Tag Archives: FDI

China Invests Abroad

CHINA IS NOW the second largest investing economy. This reflects Beijing’s ‘Go Global’ policy that delivered a surge of cross-border M&A purchases in manufacturing and services by Chinese firms last year while individuals stepped up their purchases of real estate in developed countries. Chinese firms accounted for 8% of inbound cross-border M&A in the United States last year, worth a record $29 billion.

But China is also the world’s third favourite destination for foreign direct investment (FDI) after the United States and the United Kingdom. According to the UN Conference on Trade and Development (Unctad)’s newly released World Investment Report, 2017, China had FDI inflows of $134 billion last year. That was 1% down on the previous year, mostly because of lower inflows into the financial sector.

However, Unctad notes that:

In non-financial sectors, [China] recorded 27,900 new foreign-invested enterprises (FIEs) in 2016, including 840 with investments above $100 million. In addition, 450 existing FIEs significantly expanded their businesses, undertaking additional investment above $100 million. Non-financial services continued to underpin new FDI, with inflows in the sector growing by 8% while foreign investment into manufacturing continued to shift to higher value added production. In March 2017, for example, Boeing started to build an assembly facility in China, the first such project outside the United States.

Inflows via Hong Kong fell much more sharply, from $174 billion to $108 billion over the same period, though 2015 was an exceptional year and 2016 represented something of a return to trend.

China’s outflows increased to $183 billion in last year from $128 billion in 2015. Those via Hong Kong slowed slightly, from $72 billion to $68 billion.

The Unctad report identifies state-owned multinationals as major players in global FDI. China is home to the most — 257 or 18% of the total, way ahead of second-ranked Malaysia (5%). In 2016, the report notes, greenfield investments announced by state-owned multinationals accounted for 11% of the global total, up from 8% in 2010.

The investments of China’s state-owned multinationals “are instrumental in the country’s outward FDI expansion strategy”, Unctad says. It notes that generally the investments of state-owned multinationals tend to be weighted more heavily in financial services and natural resources than those of multinationals as a whole.

Seven of the 10 largest financial state-owned multinationals are headquartered in China, as are four of the 25 largest non-financial ones — China National Offshore Oil Corp. (CNOOC), China COSCO Shipping Corp., China MinMetals Corp. and China State Construction Engineering Corp. (CSCSC).

China remained the largest investor economy in the least developed economies, far ahead of France and the United States, and showed more interest than most in investing in transition economies, and particularly landlocked ones like Kazakhstan and Ethiopia, though the sums remain relatively small. However, state-owned oil firm Sinopec acquired the local assets of Russian oil company Lukoil for $1.1 billion.

A future focus of China’s investment will be via its One Belt One Road (OBOR) initiative. Beijing has already signed around 50 OBOR-related agreements with other nations, covering six international economic corridors. FDI to Pakistan, for example, rose by 56% year-on-year last year, pulled by China’s rising investment in infrastructure related to the China-Pakistan Economic Corridor, one of the most advanced OBOR initiatives.

Unctad notes:

Stretching from China to Europe, One Belt One Road is by no means a homogenous investment destination. However, investment dynamism has built up rapidly over the past two years, as more and more financial resources are mobilized, including FDI.

A number of countries located along the major economic corridors have started to attract a significant amount of FDI flows from China as a result of their active participation in the initiative.

Central Asia, unsurprisingly, is at the leading edge of this. The implementation of OBOR is generating more FDI from China in industries other than natural resources and diversifying the economies of various host countries.

Chinese companies already own a large part of the FDI stock in extractive industries in countries such as Kazakhstan and Turkmenistan. The ongoing planning of new Chinese investments in the region, however, has focused on building infrastructure facilities and enhancing industrial capacities. In addition, agriculture and related businesses are targeted. For example, Chinese companies are in negotiation with local partners to invest $1.9 billion in Kazakh agriculture, including one project that would relocate tomato processing plants from China.

South Asia benefits from the development of the China-Pakistan Economic Corridor.

This has resulted in a large amount of foreign investment in infrastructure industries, especially electricity generation and transport. For instance, Power Construction Corporation (China) and Al-Mirqab Capital (Qatar) have started to jointly invest in a power plant at Port Qasim, the second largest port in Pakistan. In addition, the State Power Investment Corporation (China) and the local Hub Power Company have initiated the construction of a $2 billion coal-fired plant.

OBOR also stretches to North Africa. Indeed, it seems decreasingly to recognise any geographic limits to its ambition and scope.

Egypt has signed a memorandum of understanding with China, which includes $15 billion in Chinese investment, related to Egypt’s involvement in the initiative. It is undertaking a number of cooperative projects under the One Belt One Road framework, including the establishment of an economic area in the Suez Canal Zone and investments in maritime and land transport facilities.

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Nexen Likely An Easier Deal Than Other Chinese FDI

Governments around the world are taking a more critical eye to Chinese direct investment, but CNOOC’s proposed $15.1 billion merger with Canada’s Nexen is likely to get the nod from regulators, regardless of it being the largest Chinese foreign direct investment to date. First, it is an agreed all-cash deal. Second, China’s largest offshore oil and gas exploration company has made a better job than other Chinese firms of wooing Canadian regulators. It says it will base its North American operation in Calgary, including oil sands research, and create jobs there. It has learned the lessons of its failed 2005 bid for California’s Unocal which ran into a wall of xenophobia. Third, CNOOC has a existing joint venture with Nexen in the Gulf of Mexico, so U.S. regulators are less likely to raise concerns about a full takeover.

Nexen, though it has substantial operations in Alberta’s oil sands at Long Lake, and operations in the North Sea, the Gulf of Mexico and in West Africa, needs capital to exploit its assets. Its share price has been weighed down by that, the slump in natural gas prices and a number of production setbacks in Canada and the North Sea, providing an opportune time for the state-owned Chinese energy group to bid. Given the current glut of gas and heavy crude, North American oil and gas assets are relatively cheap, making it likely that other cash-rich investors will follow in CNOOC’s wake. Nor will they necessarily have to pay the rich premium of 61% to Nexen’s market value immediately before the deal was announced that CNOOC is paying.

They will, however, increasingly have to explain how they will be good local corporate citizens, complying with labour laws and creating jobs. Some Chinese state-owned firms, used at home to having Beijing at their back to overcome any such local difficulties and unused to having to deal with lower-level stakeholders such as community groups and labour unions, may find this a painful learning curve. That is proving the case with natural resources acquisitions in Australia. Some may find it just too arduous to make pursing further foreign direct investment worthwhile at any price.

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FDI In China Provides Rare Productivity Boost For Local Firms

Governments of many emerging economies encourage and subsidize inbound foreign direct investment (FDI) as a way to improve the productivity of domestic firms. Academic research to date suggests that the impact is mostly less pronounced than governments would hope for from such policies. Multinationals have proved adept at taking the subsidy to move in while protecting their technology and IP from moving up or down their local supply chains or moving outwards to other industries.

China, one of the world’s largest recipients of FDI  may be an exception. A new World Bank working paper, Do Institutions Matter for FDI Spillovers? The Implications of China’s “Special Characteristics”, by Luosha Du from the University of California, Berkeley, Ann Harrison from the World Bank and Gary Jefferson from Brandeis University, suggests that there have been significant productivity improvements transmitted back up the supply chains of foreign direct investors in China.

Productivity of domestically owned firms has been boosted primarily via contacts between domestic suppliers and foreign buyers of their products.

The research also finds that these productivity spillovers have been strongest among foreign direct investments where Beijing targeted it via tax incentives. (The study covers FDI from 1998 to 2007, the year before China started phasing out differential corporate tax treatment for domestic and foreign companies, raising an intriguing question of whether, from the perspective of productivity spillovers, that was a wise policy switch.) The paper also says, less surprisingly, that FDI from Taiwan, Hong Kong and Macau, tends to have no effect on, or hurt local firms whereas that from OECD countries benefits them significantly.

The paper is a lucid, if technical read, but grist for the mill of the argument over technology transfer by foreign firms investing in China.

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China To Vet Foreign M&A On Broad National Security Grounds

China plans to vet proposed foreign takeovers of Chinese companies in the interests of national security. The State Council says it is establishing a ministerial level committee under the National Development and Reform Commission and the commerce ministry. It will start work next month and look at proposed foreign acquisitions in areas involving national defense, agriculture, energy, resources, infrastructure, transport, technology and equipment manufacturing. It will assess their impact on economic stability, social order and the country’s technology R&D efforts.

China is not the first country to set up such inter-agency scrutiny, though not many have given theirs such a broad remit. The U.S., for example, has its Committee on Foreign Investment in the United States (CFIUS). Its mandate is narrowly national security, though some conservatives want it broadened and the committee strengthened in response to China’s growing foreign direct investment.

China attracted $106 billion in foreign direct investment in 2010, up 17% on the previous (global financial crisis wracked) year. Foreign companies have not previously faced formal review of their proposed direct investments in China on national security grounds, although informal barriers have long existed and Beijing has always held an ultimate veto. In 2008 China introduced an anti-monopoly law (and promised the national security review mechanism that has now been announced). Coca-Cola’s $2.4 billion bid to take over Huiyuan Juice in 2009 was one that got stymied on competition grounds. Before that ArcelorMittal and Russia’s Evraz Group were rebuffed in attempts to buy into the steel industry.

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A Proposed U.S. Response To The Spreading World Of China’s FDI

Last month, The Heritage Foundation, a conservative American think-tank, published its annual map (above) of China’s direct foreign investment (FDI) by destination, covering investments of at least $100 million made in 2011. The data comes from its China Global Investment Tracker, which goes back five years.

The dominant aspect of Chinese investment in 2010 was a rush to South America, led by (but not limited to) Brazil. Other features include a jump in new, large construction contracts and fewer failed transactions. Chinese investment in the U.S. in 2010 was steady at a bit over $6 billion but far more diversified than in 2009.

No great surprises there, though the map does highlight the ubiquity of Chinese FDI last year.

In a new blog post, Derek Scissors, Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation, lays out the Foundation’s policy prescriptions. These include clarifying which areas of America’s natural resources and manufacturing are open to Chinese FDI and “sharpening the mandate” of the Committee on Foreign Investment in the United States (Cfius), an inter-agency committee comprised of representatives of 16 U.S. government departments and agencies that reviews the national security implications of foreign investments in the U.S.

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Unintended Consequences Of Yuan Revaluation

Our man with his ear to the ground moving and shaking the global elite at the World Economic Forum’s annual meeting in Davos sends word that amidst a general half-glass full/glass half empty sentiment towards China’s commitment to revaluing its currency, there is some concern that a revalued yuan against the dollar would be a mixed bag for U.S. firms. U.S. exporters would find their products becoming relatively cheaper in the Chinese market. In the other direction, American firms with Chinese operations would find their exports from China becoming relatively more expensive. Foreign-affiliates account for 54% of all China’s exports, according a finance ministry report last year. Against that, foreign affiliates would also be repatriating higher profits in dollar terms from their domestic Chinese sales, and their margins would be helped by getting cheaper raw materials when those are imported.

It is on the investment rather than trade account that a yuan revaluation may have the greatest unintended consequences. It would become more expensive for U.S. companies to invest in setting up Chinese operations, giving an advantage to those already there. It would also likely boost China’s outward foreign direct investment (FDI), as it lowers the cost to Chinese firms of buying overseas assets. This Bystander recalls that that is what happened in Japan after Washington arm-twisted Tokyo into allowing a 50% revaluation of the yen against the dollar in 1985-87. Japan’s overseas FDI went from barely $6 billion in 1984 to nearly $50 billion by 1990.

In China’s case, the drive overseas is led by the search for natural resources. Manufacturing accounts for less than 10% of Chinese firms’ FDI. Some labor-intensive manufacturers are looking abroad for cheaper labor in the face of rising wages at home; more than 700 Chinese companies had invested in operations in Vietnam as of last July, according to Vietnamese officials. That is a drop in the bucket of the country’s manufacturing cohort, and they are mostly small or low-value-added manufacturers from Guangdong and the provinces bordering Vietnam. Yet a rising yuan could sweep along more in their wake. If Japan’s experience were to be replicated (and Beijing has resisted such a rapid forced appreciation having seen the effect on Japan’s domestic economy), the bigger flood of Chinese firms looking beyond natural resources to invest in access to foreign markets, brands and technology would be likely to prove much more troublesome for Western competitors, and to expand trade friction into investment friction.

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Slowly Spreading Jam

The latest Strategic Economic Dialogue meeting between China and the U.S. has concluded with a long study list for the two governments and few parting gifts from Beijing in the form of more financial markets opening.

Foreign firms will be allowed to invest again in domestic securities companies, though a cap of a maximum 33.3% stake will stay in place for a while. However, Beijing said as long ago as May that it would resume licensing securities joint ventures later this year after a two-year hiatus. Foreign banks and other companies that do business in China will also be allowed to issue debt and equity in the domestic markets if the capital raised is to be used for expanding their Chinese businesses.

What the Americans didn’t get was freedom for foreign companies to take bigger stakes in Chinese financial firms and for Chinese-foreign joint ventures to be allowed to undertake a wider range of businesses. That is jam being held back for tomorrow.

In a little dig reminiscent of the product safety row between the two countries, Zhang Xiaoqiang, vice head of the National Development and Reform Commission, China’s top economic planner, called on the U.S. to be more open to Chinese investments and to clarify which parts of the economy were off-limits to foreign investors on national security grounds. Under new U.S. legislation that came into force in October, foreign investments in infrastructure and high-tech and those coming from foreign state-owned enterprises face intensified review. Zhang identified the chemical, medical, mechanical, space and electronic businesses as areas where Chinese companies were interested in investing, but clearly feel they will face discriminatory scrutiny.

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