Siren song: Chinese economic relations with Portugal (part II)

1. Since 2010, large Portuguese-flagged firms operating in some strategic or sensitive sectors have become partially or wholly owned by Chinese, mostly state-owned companies. The context where the acquisitions happened was a very difficult one for the Portuguese economy. Back then, the country was under an international financial assistance program and strict surveillance from the International Monetary Fund (IMF), the European Commission, and the European Central Bank. Austerity-driven policies and a wide-ranging privatization program started in 2011. As happened with other European Union countries, particularly from southern Europe, China saw an opportunity to take advantage of their vulnerable economy, severely affected by the financial and economic crisis that had begun in 2008.

In the 2010-2015 period, and according to Ivana Casabury from ESADE Business School, Portugal received USD 7.23 billion in Chinese investment (8% of the total for Europe). The amounts invested in Portugal were very high in comparison with its economic weight in Europe (see ESADE “Chinese investment trends in Europe 2016-17”, 2018, p. 65). The Chinese acquisitions happened in several sectors of the economy: in the banking and insurance area, the Novo Banco (Banco Espírito Santo) was taken over by the Chinese group Haitong Securities in 2015; Fidelidade, the country’s largest insurance company, by the private group Fosun International in 2014; in the Health sector, Fosun also acquired Espírito Santo Saúde / Hospital Luz Saúde in 2015; and in the media sector, the Macau-based KNJ Investment Fund acquired the Global Media Group — owner of the newspapers ‘Diário de Notícias’, ‘Jornal de Notícias’, ‘Dinheiro Vivo’ and ‘TSF’ radio — in 2016.

2. In addition to these sectors, the Chinese acquisitions in the energy area have been a case of significant interest, both in the media and in the academic community. It’s important to remember that these investments are of strategic importance, not only at the economic-business level, but also at the level of politics and State security. Consider the main current shareholder of EDP (Energies of Portugal). In accordance with the company’s official information, we find China Three Gorges (Europe) S.A. EDP’s official information unequivocally indicates that 21.47% of voting rights — and EDP shares — belong to the People’s Republic of China. As for the National Energy Network (REN) and its main shareholders, the official REN information refers that 25% of its capital is owned by the State Grid of China. What should one think of all this?

The first observation that comes to mind is that Portugal seems to lack a coherent policy where the Portuguese State should have a role and performance instruments — and its non-strategic sectors, which should work in line with the logic of the market and private economy. The second observation is the absence of a clear distinction between foreign direct investment by private companies and foreign direct investment by companies of foreign States, such as China Three Gorges. The third and most critical aspect is the lack of a long-term vision in a sector unanimously recognized as strategic: energy and power networks. It is worth noting that, as demonstrated earlier, in both cases — EDP and REN —, the Chinese State is the main shareholder. Meanwhile, the Portuguese State, as mentioned earlier, seems to believe that a foreign State — who is neither a member of the European Union nor part of Portugal’s political-military alliances — is an adequate entity to own strategic assets. This is a risky belief given the developing global tensions in the current world.

3. China is not a liberal State in any sense of the term. China has sought to benefit from the advantages of a global liberal environment, which guarantees the openness of international markets. Simultaneously, the Chinese State continues to maintain political control over its own market and economic system. As an example, it would be impossible for a Portuguese company to buy an energy company in China. This Chinese economic approach has a classical name: mercantilism. A mercantilist policy seeks the growth through the promotion of exports — that is, guided by the external markets —, undertaken by forms of state dirigisme.

Thus, it’s relevant to look to the analysis of the European Commission and its observations on the practical significance of the socialist market economy of China (see European Commission, “On Significant Distortions in the Economy of The People’s Republic of China for the Purposes of Trade Defence Investigations”, 2017). As the Commission explains, “The move to a socialist market economy meant a shift from a pure planned economy to a hybrid system. It is fair to say that while the Chinese economy has developed remarkably in the last forty years and is much more deeply integrated in the global economy, it has developed into an economy that is unlike any other economic system in the world. In practice, the socialist market economy system has meant that while market forces have been mobilized to some extent, the decisive role of the State remains intact”.

4. According to INE, the Portuguese National Statistics Institute, in 2018 China was the main extra-EU supplier of goods to Portugal, accounting for a share of 3.1%. Machines and devices, metals and textiles were the main products that originated a sharp deficit in the trade of goods with China. Part of the explanation for the trade deficit is also related with the relocation to China of traditional Portuguese productions, such as textiles and clothing, using cheaper and more abundant labor. Beyond the problem of social dumping and the loss of national employment, Covid-19 showed other vulnerabilities of the globalized model of production and distribution. Suddenly, critical medical equipment, like ventilators, personal protective equipment, and other products to help deal with the outbreak of virus were scarce in the country.

On April 3, 2020, amidst of the crisis generated by the Covid-19 pandemics, the Portuguese Prime Minister, António Costa, stated in a radio interview to Rádio Renascença that this was the time for “Europe and Portugal to position themselves to return to producing at home much of what they are used to importing from China”. And in a similar tone added the following: “The biggest thing we must think is that we cannot have the same extensive economic chains we have today, and we cannot be so dependent on a country like China. This is the biggest lesson.” If this is the future political and business practice, the changing of attitude will be quite striking. Every Portuguese Government of the last decade was very sympathetic with China, and the business class was usually very attracted to the supposed big economic gains from deepening trade and investment relations with China.

5. As already explained, the economic relations with China are also very political due to the specific nature of the Chinese State, wherein the economics and politics are inextricably linked under the control of the Government (i.e. the Communist Party). Precautions are necessary in the current and coming world. The Covid-19 pandemics is an early sign of how Portugal needs to be careful. Many people imagined that Xi Jinping’s China was the adequate partner to defend globalization and counterbalance Donald Trump’s ‘America first’ policy; however, one shouldn’t solve an evil with a still greater evil — China is an authoritarian great power. To imagine, as happened in Portugal for long time, that Chinese investments and their network of business and partnerships are merely ‘economic’ was a misperception of both Chinese reality, and of the complexities of globalization. The result was a strategic dependence on the Chinese production of health-critical goods, as we have been seeing. In international future adverse circumstances, the energy sector may be even a worse headache for the Portuguese State.