CHINESE FOREIGN DIRECT INVESTMENT

AND THE GLOBAL ECONOMY

1. Introduction
In theory, the ownership of a business in a capitalist economy is irrelevant. In practice, it
is often controversial. (Economist, 2010a)

This controversy is likely to intensify over the next few years as China plays an
increasingly greater role in the global economy. Some might see capitalists allowing
communists to buy their companies as taking economic liberalism to an absurd extreme.
But allowing them to do so should ultimately be beneficial to all concerned.

2. Background
Chinese companies are increasingly investing overseas. In 2010 Chinas accumulated
overseas direct investment amounted to USD 59 billion, up by 36% from the previous
year. Chinas domestic investors invested in 3,125 foreign enterprises from 129 countries
and regions (MOFCOM, 2011). However this cannot be considered a new trend.

The policy of Four Modernizations, declared by Deng Xiaoping in 1978, aimed

to open China to the outside world. The Chinese government not only has tried to
attract foreign investment into China, but also has supported Chinese enterprises
to make outward foreign direct investment (FDI) to seek experience overseas.
(Suvakunta, 2010)

A decade ago China adopted what is commonly referred to as the Go Out Strategy,
encouraging its companies to expand globally. But it is only now that the rest of the world
is really starting to take notice. One reason for this could be some of the recent landmark
takeovers such as Geelys purchase of Volvo, the Swedish carmaker, for USD 1.8 billion
(PDO, 2010).

While the sale of such national icons will undoubtedly be a cause of distress to the home
country, historically the rich world has been largely tolerant of rising mercantilist
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economies such as South Korea and Singapore. The difference in the case of China is that
it is already the second largest economy in the world, and likely to overtake the USA in
future (Economist, 2010a).

Analysts predict that the Chinese government may well seek to double the countrys
cumulative outbound investment within the next five years. However this trend will be
resisted by some countries that are not yet ready for the idea of so much Chinese
ownership of key assets (Orr, 2011).

Chinas need for energy and commodities to feed its economy has clearly been a driving
motive for this increase in outbound foreign direct investment. Some recent deals
highlight this: in 2009 Sinopec, the largest Chinese oil refiner, bought over Swiss oil
explorer Addax for USD 7.24 billion (Wheatley, 2009) and in 2010 purchased shares of
Syncrude Canada Ltd for the price of USD 4.6 billion (PDO, 2010).

Control of the worlds stock of foreign direct investment has historically been an
indicator of a countrys economic muscle. In 1914 Great Britain owned 45% of the
worlds FDI, while the USAs share peaked at 50% in 1967. Today, Chinese investments
including those of Hong Kong and Macau account for just 6% of total FDI
(Economist, 2010b).

Figure 2.1: Stock of outward foreign direct investment (% of world total)

Britain

United States

China
Japan

Source: Economist, 2010b

Meanwhile Chinas foreign exchange reserves have increased 10 times over the last nine
years. By the end of June 2010 it had almost reached USD 2.5 trillion. This has helped to
generate record credit and money supply growth, but economists fear it may be creating
asset bubbles.

This serves as an additional motive for foreign investment because the central bank buys
most of the foreign currency entering China in order to cap the Yuans exchange rate.
Every dollar that can be recycled as outbound investment is one dollar less that must be
bought and added to reserves. Greater capital outflows would reduce the balance of
payments surplus and make monetary policy easier to conduct (Wheatley, 2009).

Figure 2.2: Chinas foreign exchange reserves 20012010

Foreign Exchange Reserves as at end June

Forex Reserves (USD Billions)

2,500

2,000

1,500

1,000

500

0
2001

2002

2003 2004

2005

2006

2007

2008 2009

2010

Year

Source: Author, based on data from SAFE

It is clear that the world will see more in foreign direct investment from China over the
next few years. While this maybe welcome, especially in developing countries, others
will feel threatened and may even take action to prevent certain strategic, if not all deals
with China.

3. Risk and mitigation

China is set to be a heavyweight of the 21st century. Its recent advances in the fields of
microelectronics, nanotechnology and aerospace are already raising questions about the
future of Americas global leadership (Business Week, 2005).

This maybe a cause for legitimate concern when it comes to matters of national and
global security. However what most countries fear most at the present stage is the
unknown influence of an opaque communist government on the state-owned Chinese
companies that are behind the current shopping spree of overseas business enterprises.
The foreseeable consequences on global capitalism are unappealing at the least
(Economist, 2010a).

The problem with opaqueness is simply that we do not know. We may know that Beijing
has a say perhaps even the final say in all foreign investment deals coming out of
China. But we cannot know for sure that whatever apparent interferences by the state
have been for mere political reasons. In many countries, state regulation of foreign
investment, both inward and outward, is taken for granted whether or not the companies
involved are state-owned or not.

China has also lashed back at accusations that its state-owned enterprises received
subsidies as part of the foreign investment drive. Vice Minister of Commerce, Chen Jian
refuted the allegations at a recent press conference.

Some have taken it for granted that Chinas SOEs are enjoying the support of the
government, Chen said. In fact, the SOEs operate independently and are
responsible for their own profits or losses and have been doing so ever since the
country adopted its socialist market economy. (Xinhua, 2010)

Resistance to Chinese investment maybe inevitable by governments in some countries,

but this is likely to upset Chinas leaders. This could even lead to the risk of retaliation in
some form, such as China selling off bonds of the reluctant governments or increasing the
challenges that enterprises from those nations face in selling to China (Orr, 2011).

Perhaps more importantly than the ability to reach Chinese markets, access to raw
materials from China is also vital to many foreign economies. In fact in 2009 Chinas
reduction in export quotas for certain materials prompted the United States to file a
complaint of unfair trade practice with the World Trade Organisation.

While emphasising its sovereign right to protect its exhaustible natural resources, Chinas
response expressed a willingness to negotiate and even make concessions by way of
reducing export taxes on a variety of materials.

A wide-ranging confrontation with Beijing over trade could carry serious risks,
given the still-troubled state of the economy, analysts said. China not only is the
nations second-biggest trading partner, after Canada, but it also holds many
billions of dollars in U.S. government bonds. If relations turned sour and Beijing
decided to unload those securities, the U.S. economy could suffer significant harm
(Lee and Puzzanghera, 2009).

The argument for control is perhaps to be taken more seriously in areas that relate to
national security. However it has been argued that, at least in the case of the United
States, a framework already exists to assess individual deals for any risk to national
economic and security interests.

Firstly, all acquisitions within the United States, whether they involve domestic or foreign
buyers (private or state-owned), are routinely assessed for their impact on market
competition. If the Justice Department determines that a deal would significantly reduce
competition, it maybe subjected to substantial modification or blocked altogether.

Secondly, U.S. law allows for an inter-agency review of any foreign acquisition of an
American company whenever there is credible evidence that the acquisition could pose a
threat to national security. Such reviews have also been extended to deals involving
strategic technologies such as telecommunications, internet and computer industries
(Tyson, 2005).

China is fast becoming a major player in the global marketplace, but it is still taking its
first steps in many areas. This uncertainty could be the cause for many of the
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misunderstandings and perceived threats surrounding overseas takeovers and joint

ventures by Chinese firms. Even if there are risks involved, they would be better
addressed by smarter negotiation and tightening competition law than by keeping
investment out.

4. Opportunity an African view

The Standard Bank Group is Africas largest financial intuition. Starting from its base in
South Africa it has expanded to 17 countries across the African continent and also has a
presence in Honk Kong, Russia and South America.

In October 2007 Standard Bank sold a 20 percent stake to the Industrial and Commercial
Bank of China (ICBC). The transaction was worth USD 5.5 billion, the largest single
foreign investment by China at the time.

The deal was not only important to Standard Bank, giving it a place on the world
financial stage, but also of great symbolic significance for Africa. It was an indication of
Chinas growing business commitment to the continent.

Figure 4.1: Standard Bank shareholder by geographic region 2008

Shareholders by geographic region
2%

8%

13%

South Africa (57%)

China (20%)
United States of America (13%)

57%
United Kingdom (2%)
Other foreign shareholders (8%)

20%

Source: Standard Bank, 2009

According to Jacko Maree, the CEO of Standard Bank, the deal, which came just before
the global financial crisis, provided necessary capital that enabled them to survive
through the turbulent period that followed.

More tangible business benefits have been seen as a result of major Chinese companies
embarking on projects in the content. Thanks to the link to ICBC, these companies turn to
Standard Bank for domestic advice and financing.

We are currently working on numerous projects across the continent in areas of

commodities, infrastructure, power, and telecoms. Oil is an obvious sector where
Chinese companies are investing or interested in doing so, and where we are
providing either advisory services or on-the-ground services for them to actually
complete the transactions.

So it will be very beneficial for us, but Rome wasnt built in a day. We reported
in our results for the last year that we had incremental revenues of some $78
million coming out of the ICBC relationship. Thats not to be sneezed at, but we
think this is just the tip of the iceberg. (Jacko Maree as quoted in Kloss and
Sagar, 2010)

Overall, Maree feels that Chinese involvement is overwhelmingly positive, but he also
stresses the importance of setting ground rules. In the case of ICBCs investment in
Standard Bank, the South African government and the South African Reserve Bank had
very clear ideas about what was good for South Africa.

5. Conclusion
China has valid reasons to increase its stake in the global marketplace. It also has the
resources to make it possible. In order to benefit, the rest of world must learn to
accommodate China, or it will miss out on this opportunity and possibly create too
powerful an enemy in the process.

China also has a lot to learn, but allow them onto the playing field and that is exactly
what they will do. Of course care and caution must be exercised, but it must be done
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through assessment and analysis for a deals impact of competitiveness and national
security on a case by case basis. To make negative allegations purely on the basis of
sentiment will only aggravate existing friction, and that most certainly is not in the best
interest of the global economy.

6. List of references
Business

Week

(2005),

New

World

Economy,

August

22,

2005.

http://www.businessweek.com.

Economist, The (2010a), China buys up the world, November 11, 2010.
http://www.economist.com.

Economist, The (2010b), Being eaten by the dragon, November 11, 2010.
http://www.economist.com.

Kloss, M. and Sagar, V. (2010), The ChinaAfrica business connection, McKinsey

Quarterly, June 2010. http://www.mckinseyquarterly.com.

Lee, D. and Puzzanghera, J. (2009), Chinas export restrictions are target of U.S.
complaint to WTO, Los Angeles Times, June 24, 2009. http://articles.latimes.com.

MOFCOM (Ministry of Commerce, Peoples Republic of China) (2011), Statistics of

China's Non-financial Foreign Direct Investment in 2010, January 28, 2011.
http://english.mofcom.gov.cn.

Orr, G. (2011), What might happen in China this year, McKinsey Quarterly, January
2011. http://www.mckinseyquarterly.com.

PDO (Peoples Daily Online) (2010), Chinese acquisitions may reach record high, May
26, 2010. http://english.peopledaily.com.com.

SAFE (State Administration of Foreign Exchange, Peoples Republic of China),

http://www.safe.gov.cn.

Standard Bank (2009), Annual Report. http://annualreport2009.standardbank.com.

Suvakunta, P. (2010), China's Go-Out Strategy: Chinese Foreign Direct Investment in

Thailand,

Thailand

Law

Journal,

2010

Spring

Issue

Volume

13.

http://www.thailawforum.com.

Tyson, L. DA. (2005), What CNOOC Leaves Behind, Business Week, August 15,
2005. http://www.businessweek.com.

Wheatley, A. (2009), Why China Will Keep Investing Abroad, The New York Times,
July 21, 2009. http://www.nytimes.com.

Xinhua (2010), Chinese official refutes allegation subsidies given to SOEs for outbound
investment, November 1, 2010. http://china-wire.org.

All electronic sources retrieved in February 2011.