China’s global spending spree

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0:41Imagine that you work for CIA and you're coming under investigation because of something you did in the line of duty, but it is now being questioned. BBC World Service, welcome to the documentary. You say, I better get a lawyer. And there's legal insurance you can buy. It specializes in government employees and intelligence personnel. And it was founded by an FBI agent.

1:15Over a long career, veteran U.S. journalist Jeff Stein had heard it all. But in 2016, he uncovered a story even he could scarcely believe. Why would you suspect that an insurance company founded by an FBI agent is secretly owned by a Chinese person with close connections to the Chinese Communist Party? The world of insurance isn't often exciting, but listen to this. An American company called Right USA caters for top-secret U.S. government agents, and it's privy to all their personal details. Yet, a few years ago, Fosun Group, a major Chinese firm with top-level connections, bought it, quite legitimately and seemingly without many noticing.

2:06The purchase was legal at the time, but still, it raises the question, what happens to all the agents' personal data? It was in the open, so to speak, but still, because everything's intertwined so closely in Beijing, you're essentially giving it up to Chinese intelligence. How did you find out about this story? A tip. Someone called me up and said, hey, do you know that the insurance company that insures intelligence personnel is owned by the Chinese? And I said, well, I did not know that. I was astonished. One person recalled getting a mailer from the parent company talking about the acquisition of Right Insurance and said he hadn't bothered to open it.

2:53And he opened it and said, oh my God. So the company had actually given notice of Chinese ownership and people just didn't open it. And these were veteran CIA officers.

3:09Jeff Stein's story ran in Newsweek magazine, and there was a big reaction in Washington. The U.S. Treasury investigated this sale. Not long after, the company was sold again, putting it back in American hands. It's unclear who ordered that sale. It was like, wake up! You know, there was nothing illegal about the purchase of Right USA and selling insurance. They just hoped no one would really notice. And guess what? No one did notice. What's more, no one truly understood at the time that the Chinese state-backed investment in Wright USA appears to have been part of a much larger strategy. We now know that purchase was fueled by a$1.2 billion loan from China's state banks, routed through an account in the Cayman Islands.

3:59Fosun Group and the insurance company, now known as StarRite USA, didn't respond to our requests for comment. I'm Celia Hatton, and in today's documentary, the surprising story of how China's become the world's biggest overseas investor, giving it the potential to dominate sensitive industries, secrets and key technologies, and all reveal brand new data shared exclusively with the BBC that shows how the wealthy West is the top destination for Beijing's money.

4:35Back in 2013, China's leader Xi Jinping was just a year into office and he was already making clear that he had grand visions for how his country could stretch far beyond its borders. To forge closer economic ties, deepen cooperation and expand development in the Euro-Asia region, we should jointly build an economic belt along the Silk Road. Xi Jinping said China is committed to promoting a good relationship. One belt and one road are passed, leading to mutual benefits and win-win progress. The Belt and Road Project was a bold plan to build new trading routes to link up with countries that weren't getting much attention from the West.

5:24Beijing was offering money and know-how to leaders of developing countries, pledging to help build infrastructure and invest in their assets. I was a BBC journalist in China at the time, covering Xi Jinping's big announcements. The new plans to invest and trade with the developing world, countries stretching from Central Asia to Africa and South America, were headline news. Turns out that wasn't the whole story. Enter Brad Parks. He's built his academic career tracking how and where governments spend their money abroad. Are these real estate projects? Brad heads AidData. It's a research lab based in Virginia at one of America's oldest universities, William & Mary.

6:15It gets its funding from governments and charitable organizations around the world. And for the past 10 years, they've had a major focus on China. 120 researchers work at AidData. And in 2019, they were grappling with a mystery. They'd been looking at Belt and Road projects. For the better part of a decade, we were focused like a laser on grants and loans to low-income and middle-income countries. But to their surprise, they discovered Chinese leaders were spending a lot more elsewhere, though they didn't know where. We knew that we were missing a big part of the picture when there was a disclosure made by the Chinese to the Bank of International Settlements in Switzerland that their overseas lending amounts were$2.6 trillion.

7:12And we said something doesn't add up here because we're exclusively focused on grants and loans to developing countries, and that sums to$1.3 trillion. So what's accounting for this massive differential? The BBC has been given exclusive advance access to what aid data has uncovered. About$1.3 trillion had been spent in developing countries. But we now know that quietly, Chinese state banks were also spending equal sums of money in rich countries, from the United States to the UK, the Middle East to Australia. We were assuming that China largely was not paying attention to advanced industrialized countries because they can finance most of their own projects and activities.

8:01And we were naive. That is not true. The program is vastly larger than anyone previously understood. And much of the money is now being redirected to the wealthy industrialized world. But they're doing that with kind of the hidden hand of the Chinese state. Chinese businesses used money provided by Chinese state banks to invest in, and in many cases, by foreign companies. The banks have helped to fund these investments. And we have to note, although sometimes the investments are murky, routed through shell companies or offshore accounts, strictly speaking, they are legal. It's like having a credit card with a sky-high limit, where you can put it on credit to make a purchase that you would not be able to make with your own cash on hand.

8:52So it's like if you're a Chinese company and you spot another company in another part of the world that has something that you want, basically you've got this state-backed credit card. With deep, deep pockets. One of the key advantages of China's political system is the ability to set multi-decade long goals. You do the planning, you set the strategy, you influence the financing. China's not democratic, but those who study it say part of its strength lies in the fact that it's highly organized. Ku Yujin is one of them. She's an economist and the author of The New China Playbook. The whole system, whether it's the banks or the land and the resources, the licenses, the permits, all of that is under the government's control.

9:43And added on that is this productive manufacturing capacity. When you combine it, it really creates a very, very unique advantage that is very difficult to displace. China's been working with a very clear strategy. It's got the Belt and Road investments for developing countries And, we now know, it's been hedging its bets by investing equal amounts in rich countries. China would love to put money into the UK and Europe and the United States if it can. I think it offers much more in terms of stability of returns, but also establishing that presence in a country and then working mutual investment possibilities.

10:27the knowledge flows, the ability to diversify into advanced economies, investment opportunities are huge. But that can only happen where Chinese money is welcome. And that is a big assumption these days, geographically speaking. China has met with a lot of challenges and advanced economies based on national security risk. We have also seen that they have become much less welcome to Chinese money, even if they actually do need it themselves. So I'm looking at the database that ADATA has compiled. We have advanced access to it, but by the time you hear this, you'll be able to see it too because it will be released open source.

11:09The database has more than 30 ,000 detailed entries. And when you look at the big picture, you'll see patterns. Some of the deals listed here appear to be made with profit in mind, like this deal to loan some money to a UK supermarket, while others have a different flavor. They appear to be made for strategic reasons. We've mentioned one big Chinese government initiative, the Belt and Road, and now I'm going to highlight another. It's called Made in China 2025. It was announced a decade ago, and it was a clear plan for China to dominate 10 cutting-edge industries like robotics, aerospace, biotech and semiconductors by this year, 2025.

11:55Beijing wanted to fund big money investments abroad so key technologies could be brought home to China. Made in China 2025 was a way to galvanize that energy and that incentive to overcome some of these key strategic challenges. It did have the consequence of sounding alarm bells for the rest of the world. You're listening to China's Global Spending for the documentary on the BBC World Service. I've spent the last three decades trying to better understand money across the boardroom, the newsroom and the trading floor. That's longer than most podcast hosts have been alive. But even though I've got questions, join me, Maren's Upset Web, every week for my show, Merrin Talks Money from Bloomberg Podcasts, where I have in-depth conversations with fund managers, strategists and experts about how markets really work.

12:49And join me for a separate episode where I answer listener questions on how to make those markets work for you. Follow Merrin Talks Money on Apple Podcasts, Spotify or wherever you listen. I'm Celia Hatton with The Documentary on the BBC World Service. So this is on the beach at Druish Bay. I had a control hut up here. And And what's in the rest of the picture? What's the tall? Well, that's that bit's the plough. SMD, or Specialist Machine Developments, is a company that produces underwater ploughs and robots. SMD was founded in 1971 by my supervisor, Alan Rees, with the idea of exploiting the technology I was developing in my PhD.

13:30If you're trying to make a trench for a pipeline or you're trying to bury a telephone cable, it's machines for doing that. And, yeah, SMD's a world leader in trenching and earth moving on the seabed. Tony Trapp was one of the founders of SMD. He began it in Newcastle, in England's relatively disadvantaged North East. With pioneering work. We were obviously proud of it as a company, that it was British. I just thought it was a fantastic company. And the fact that it was in North East England, yeah, very, very proud. Tony left SMD when his co-founder, Alan Rees, retired. And shortly after, the whole company was sold to another UK firm, Inflexion.

14:12Seven years later, it was sold again to a Chinese state company called CRRC in 2015. The sale happened just as the UK was entering its self-declared golden era with China. Since there was no national security screening law in place, companies like SMD were up for grabs. I wasn't particularly expecting to hear that SMD had been sold. My initial reaction was, I must admit, horror. How could they do that? That just didn't feel right to me. I had no concept it would be sold to China. And I suppose I recoiled out of surprise. How was that allowed to happen? We had developed some very important technology and expertise.

14:57And should that go to the Chinese? It sort of felt wrong. After it was acquired, SMD opened a major factory in Shanghai where it began producing underwater robotic vehicles. Naval experts tell us SMD's robots are useful in undersea mining and finding oil and gas, all strategically important activities. Plus, those types of robots have military uses. They can build underwater structures and salvage things from the seabed, a downed aircraft, for example. The analysts explained it's not easy to manufacture robotic vehicles. A company like SMD that designs and builds its own is quite rare. I'm sure all the intellectual property held by SMD is effectively held by the Chinese.

15:47They're buying it, they want to secure the technology, and they want to quickly make sure they've got a hold of that technology for good. When asked, SMD told us... Only 1 % of our work relates to the defence sector, and the company has not undertaken any defence contracts in the last 10 years. Our Chinese facility supports the local market and design and intellectual property remain in the UK. SMD shows up in the ADATA database and for the first time we can reveal its purchase appears to have been made possible by a loan from a Chinese state bank and not just that, a state policy bank. Brad Parks explains.

16:29A policy bank means that the bank is responsible for implementing government policies. The policy banks, if the government says jump, they say how high. SMD said its parent company obtained both private investment and what it called commercial loans, chosen to diversify its asset structure. Those suspicious of China's motives say companies in sensitive sectors like SMD need better protection. Remember the shock sale of that American insurance company we mentioned right at the start? The one that had FBI and CIA agents as its clients? Two years after that episode, the first Trump administration tightened its foreign investment laws, and it pressured its allies to do the same.

17:17John Bolton was the U.S. National Security Advisor starting in 2018. I thought there was a lot of naivete across Europe generally, And there was a lot of naivete in the United States. Businesses had invested a lot in China. They had a lot at stake. They didn't really want to believe that we were being threatened. But the evidence mounted bit by bit. And the more we thought about the threat, the more we saw ingenious ways that China could engage in economic transactions that looked perfectly innocent, but which were not, which had either espionage connotations or other kinds of national security threats.

17:54The Chinese embassy in London told us... The Chinese government has always required Chinese enterprises to strictly comply with local laws and regulations, and has supported them in conducting international cooperation based on mutual benefit. Such enterprises also contribute actively to local economic growth, social development and job creation. After the Americans tightened their foreign investment screening, the UK followed four years later in 2022. We've seen a wave of countries placing limits on what kinds of foreign investments they'll allow. But sometimes that can be easier said than done.

18:42I've come to a country that imposed restrictions long after many others. It's now in the middle of a tech battle between the US and China. It's the Netherlands. And I'm in Nijmegen, the Dutch Silicon Valley.

19:02We're at the offices of Bits and Chips, an online tech news website. It's been reporting on a fierce battle for control of Nexperia, a Chinese-owned semiconductor company whose headquarters is here in Nijmegen. Here we go. We were still writing in Dutch at the time. Yes. This is it. NXP sells standard products. 2016. Paul van Cervan has been writing about Nexperia for years. It shows up in the AIDATA database too. Chinese state banks loaned$800 million so a Chinese conglomerate could buy it. Another Chinese company, Wingtech, then snapped it up. It was not a big deal at all at the time. At the time, it was called standard products, and that's a very good description, actually.

19:53So the things that Nexperia makes were considered back then to be unremarkable? Absolutely, yeah. Very humble components for cars, for fridges, for vacuum cleaners, for toasters. They're made by the millions, if not billions. They can cost less than a cent. And it's a very low margin business. Sometimes it's described as the pepper and salt of electronics or the nuts and bolts. Do you feel the same way now? I suppose not now. How so? Well, we've come to realize the strategic value of even those humble components. We've seen parking lots filled with cars that couldn't be sold because their windscreen wipers didn't work for lack of a tiny little chip.

20:53We have car manufacturers in a panic over their supply lines of these Humboldt chips. So, yeah, we've woken up to the fact that it's a very strategic activity. In September, Nexperia's strategic value was highlighted when the Dutch authorities took control of the company's operations. In part, it said over concerns that Nexperia's technology was at risk of being transferred to other parts of the larger wing tech company. That bold move had resulted in Nexperia effectively being cut into two, separating Dutch operations from its Chinese manufacturing. What it tried to accomplish is to safeguard production, and now production basically is shut down.

21:43From opinion pieces, expert takes, I haven't seen a single piece that was positive about the way that the government handled this. They're all negative and asking, why was it handled in this way? A lot of them understand the concerns, but then don't understand the way it was managed. We've come to the seat of the Dutch government, in The Hague, to see Xiaoxue Martin. She studies the links between the Dutch economy and China at the city's Klingendale Institute. We're a country that has always done very well with open trade, free trade. And this is really the merchant side of Dutch policy. Only recently we found that actually, hold on, geopolitics makes it necessary to have more industrial policy, to have this investment screening, when in the past there wasn't that much attention for this.

22:29The Netherlands put a screening law into place two years ago, but it didn't help them when things started going wrong at Nexperia, a company that had already been sold. So the government used a law from the 1950s to seize control of Nexperia's Dutch operations, a move that shocked Beijing. There was no communication from the Dutch side with the Chinese, which is why it was a slap in the face for Chinese diplomats, for the Chinese side. And that really surprises me because normally the Dutch government is a bit more diplomatic about these kind of things. For this specific case, the government didn't do that.

23:08And then the Chinese reaction was kind of understandably to say this is really an issue and why are you bending to American pressure? The United States plays a role in this story. Last December, Washington placed the parent company, Wingtech, on the US entity list, effectively putting tough controls on its exports. The US said Wingtech risked US security by allegedly aiding China's efforts to improve its capacity to manufacture semiconductors. Nexperia was caught in the tensions between the US and China. When asked, Nexperia told us. Our Chinese business has stopped operating within Nexperia's government's framework and has been ignoring management instructions.

23:54We welcome China's commitment to resuming exports of critical chips to global markets.

24:05Xiaoxie and I get some fresh air by walking along the waterfront at The Hague. I mean, how common is it just to see container ships in this part of the world? It would be weird to not see any port activity in the Netherlands. We're only a short distance away from the port of Rotterdam, and so we can see huge container ships sailing across the horizon. It's a symbol of the Netherlands' openness to trade. Chinese companies own 70 % of the shipping container terminal business here. Xiaoxue is clear. It's easy to go too far down the path of fearing what could happen as a result of doing so much business with a superpower like China.

24:45Real opportunities could be lost. There's a danger of making it seem as if China is this monolith that all want the same thing and that they're all out to get Europe and to get the United States and that it's a scary entity when obviously it's not. Most companies, especially if they're private instead of states-owned, they just want to make money. They want to be treated as a normal company. They don't want to have this negative reception that they're getting in Europe. She's seen how this debate has evolved. It's a pendulum swinging where you could see in the past there was too much naivete about China and about the risks that there could be with Chinese actors.

25:24Then the pendulum swung too much to the other side where everything that's Chinese is suddenly scary and gets a news headline. And I hope we can end up somewhere in the middle where we can evaluate better when exactly is something a risk and when is it not. because to create mutual dependence is actually good for us. Back in the UK, SMD's co-founder, Tony Trapp, has changed his thinking about the Chinese acquisition of the underwater robotics company he helped create. At the time, it felt like a betrayal, but I think that was naive, looking at events subsequently, the state of the market, the crash of oil prices and the difficulty of keeping companies going.

26:04It's quite likely that SMD wouldn't exist now if the Chinese hadn't bought it and been willing to fund it when times were hard. They put a lot of money into it. And I think you have to view it in the end as a success story because it's kept a big specialist engineering company in northeast England. So, yeah, I now think it's been the saviour of the company. The last word on this subject goes to Brad Parks, the man who's spent years tracking what Beijing is actually doing with its money. I put it to him. If China is so far ahead of its rivals in its plans to buy into sensitive sectors, does that mean that the race to dominate these arenas is already over?

26:50No. There's going to be multiple laps. There are many Chinese companies that are still trying to make these types of acquisitions. The difference is now they're facing higher levels of scrutiny to vet these inbound sources of foreign capital. So China makes its move. China is not the follower anymore. It is the leader. It is the pace setter. But what I'm anticipating is that many G7 countries are going to move from the back foot to the front foot. They're going to move from defense to offense. It's a significant move from defense to offense. We're entering a new era, one in which the revelations that come from fresh data could lead to huge changes into how we all value the innovations made close to home.

27:45That's all from this edition of The Documentary and me, Celia Hatton. The producer was Mike Gallagher. If there was a big red button that would just demolish the internet, I would smash that button with my forehead. From the BBC, this is The Interface, the show that explores how tech is rewiring your week and your world. This isn't about quarterly earnings or about tech reviews. It's about what technology is actually doing to your work, your politics, your everyday life. And all the bizarre ways people are using the internet. Listen on BBC.com or wherever you get your podcasts.