[East Asia Forum] The rise of Chinese foreign investment

June 11th, 2012

Authors: Peter Drysdale, East Asia Forum and Shang-Jin Wei, Columbia UniversityResource

In the past half decade Chinese foreign direct investment has become a major element of global capital flows.

Chinese investment abroad has a young history and represents a new dimension of China’s integration into global economic and political systems.

The upward trend is clear. As China relaxes restrictions on outbound capital flows, an increasing share of the country’s foreign asset holdings will likely shift from official holdings of foreign exchange reserves to direct investment abroad by Chinese companies.

China has opened its product markets and upgraded its manufacturing industry by developing labour-intensive exports and encouraging large flows of inward foreign direct investment. This export-oriented growth strategy, fuelled by the mobilisation of low-cost labour and domestic and foreign capital and technology, saw growing trade and current account surpluses ease constraints on Chinese direct investment abroad in the past decade.

The Chinese government’s encouragement that companies should ‘go global’ has seen Chinese state-owned enterprises (SOEs) secure a growing share of the international investment market, with particular interest in resource investment during the current global commodities boom or in technology acquisitions. Outward direct investment by Chinese privately owned firms has also begun to make a big wave by acquiring foreign firms with advanced technology or brand names.

But Chinese corporations have faced a number of problems in going global, including resistance in host countries, especially in the developed world; claims of neo-colonial motives in the developing world; and colourful reporting of their operations by foreign media. Chinese investors have a steep learning curve ahead.

Host countries, too, are still working out how to judge their interests correctly in capturing the benefits from Chinese direct investment abroad — a major new source of investment at a time when capital from developed economies is drying up.

Business abroad involves more than merely economic interaction between foreign enterprises and the state: it entails significant political interaction as well. This is particularly the case with China, as many of its overseas investors are SOEs. There is growing debate globally about whether and how the role of SOEs affects the benefits that host countries gain from Chinese investment — a debate that is really about the interaction between national political institutions that are ordered around different principles and political constitutions, and how these institutions evolve in settings governed by market disciplines.

The new issue of the East Asia Forum Quarterly, being launched at Columbia University’s Chazen Institute in New York today, assembles perspectives from top analysts in China and from around the world to review the issues surrounding Chinese foreign direct investment abroad. It provides a start in serious and objective analysis of how we should properly look at the growth and reception of this type of investment on the international stage.

This week’s lead essay from Peter Drysdale on the impact of Chinese investment on Australia’s foreign investment regime is drawn from this collection. Drysdale argues that ‘both the element of populism in Australia’s response to the rapid growth of Chinese ODI and the particular ownership characteristics of large Chinese investment projects have acted as sources of political confusion in Australian policy development and in Chinese perceptions of Australian policy. Some of the confusion relates to uncertainty about how to respond to the rapid growth of Chinese investment interest in the Australian resources and energy sectors. The issues of state-owned investment, market competitiveness and other political or security matters are not being appropriately dealt with through ad hoc introduction of additional restrictions and tests on foreign investment proposals. Some of the uncertainty has also been introduced by interested commercial and political parties in play around the market. Uncertainty around these issues runs the risk of hindering the industry’s potential and damaging Australia’s longer-term political and security interests’.

Drysdale concludes that the best way to dispel the uncertainty and policy confusion that has arisen would be, first, to re-assert the market framework within which all foreign investment proposals are examined in Australia and, second, initiate government-to-government arrangements for routine consultations between Australian and Chinese authorities on the issues that are arising. Arms-length treatment and incomplete engagement are not a satisfactory response to circumstances that are evolving very rapidly. This would help to facilitate scrutiny of competition, corporate governance and financial transparency issues related to investment by SOEs. The details of this sort of initiative would need to be the subject of discussion and joint study.

Australia cannot expect to capture new Chinese markets without the links that Chinese ODI provides. And without more transparent foreign investment screening and common sense in the formulation of foreign investment policy, Australia is likely to damage its foreign investment standing more broadly.

Peter Drysdale is Editor of the East Asia Forum.

Professor Shang-Jin Wei is Head of the Chazen Institute at Columbia University, New York.



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