SOEs Declining Role in China’s Foreign Investment
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SOEs Declining Role in China’s Foreign Investment

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Though overseas investment is a decidedly capitalist thing to do, the main players in China’s efforts to invest abroad are a vestige from the past: state-owned enterprises (SOEs).  As Chinese overseas investment experiences a dramatic rise, SOEs still do most of the investing.  In 2005, SOEs were responsible for 100 percent of investments; in 2011, that number had decreased—to 89 percent, according to the Heritage Foundation.  A 2010 Columbia University survey found that 16 of the top 18 foreign asset-holding Chinese companies were SOEs. 

2011’s Going Out strategy, outlined in the 11th Five Year Plan (2006-2010), calls for increased overseas investment to “enhance China’s competitiveness,” and for the support of “companies in exploring resources overseas that were in short supply domestically.”  This has allowed state-owned enterprises to rapidly increase their foreign investment, or outward direct investment (ODI).  ODI was over $77 billion in 2012, 12.6 percent more than in 2011. 

A significant portion of ODI is directed toward energy and natural resource projects: the 12th Five Year Plan (2011-2015) sets a number of priority sectors, including energy, high-end manufacturing, and raw materials.

Though SOEs are administered by the Assets Supervision and Administration Commission of the State Council (SASAC), SOEs are able to make overseas investments without oversight as long as it falls “within their primary business sector,” with SASAC approval needed for anything outside their scope.  In fact, this is one of their major advantages, as private firms need approval from such government organizations as the National Development Research Council (NDRC.)  SOEs also have access to low-cost financing and substantial subsidies from the government.  Their financial losses are covered by the central government, leading to more freedom and flexibility in overseas investments.

Much of the support of SOE overseas investment derives from the fact that SOE investment is used to further Chinese government foreign and domestic policy goals.  On the domestic side, it is used to assist strategic Chinese industries.  SOEs are encouraged to pursue raw materials to support Chinese manufacturing needs and interests, as well as companies with needed technological knowledge to advance Chinese industry. 

Additionally, as the U.S.-China Economic & Security Review Commission (USCC) has noted, “the natural resource-seeking ODI of the Chinese energy majors is intimately connected with the government’s pursuit of a national energy security agenda to secure overseas assets and supply agreements.” The USCC report also cites “a desire to avoid foreign quotas, tariffs, and other barriers to Chinese-made goods” as a motivation for overseas investments and acquisitions.

SOE investment is also used as an aspect of “dollar diplomacy,” which uses financial assistance to cultivate friendly relations with other nations. The Chinese government is also able to smooth the path of SOEs by helping a target nation improve their level of infrastructure, for example.

These state-directed, strategic motives are of considerable concern to foreign observers, both for strategic/security and economic reasons. On the economic side, in the case of the United States, in testimony before the U.S.-China Economic and Security Review Commission, attorney Elizabeth J. Drake cites three areas where Chinese investment could impact US economic competitiveness: “1) price competition with Chinese-invested firms in the U.S. market; 2) trade distortions that may result from Chinese investors’ supply chain policies; and 3) competition for resources and technology.”  

Strategic concerns have also loomed large: in 2005, Chinese oil company CNOOC (70 percent owned by the central government), dropped its bid for the U.S. energy firm Unocal amidst political opposition over concerns about national security.

There are also environmental concerns, considering that China suffers immensely from the consequences of its growth at all costs policy, which observers fear is exported to countries China invests in.  However, there have been some positive developments: Ministry of Commerce has instructed SOEs to “observe ecological and environmental protection requirements,” and in February 2013, along with the Ministry of Environmental Protection (MEP), issued the “Guidelines on Environmental Protection for Overseas Investment and Cooperation” that would require companies “to conduct  environmental impact assessments, develop mitigation measures, and work with local communities to identify potential negative impacts of  the investment.”

There are some changes afoot for the role of SOEs in overseas investment. Private firms are slowly but surely snatching a bigger piece of the pie.  In 2012, they accounted for just under 10 percent of ODI, compared to 4 percent in 2010.  Private firms are also playing a greater role in an emerging type of overseas investment: mergers and acquisitions (M&A).  Private companies were responsible for over 62 percent of M&A deals in the third quarter of 2012, compared to 44 percent four years ago, according to a report by KPMG. For the same period, SOE participation in M&A decreased from 56 percent to 38 percent. 

In terms of the future of SOEs as a whole, USCC reports that SASAC has become increasingly oriented toward making SOEs “national champion” firms that prioritize profits over (potentially unprofitable) strategic interests.  This focus on profits will also lead SASAC to “streamline central-level SOEs by forcing the least profitable ones to close or to merge with other firms.”  

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