China’s Diplomatic Push For Its Foreign Direct Investors

Prime Minister Wen Jiabao’s European tour provides a foretaste for the sort of diplomatic push in support of Chinese investment in developed countries that is only likely to increase over the next decade in line with Beijing’s extortion to Chinese companies to “go global”. While the headlines of Wen’s visit to Germany in particular were taken by the deal intended to grow two-way trade to $280 billion by 2015, it is the mostly overlooked agreements on growing investment, struck on the other two stops on his trip, Britain and Hungary, as well, that matter more to Beijing.

Access to natural resources is the driving force behind Chinese companies’ foreign direct investment (FDI) in developing economies, but in developed nations they are looking to buy commercial assets, particularly those that can provide value-added services, brands, management and technological expertise, raising local concerns about the influx and calls for more controls to regulate it. In the U.S. in particular, where protectionist sentiment is ever lurking in the legislature, there are competitiveness concerns about technology transfer, especially if it has military application, subsidies to state-owned banks, noncommercial motivations of state-owned companies, and the routing of Chinese FDI via third countries such as Hong Kong and tax havens to disguise its origin.

China’s outward FDI , at 1% of the world’s total, lags its share of global trade (8%), but its annual flows are growing rapidly. It hit $59 billion last year, up from an average of $3.8 billion in 1995-2005. Given the size of China’s foreign exchange reserves and the growth rates of its economy, $1 trillion of FDI could come out of China over the next 10 years. Hence the diplomatic push to forestall the erection of further barriers to Chinese trade and investment and to dismantle those that already exist. Some of this is done by signing bilateral trade and investment treaties like the ones struck on Wen’s visit, and some through multilateral organizations such as the G20. It seems inevitable that Wen’s successor will be doing a lot of globetrotting to pave the way for more Chinese investment in developed economies. There is going to be a lot of it.