Economy

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.

Aiming high
Aiming high
Sun Qizi

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.

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 Road countries 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."

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Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

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