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IMGXYZ4279IMGZYXDespite slow economic recovery in the United States and Europe, China's overseas investment in the West has increased rapidly in the last few years. Chinese total Outward Direct Investment (ODI) surged in 2011 and 2012 and continues to rise, making China the world’s fifth-largest investor. Developed and developing countries alike are welcoming this capital spending by Chinese state-owned enterprises (SOEs). Carnegie-Tsinghua’s Zhao Kejin hosted a roundtable discussion with U.S. financial experts and Chinese scholars on the future of China’s overseas investment.
Risk Assessment for China’s ODI
Direct investment from Chinese enterprises around the world has grown swiftly within the last decade, rising from $2.7 billion in 2002 to $74.6 billion in 2011, Zhao explained. However, political risk stemming from investments abroad remains a critical issue for China.
- China’s “Going Global” Strategy: A U.S. panelist stated that there was limited diversity in Chinese ODI practices, with most investments concentrated in Asia, Africa, and Latin America. He added that China focuses primarily on industries, such as property leasing and business services, though manufacturing and technology are receiving renewed interest. The panelist suggested that interest in new technology is still low.
- Risks for State-Owned Enterprises: Mergers and acquisitions are the most common form of foreign direct investment for Chinese SOEs. One panelist warned of the serious risk factors attached to these investments. Political change abroad is one of the most destabilizing forces for investments: nationalization, foreign exchange, and overall domestic policy changes can jeopardize foreign investments.
- Steps to Avoid Political Risk: According to one Chinese expert, identifying risks, evaluating decision- making processes, and understanding investment procedures abroad are all important tools to assess risk in countries where China has important investments. This expert explained that Chinese enterprises first embark on joint ventures, rather than moving directly to mergers and acquisitions.
Special Case Study of Southeast Asia
Given that Southeast Asia claims a significant portion of China’s ODI, maintaining stable relations with its neighbors is a priority, panelists agreed. However, as territorial disputes continue, this will put Sino-Southeast Asian relations in a precarious position.
- Overseas Interests: One Chinese panelist concluded that Southeast Asia posed little threat to China, although territorial tensions will negatively impact the level of Chinese ODI that flows to Southeast Asia. In analyzing ASEAN and Southeast Asia, he saw China and Japan as the most volatile nations in the Asia-Pacific region. Another scholar added that relations between China and other state actors could deteriorate, thus making it difficult for China to protect its overseas interests.
- ASEAN Structure Critical to Southeast Asian Stability: Chinese panelists agreed that reshaping ASEAN to include more states might lead to instability in the region. They were in favor of the “ASEAN Plus Three” structure that is composed of the core ASEAN nations plus China, Japan, and South Korea. ASEAN’s overall goal is to maintain stability and flexibility among member states and in the region. One panelist countered that this structure could lead to intense competition in the region, potentially causing countries to divide across political and religious lines.
China Moving Forward
If unresolved, a number of challenges could hinder Chinese enterprises’ ability to effectively invest abroad.
- Chinese Government Needs to Adapt: A panelist argued that the Chinese government needs to promote effective integration of Chinese enterprises into local legal and environmental frameworks abroad. The government should take a more active role in providing guidelines to companies investing abroad with information on specific countries and industries.
- Difficulties for Chinese Personnel Abroad: The number of Chinese enterprises and personnel going abroad is increasing rapidly, stated one participant. There are currently 1.2 million Chinese workers and employers of SOEs working abroad. This increasingly large number is helping to demystify China and to promote a positive overall image. However, because of close ties between government and business in China, this can generate a negative attitude toward Chinese direct investment, added one Chinese scholar. Greater public diplomacy and mutual understanding is necessary to counter this, said the scholar.
