Upbeat Outlook for China's Outbound Investments
Foreign direct investment (FDI) by Chinese firms outside China exceeded US$ 100 billion in 2015, for the second year exceeding inward FDI by foreign firms. China early in its reform period encouraged inward FDI (unlike Japan and South Korea at their early stages), partly to earn foreign exchange and partly to learn the technological, management, and marketing skills of foreign firms. China was slower to permit outbound investment, now encouraged as part of it "going out" policy. Outbound FDI as recently as 2002 was under US$ 3 billion, on a cumulative stock of around US$ 30 billion. Most of the early outbound investment was linked to the development of resources: oil in Kazakhstan, Iran, Angola, and Sudan; oil sands in Canada; copper in Zambia and Mongolia; and efforts to acquire agricultural land in Africa and Australia.
Recently it has become much more diversified. By the end of 2015 cumulative outbound FDI exceeded US$ 1 trillion. This compared with over US$ 6 trillion by the United States, over US$ 1.6 trillion by Britain and Germany, and over US$ 1.5 trillion by Hong Kong and France.
Hong Kong has been the most important destination for China's investment, accounting cumulatively for nearly 60 percent. Another 12 percent was in the British Virgin Islands and Cayman Islands, two Caribbean tax havens which conceal the true destination and even the nature of the investment. It has been suggested that some of this was actually invested at home in China, to take advantage of former privileges for overseas investment in China.
Much of the investment, over US$ 40 billion, went to the United States, spanning a wide range of activities. An even greater amount is in the European Union, but the largest national destination after the USA is Australia, followed by Singapore. Some of these investments were "trophy" investments, such as the purchase of the Waldorf Astoria by Angang Insurance in 2007. This is a landmark hotel in New York, frequently used by diplomats and heads of government when they attend meetings at the nearby United Nations. Angang plans to convert most of the rooms into luxury apartments, cutting the number of hotel rooms by three quarters, with the planned renovation starting in 2017. Angang also famously got into a bidding war for the Starwood Hotel chain early this year, finally offering US$ 14 billion before withdrawing, allegedly because China's Insurance Regulatory Commission intervened because that bid would have broken the rule that no single investment should exceed 15 percent of total assets.
Chinese firms have also invested in Hollywood cinema production studios, supposedly to generate content for Chinese cinemas – despite official quotas for foreign films – and in manufacturing. For example, Shangdong Tranlin Paper Company has brought its distinctive straw pulping technology to the United States to produce in Virginia. And China's high speed railway company has won a bid to produce new subway cars for the Boston subway system, to be assembled in Pittsfield in western Massachusetts. Founded in 2001, WuXi PharmaTech engages in biological research for new pharmaceuticals. In 2008 it acquired the American firm AppTec Laboratories to enlarge the scope of its research and to establish itself as an international applied research firm, not just a Chinese firm – drawing board members, staff, and venture capital from outside China.
The process continues. Haier, which long ago manufactured home appliances in South Carolina under its own name, is in the process of acquiring the home appliance division of General Electric for US$ 5.4 billion. Another Chinese firm, Midea, is in discussion to acquire the German robotics producer Kuka for around US$ 5 billion.
Outbound FDI facilitate the development of overseas markets for Chinese products, familiarized foreigners with Chinese firms and brands, and accelerates Chinese acquisition of advanced technology – as in Geely's purchase of Sweden's Volvo from the US Ford Motor Company. Also, until last year it also served a useful macroeconomic or monetary function. China's ongoing trade surplus along with inflows of foreign capital – combined with China's policy of controlling movements of the exchange rate of the yuan into dollars – resulted in a sometimes unwanted expansion of central bank credit, which was inflationary unless countered by other means. Outflows of capital from China relieved this pressure on the central bank. It was reversed in 2015 and early 2016, as China had to draw down its official foreign currency reserves to inhibit a depreciation of the yuan.
The American economy remains open and receptive to foreign investment from around the world, including China. Direct investment involving management control, however, is limited by decades-old laws in certain sectors such as domestic airlines, broadcast radio and television, and coastal shipping. Foreign investment in defense-related industries is subject to administrative review to assure non-export of military-related technology, although in practice that review process has rejected few proposals and modified some others to conform to its purposes. Otherwise, the American economy is open and available to foreign investment. Indeed, the governors of many states, like the governors of many of China's provinces, actively solicit foreign firms to locate in their states, often providing tax or other incentives to do so.
China's outward investment is likely to grow robustly, along with continued expansion of China's economy and maturation of Chinese firms.
Richard N. Cooper is the Maurits C. Boas Professor of International Economics at Harvard University
Maurits C. Boas Professor of International Economics at Harvard University
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