China Power

Understanding China’s Efforts to Invest Overseas

China’s efforts at foreign direct investment (OFDI) have had mixed results. Eve Cary gives us her take.

Eve Cary

The old axiom, “there’s no such thing as bad publicity,” has not been the case for China’s efforts to invest overseas, which have been plagued by negative attention. Highly-publicized investment failures such as the China National Offshore Oil Corporation’s blocked 2005 bid for UNOCAL and the collapse of a $1.7 billion Chinese housing investment project in San Francisco earlier this month have set the narrative, but do not tell the whole story. Public understanding of China’s outward foreign direct investment (OFDI), particularly in the United States, is not based on facts.

The growth of investment in the last 10 years has been astronomical, largely because the starting figure is so low: OFDI totaled just $2.5 billion in 2002.  In comparison, official numbers, according to the Economist,  put total ODI at over $77 billion in 2012, an increase of 12.6% from 2011 and enough to make China the sixth-largest global investor.

This figure is still rather small, however.  Context is important here: Belgium, the Netherlands, and Spain have larger holdings than China, according to the Economist.  Additionally, though investment in the United States has grown substantially (39 percent year-on-year from 2010 to 2011, for example) the $50 billion invested from 2005-2012 comprises just 1.8 percent of the U.S.’ total inward investment for that period, according to a 2012 report by the Heritage Foundation.

Investment in Europe is dramatically rising: the Chinese Ministry of Commerce says that investment in the EU increased 280 percent year on year from 2008 to 2009, doubled in 2010, and then rose 22 percent in 2011. In 2012, Chinese Mergers & Acquisitions investment in Europe reached $12.6 billion.

On the whole, however, Chinese investment in the United States and Europe are very minor pieces of the puzzle. In 2011 70 percent of China’s OFDI was directed to Asian countries (but declined sharply in 2012), and 89 percent to developing countries.

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Much of this investment has been sparked by the actions of the Chinese government. Like the exhortation “Go West, young man,” China is telling its companies to “go global,” and invest overseas.  This strategy was included in the 12th Five Year Plan (2011-2015), adopted in March 2011, and has largely focused on state-owned enterprises (SOEs), which are given subsidies and funding to accomplish this goal.  According to the Heritage report cited above, in 2005, SOEs made 100% of large investments.  Six years later, that percentage had fallen to 89%–still a massive monopoly.  That being said, a drop in the SOEs’ share of investment (however minor) is a positive sign for the emergence of private enterprise.

Why is the central government pushing overseas investment? For one, increased outbound investment is necessary to balance incoming foreign direct investment and to keep a lid on the current account surplus to maintain the current currency levels. Additionally, as an article in the China Business Review points out, overseas investment (and its accompanying benefits) is seen as necessary amidst a changing business climate, with Chinese firms needing to “upgrade their technology, pursue higher levels of the value chain previously conceded to foreign firms, and augment managerial skills and staffing to remain globally competitive.” Investment is also a crucial tool of soft power, allowing the Chinese government to use private enterprises and financial incentives to indirectly further political goals, or at least burnish China’s image in a country or region.

China’s increasing investment has not come without challenges. Some estimate that China has pursued US$35.3 billion worth of failed or “troubled” deals in the United States alone—and US$36.2 billion in Australia.  Though the Obama administration has been less protectionist in terms of blocking deals, deals fall through for many reasons.  In the case of the recent San Francisco housing project noted above, sources said the deal failed because “the Chinese government asked for more control over the project than Lennar[the developer] was able to agree to.”  Chinese companies also have to cope with demands and regulations from home (and the time consuming process of approval for overseas investment) as well as navigate what is still largely uncharted waters in terms of new entering markets.

There have been successes along with the failures. In September 2012, Dalian Wanda Group closed on the purchase of the U.S.’ AMC Entertainment, becoming the world’s largest theater owner. Doors are also opening for Chinese investment: states in the U.S. are anxious to get their fingers in the pie.  Forbes describes trade delegation trips to China taken by the governor of Nevada and the mayor of Toledo, for example. California Governor Jerry Brown just returned from a trip to China earlier this month as well.

However, there is clearly a trend towards increased investment in the developing world, at the expense of developed nations.  At the Economist’s Bellwether conference this January, Zhao Changhui of China’s Export-Import Bank summed up the frustration of Chinese companies, noting that “Chinese firms were wasting time and energy trying to convince skeptical Western countries of their commercial bona fides,” and that they should look to countries in the developing world who are “hungry for Chinese investment.”

Mei Xinyu, a researcher from the Chinese Academy of International Trade and Economic Cooperation, concurs  in the China Daily, noting that “developed countries have stringent market access restrictions, while Chinese investment is more welcome in developing countries…plus, Chinese companies tend to invest in developing countries because of the low production costs there…”

Encouraging Chinese investment in the United States and the developed world would be prudent, considering that the Chinese Ministry of Commerce would like to see OFDI reach $150 billion by 2015.  As the China Business Review notes, Chinese investment has opportunities for American firms, providing “divestment of assets, co-investment, and new business opportunities in China.” Exposing Chinese firms to Western business practices and regulations may also help them leapfrog in areas such as corporate governance and spark increased financial liberalization within China’s economic framework.