government level. Assuming that Europe will suffer from aftereffects of the European financial crisis for some time, there will be an opportunity for Chinese capital in the construction of large-scale transportation infrastructure connecting Western and Eastern Europe. China is a major competitor of Korea in the European market. If China becomes more competitive in Europe, there is a possibility that Korea will have a smaller say in the KOR-EU FTA. Triggered by China’s recent steps,

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Japan has said that it would buy bonds issued by the European Financial Stability Fund (EFSF). The Korean government and Korean companies need to capitalize on Europe’s sovereign debt crisis as an opportunity to tap into the European market. They should buy European government bonds from a strategic perspective, invest in infrastructure and acquire European companies in new growth sectors. This process requires a strategic approach, with consideration for the specific benefits each country can provide. For example, given Spain’s presence in Latin America, an alliance with a Spanish company would be advantageous for entering the Latin American market. They should keep good relations with Greece, taking into account that Greece is the biggest customer for Korean shipyards. Pursuing investments and strategic partnerships in Greece is worthwhile considering its importance as a gateway to the Balkan and Mediterranean markets.

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:: China’s rise and “Go Out” policy

Chinese money finds its way to Korean high-tech firms

JO Yong-Chan Senior Researcher of the China Financial Institute

hina’s domestic market has long been described by the expression “big fish eats small fish (大魚吃小魚)” for its fierce competition. This expression means that economic size is a C competitive advantage. A new expression, “fast fish eats slow fish (快魚吃慢魚),” was recently coined because speed, not scale, determines the success of businesses nowadays. This year, China adopted different methods of economic growth, which allow small companies to pursue mergers and acquisitions (M&A) and to tap into foreign markets. Perhaps “small fish swallows big fish (小魚呑大 魚)” will become popular.

○● China’s foreign investment expands from energy to manufacturing It was 2005 when China adopted the “Go Out (走出去)” policy to encourage Chinese enterprises to invest overseas. According to China’s Ministry of Commerce, China’s annual foreign direct investment (FDI)

027 Summer 2011�POSRI Chindia Quarterly outflow averaged merely USD 2 billion in the 1990s, but rapidly increased to exceed USD 10 billion in 2005, USD 55.9 billion in 2008, and USD 56.5 billion in 2009. So far, China’s outbound investment in overseas markets has been focused on the energy industry, especially the mining industry. However, this focus has recently been diversified. Large state-owned companies— China National Petroleum Corporation (CNPC), Sinopec, China National Offshore Oil Corporation (CNOOC), China Baoan Group Co. (CBGC), and China Steel Corporation (CSC)—led acquisitions of foreign resource companies. For five years, from the beginning of 2005 to the first half of 2010, China concluded 91 acquisition deals of overseas mining assets, with a total value of USD 31.9 billion. Overseas investment of Chinese manufacturing companies is increasing in volume and scale. A case in point is that Chinese automaker Geely bought Volvo, the troubled US-owned Swedish car maker, for USD 1.8 billion. Japanese companies, which have been under economic recession for twenty years, have also been good targets for Chinese capital. Last year, Chinese automaker BYD signed a contract with Ogihara to acquire a factory

Small fish swallows big fish (小魚呑大魚)

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China’s M&A Market (2009-2010) ($1 Mil.) (# of M&A) 160 200 M&A Amount # of M&A 120 150

80 100

40 50

0 0 2009.1Q 2Q 3Q 4Q 2010.1Q 2Q 3Q 4Q

Source: Zero2ipo Venture Capital Research Center, Jan. 2011

owned by the leading Japanese metal die maker. China’s shopping spree in Japan goes on and on: Laox, a famous consumer electronics chain in Akihabara (June 2009), Honma Golf (February 2010), Higashiyama Film (May 2010), and apparel maker Renown (May 2010). China, with its abundant capital, is actively engaging in acquisitions of Japanese companies on the brink of bankruptcy or ailing Japanese companies. In 2010, Chinese companies sealed 44 acquisition deals in Japan, with a combined worth of USD 437.7 million, the highest deal count in a decade.

○● China: a strong hand in Korea’s capital market The tightening of China’s policies has caused liquid assets to flow into foreign investment. China’s investment in Korean stocks, bonds, and takeovers will likely increase. Chinese funds directly invested in the Korean stock market are from 88 Qualified Domestic Institutional Investors (QDII) that have been awarded quotas of USD 68.36 billion by the Chinese government. Standard Chartered, Citibank, HSBC, and Bank of East China,

029 Summer 2011�POSRI Chindia Quarterly China’s total FDI

($1 Mil.) 600

500

400

300

200

100

0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: China’s Foreign Investment Statistics

which invest overseas on behalf of QDII’s, offer a variety of financial products in Korea, investing not only in emerging markets, but also in gold and infrastructure in Asia. At the end of April 2011, foreign investors held listed South Korean securities totaling KRW 488.68 trillion, including listed stocks worth KRW 412.50 trillion (accounting for 30.8% of the total aggregate market value), and listed bonds worth KRW 76.17 trillion (6.6% of the total listed bond issues). From January to April, China’s net purchases of Korean stocks totaled KRW 622.9 billion. Total net purchases by foreigners during this period amounted to KRW 1.314 trillion. China made the third largest purchase of listed Korean stocks, after the US and Singapore. China has continued to make net investments in Korean bonds each month in anticipation of the appreciation of the won. Since 2009, China has made monthly purchases of Korean Treasury notes worth KRW 30-40 million. From January to April 2011, China bought KRW 1.394 trillion worth of Korean bonds, replacing the US as the highest purchasing country. China’s investment in Korean bonds is 100% focused on government bonds. Most of that investment presumably comes from the

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foreign reserves of the Central Bank of China. China cut US Treasury Bond holdings by USD 9.2 billion in March, and continued to decrease its holdings for five consecutive months. China’s increased holdings of Korean bonds seem to be part of China’s strategy to diversify its foreign reserves. The Japanese stock market is a good indicator of China’s investment pattern, because China began investing in Japan earlier than in Korea. Foreigners made net purchases of JPY 3.2 trillion in the Japanese stock market in 2010. It is believed that one third of these purchases were made with Chinese money. Chinese investment patterns are brand-oriented and covert: 1) Chinese investors It is the right time for the Korean target companies with an government to lay the foundation for Korean companies to venture aggregate market value of out into the Chinese market by more than JPY 1 trillion; 2) allowing them to actively seek they limit total purchases to global M&A. 23% of listed stocks; 3) once they start buying, they tend to increase their share up to 2%; and 4) they do not exceed the 5% threshold that obliges investors to disclose their holdings. In Japan, Chinese investors prefer rapidly growing firms such as Ship Healthcare Holdings, Inc., which developed easy-to-use medical kits that can also be used as notebook computers. The stock value of this company, which caters to an aging society, doubled from JPY 510 a year ago to JPY 1,317 on May 23 of this year. China keeps buying stock in senior health care businesses, including private nursing homes, construction of senior housing, medical services, and food delivery services. In the Korean stock market, China is also expected to invest in major brands. In March 2011, China Investment Corporation (CIC) launched a

031 Summer 2011�POSRI Chindia Quarterly China’s monthly net purchases of Korean stocks

8000 Listed South Korean bonds 7000 Listed South Korean stocks 6000 5000 4000 3000 2000 1000 0 -1000 2009.1 3 5 7 9 11 2010.1 3 5 7 9 11 2011.1 3 -2000

Source: Financial Supervisory Service of Korea

dedicated fund of USD 100 million to invest in listed Korean firms. As happened previously with China’s US-dedicated and Japan-dedicated funds, the Korea-dedicated fund will bring with QDII’s, 242 private equity firms, and the National Social Security Fund (NSSF). Given that the Chinese government is trying to diversify the investment of its ever-growing foreign exchange reserves, and that it is looking for long-term, high-return management opportunities, it is likely that CIC’s dedicated fund for Korea will increase.

○● China’s longing for M&A of technology companies Public sentiment toward the takeover of Korean firms by Chinese investors has grown negative since Shanghai Automotive Industry Corp. allowed Ssangyong Motor to slip into receivership and washed its hands of the business in early 2009, only four years after its acquisition of Ssangyong. Another challenge stands in the way of the purchase of Korean firms by Chinese investors: illegal leakage of Korean technology to China

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has become a hot-button issue; cash-strapped Korean venture companies have sold their advanced technologies to China for next to nothing. China’s acquisition of foreign firms differs by country. China has purchased energy and resource companies in the US, while takeovers in Japan have focused on IT service, pharmaceuticals, audio equipment, solar cells, golf-related businesses, and machine tools. Chinese law firm Dacheng (大成), located in Pudong, and the Economic Research Institute of D'Long International Strategic Investment have specialists who pay keen attention to the M&A of Korean firms. “China now has the ability and will to invest in any state-of-the-art technology,” says Park Sung-chul, a partner at Dacheng. “China wants to buy Korean IT firms equipped with state-of-the-art technologies. China hopes to learn management know-how from Korea, which has become an aging society before China and has experienced replacement demand for electronic goods and cars.” He added, “China is interested in buying financial institutions and Korean firms in various sectors, including online gaming, petroleum and chemicals, auto parts, and ship parts. Many M&A’s are already underway.”

○● “Go Out”policy, an opportunity for cooperation, not a conflict of interests If China continues to buy Korean government bonds in an effort to diversify its foreign exchange reserves, it will be disadvantageous to Korea because of the deteriorated validity of Korean monetary policy. China’s holdings of Korean bonds only account for 0.2% of China’s foreign exchange reserves. If China were to increase its holdings of Korean bonds to 1% of its total reserves, it would require additional purchases of Korean bonds worth about KRW 30 trillion. This would have a serious impact on Korea’s foreign exchange and interest rates. However, we should not overlook the positive effects of Chinese money: it buffers external shock in

033 Summer 2011�POSRI Chindia Quarterly times of unstable global markets, preventing the Korean capital market from fluctuating due to sudden capital outflows. China currently accounts for only 6% of the global business investment market. Great Britain and the United States, two historically hegemonic countries, occupied 50% of the market in 1914 and 1967, respectively. From this, it can be presumed that China’s direct foreign investment will continue to rise for quite some time. Now is the time for China, with its strong hardware industry, and Korea, with its stellar software industry, to find business opportunities with each other through M&A. It is the right time for the Korean government to lay the foundation for Korean companies to venture out into the Chinese market by allowing them to actively seek global M&A. Korea should also prepare legislation on technology leakage, and establish a supervisory system for M&A.

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