China Takes Aim At Foreign Investment Big Leagues
Chinese public and private enterprises are looking abroad, and expanding ever more into higher technology industries. It will reshape the future for China, and the world.
BEIJING — With $1.2 trillion in overseas direct investments (ODI) planned for the next decade, China is preparing to leap into the "global investor era." As a capital exporter, China "may still be in its infancy, but it's about to enter the fast lane," says Cheng Qingtao, vice-president of the China Chamber of International Commerce.
China's "Go Out" investment policy, launched in 1999, has already had a major effect on ODI, which grew from $2.7 billion in 2002 to $107.8 billion last year, according to data from the Ministry of Commerce. Deputy-Minister of Commerce Zhang Xiangchen expects the number to reach $120 billion this year and continue increasing by approximately 10% over the next five years.
Huang Yiping, an economics professor at Peking University's National School of Development, reckons that China has a real demand for outbound investments. "China's largest motive in exploiting overseas investment is to seek resources," he explains. "Approximately 41% of its overseas investment projects are concentrated in the natural resources sector which itself accounts for 51.3% of the total investment amount. The search for markets comes second. The third motive is to seek strategic assets."
State-owned enterprises continue to be the driving force behind China's ODI growth. But as Cheng Qingtao explains, the private sector is playing an expanded role. In 2013, non-state-owned enterprises accounted for 45% of China's outward foreign direct investment.
When it comes to the various overseas mergers and acquisitions Chinese companies have been involved in, "traditional business services make up the mainstream, especially in the wholesale and retailing, construction and manufacturing sectors," says Cheng. "But it is also very evident that the foreign investment is flowing from the low-technology sector to high technology and high value-added industries. Such investment has a huge growth potential and higher profit margins."
Trimming the red tape
To further promote outbound investments, China’s Ministry of Commerce amended and adopted a series of measures last month aimed at loosening regulations and simplifying administrative procedures. "The amended measures will facilitate overseas investments of private companies so long as they conform to anti-money laundering regulations," says Chen Daofu, director of the Comprehensive Research Office at China's State Council Institute of Finance.
Cheng Qintao believes there is room to further simplify the country's cumbersome investment procedures. Even with the new measures in place, companies have to go through various ministries and governmental agencies to obtain approval for their overseas projects, he points out. Cheng says legislation is also needed to fill in various legal gaps. China has no insurance law related to overseas investments, for example. Chinese companies, as a result, face serious difficulties when it comes to claiming damages.
Addressing the Asia-Pacific Economic Cooperation (APEC) forum two weeks ago, President Xi Jinping pledged to set up a $40 billion "Silk Road Fund" to support infrastructure construction and resource development in countries along the so-called Silk Road Economic Zone and the 21st Century Maritime Silk Road, a pair of economic belts where China plans to focus its business efforts.
The first of the two routes begins in China's former western capital of Xi’an, passes through West and Central Asia, and ends in Europe. The other follows a maritime trajectory by way of Malacca, west Myanmar, Bangladesh, Sri Lanka and East Africa. Chinese authorities refer to the two routes together as the "One Belt and One Road" initiative.
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The Taldyk Pass in Kyrgyzstan, along the Silk Road. Photo: Gustavo Jeronimo
New sources of capital
In October, China called for the establishment of an Asian Infrastructure Investment Bank, another financial institute to provide funding for infrastructure construction. The financial ministers and representatives of the first batch of member states have endorsed the deal. It is headquartered in Beijing with a statutory capital of $100 billion.
As Cheng Qingtao reckons, Chinese investments in the One Belt and One Roadcountries will boost the region's infrastructure facilities. And as these regions “interconnect and intercommunicate,” new investment opportunities will arise in the communication industry, in human resource development, tourism, agriculture, public health, environmental protection, trade and logistics, and in finance, he predicts.
Chen Daofu points out that most of the countries along the two "Silk Roads" are underdeveloped and lack the ability to build infrastructure facilities and maintain them over the long term. The Silk Road Fund will thus provide them with supplementary support and enable them to access a very market-oriented financing channel.
The Silk Road Fund and Asian Infrastructure Investment Bank promise to serve China's interests in a way existing financial institutions such as the Asian Development Bank do not.
"The Asian Development Bank is controlled by the U.S. and Japan to provide special funding for the projects related to their needs. It directs funds to the development points they want," says Fan Mingtai, director at the Institute of Quantitative & Technical Economics of Chinese Academy of Social Sciences. "There is a certain competition between the Asian Development Bank and the Asian Infrastructure Investment Bank. China will now be able to direct, through the Asian Infrastructure Investment Bank, the financing for building the One Belt and One Road."