As China rises, so does its risk
Doing business with a number of unstable countries has made Beijing a target of attacks.
By Ian Bremmer, FORTUNE Magazine

(FORTUNE Magazine) - On April 29, a call from a mobile phone detonated a car bomb near an oil refinery in the southern Nigerian city of Warri. No one was killed, but the effects of the blast were felt as far away as Beijing.

"We wish to warn the Chinese government and its oil companies to steer well clear of the Niger Delta," a Nigerian militia group wrote in an e-mail to the media claiming credit for the attack.

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"Chinese citizens found in oil installations will be treated as thieves. The Chinese government, by investing in stolen crude, places its citizens in our line of fire."

How did China find itself in the crosshairs of the Movement for Emancipation of the Niger Delta, a group it once might have praised for its revolutionary fervor?

Nearly three decades ago the Chinese Communist Party renounced its commitment to Marxist economic principles and began embracing market capitalism and soliciting foreign investment to fuel its economic growth.

The collapse of the Soviet Union reinforced the party's conviction that only by providing the Chinese people with a rising standard of living could the state ensure lasting stability for its authoritarian system.

Continuous attacks

Now Beijing recognizes that attracting foreign investment is no longer sufficient and that it must promote Chinese investment overseas in the quest for energy and other resources needed to sustain development. Which means Chinese companies and workers are active all over the world, involving them in the political turmoil of other states.

China has suffered attacks on its citizens working abroad before.

In May 2004 three Chinese engineers working on a port construction project in Pakistan were killed in a car-bomb attack.

Militants seeking autonomy for their province targeted the Chinese workers to protest Beijing's participation in a project they believed would exploit local resources and enrich the Pakistani government.

A month later 11 Chinese railroad workers were murdered at a construction site in northern Afghanistan.

And in October of that year two Chinese engineers were kidnapped by Pakistani terrorists. One of the hostages died during a botched rescue attempt.

In response to the attacks, the Chinese government created a Department of External Security Affairs, charged in part with the protection of China's overseas assets and its citizens working abroad.

In short, the party's "go out" policy to boost Chinese investment abroad has exposed Beijing for the first time to substantial international political risks.

China is especially vulnerable because its companies have forged agreements with a number of relatively unstable states that Western companies prefer to avoid, such as Iran, Sudan, Myanmar, and Zimbabwe.

Willingness to sign long-term deals with such nations compels China to manage new kinds of threats to its interests and often brings Beijing into political conflict with the U.S. and the European Union.

More oil revenue

Nigeria, an oil-rich state in which Western energy firms are struggling to maintain a secure foothold, is the most recent challenge. Niger Delta militia groups, which have shut in about a quarter of Nigeria's oil production, have no ideological grievance with China.

But to pressure President Olusegun Obasanjo's government to share more oil revenue with impoverished Delta residents, they have stepped up attacks against foreign firms operating in the area.

The warning to China was made just after President Hu Jintao visited Nigeria, where he and Obasanjo agreed on a number of deals, including one that provides Chinese companies with four oil- exploration licenses in return for a $4 billion investment in Nigeria's infrastructure. Three days later the bomb went off.

During the trip Hu told African journalists that his government adheres to a "principle of noninterference in the internal affairs of other states."

Beijing believes this principle gives China a competitive advantage in countries where Western companies are constrained by their governments' concerns for democratic reform and human-rights protections.

In exchange for access to the resources China needs, these states receive more than China's abundant cash and engineering expertise; they also win protection from Western pressure.

Beijing says it will not support tough sanctions on Iran meant to force Tehran to renounce its nuclear ambitions.

It has vetoed UN sanctions on Sudan intended to pressure Khartoum into halting government-sponsored violence in its Darfur region. And its investments in Zimbabwe help that country's dictator, Robert Mugabe, resist calls for reform.

Beijing has not yet paid a heavy price for investing in states buffeted by conflicts over control of precious resources. But as its international presence and profile grow, it is increasingly vulnerable to the political risks that developed states have managed for years.

Nigeria is plagued by precisely this sort of unrest. The warnings from the country's best-armed and best-organized militant group reveal that Beijing is wrong to believe that noninterference in politics shields it from turmoil in developing nations.

Chinese competition

Its state-owned companies certainly have the cash to win friends among these countries' elites. But managing threats posed by powerful militia groups is another matter.

In the longer term, as China's overseas assets become subject to the kinds of threats facing more developed states, the party will probably diversify more of its investment portfolio toward countries with relatively mature market economies.

That's good news for the U.S. and the EU: Greater investments in such states may force Beijing to adhere more faithfully to established economic rules of the road. And it makes sense for China, since attacks by militant groups aren't the only challenges for Beijing's foreign investment strategy.

In a number of countries, workers have expressed frustrations over rising unemployment in textile and manufacturing sectors caused by the flood of low-cost Chinese imports and the presence of large numbers of Chinese workers on Beijing-financed construction projects.

In September 2004, for example, hundreds of Spaniards took to the streets to protest job losses to Chinese competition in the country's shoemaking industry. Demonstrators badly damaged two Chinese-owned warehouses and set fire to a truck owned by a Chinese businessman. Others unfurled banners that read Chinese Out.

Meanwhile, Beijing's efforts to block Western sanctions against states like Iran and Sudan contribute to the already significant pressure within the U.S. Congress for punitive trade legislation aimed at China.

To the extent that Beijing continues to pursue an investment strategy that brings it into conflict with Washington, there may be an increasingly steep economic price for China to pay at a time when its economy remains vulnerable to global economic volatility.

In the short term it's unlikely any of these emerging threats to Chinese growth will mature quickly enough to force Beijing to reverse its course. The "go out" strategy has paid remarkable dividends and will continue to do so.

But over the longer term Beijing will discover that its aggressive international investment strategy comes at a price. And as China raises its global profile, that price is likely to increase.

In time, payment of that price may even compel Beijing to more closely align itself with Western counterterrorist efforts. As the U.S. and China face more of the same risks, their interests may coincide as never before.

Recognizing China's growing international clout, the Bush administration has called on Beijing to act as a "responsible stakeholder" in the international system. But it has largely failed either to entice or pressure China into taking the concrete steps that might ease tensions between the two states.

Ironically, it is China's expansion and the risks Beijing assumes with its new international role that may eventually accomplish what Washington has not.

Ian Bremmer is president of Eurasia Group, a political-risk consultancy. He is the author of the forthcoming The J Curve: A New Way to Understand Why Nations Rise and Fall (Simon & Schuster).

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.