Chinese foreign investment abroad started very modestly. In 1979, a few selected companies began to invest overseas, primarily in Hong Kong and Macao, as well as in the Asia-Pacific region. By the mid-1980s, Chinese enterprises had invested $170m in 45 countries. This represented less than 3% of total inflow of FDI into China.
In the next decade, China’s government took bolder steps toward outward investment. In the second half of the 1980s, Chinese businesses invested more than $860m in over 90 countries. At that time, natural resource development projects, along with assembly and transport, dominated Chinese overseas investments. Of the newly established overseas firms, 50% were in Asia and 18% were in Africa. However, Chinese FDI accounted for only 0.1% of the global total.
By the early 1990s, the Chinese government encouraged manufacturing enterprises to employ a 'two-resources-and-two-markets' strategy to target both domestic and international markets, while seeking resources such as capital, know-how and raw materials. Concurrently, the sectoral distribution of Chinese investment abroad shifted from resource development to manufacturing. By 2004, foreign investment by Chinese companies rose by almost one-third to $3.6bn.
A cooling of relations
This upward thrust prevailed until 2005, when the China National Offshore Oil Corporation made a bid to acquire US energy company Unocal for $18.5bn. This move was not welcomed in Washington. At the first congressional hearing on the bid, the chairman of the House Armed Services Committee, Duncan Hunter, described the effort as “a strategic acquisition, just like the acquisition by the Chinese of these Sovremenny-class missile cruisers that they purchased from the Soviet Union, which have just one role, that is, to kill American aircraft carriers.”
The signal in China was that, while the US was open for business, it might not be open for Chinese business. Nevertheless, China’s FDI abroad soared from an annual average of less than $3bn before 2005 to more than $50bn in 2010, bringing China’s total global FDI stock abroad to more than $300bn. Most of this investment was focused on developing countries and a few resource-rich developed economies. In 2010, China’s FDI stock in the US was estimated at $5.9bn – a dramatic quadrupling in comparison with 2008.
Structural adjustment in China drove outward investment. Chinese investors continued to invest in a broad range of US industries, but sectors hit by adjustment pressures in China, such as real estate and renewable energy, saw the most notable increase in interest by Chinese investors.
Towards late 2011, the policy focus shifted back to Chinese investment in critical US infrastructure. China’s sovereign wealth fund expressed its interest in investing in US and European infrastructure. Meanwhile, Chinese investment in telecoms infrastructure came under renewed scrutiny.
Like the US, the eurozone can provide China with advanced knowledge, high-tech and innovation capabilities and strategic assets. In turn, China can provide the eurozone what it needs the most: jobs, tax revenues and investment.
In Beijing, the eurozone is seen as China’s most important trading partner, making up 20% of China’s total exports. It is also China’s most vital technology partner. As the eurozone’s economic condition has deteriorated, Chinese FDI in the region has accelerated. Annual FDI flows to Europe tripled to $3bn in 2009 and 2010 before tripling again to almost $10bn in 2011. While absolute values remain small compared with Europe’s total inward FDI stock, the change in trend line is clear.
Geographically, Chinese FDI in Europe is focused primarily on Germany, the UK and France. Sectorally, there is breadth and momentum across many industries.
The triangle drama
In the coming decade, China’s new leadership hopes to double the country’s 2010 GDP and per capita income for both urban and rural residents. The medium-term objective can be accomplished only through structural reforms and a gradual shift from investment-driven growth to consumption. That, in turn, is predicated on expanding social security and health services, a shift from cost efficiencies toward innovation-driven competitiveness, as well as sustainable development. All of these shifts provide extraordinary opportunities for European-Chinese and US-Chinese trade and investment.
In terms of new capital, outward Chinese FDI is estimated to be $1000bn to 2000bn over the decade from 2010 to 2020. Assuming that present trends prevail, Europe could garner the same 25% share of global FDI as in the 2000s. Some observers estimate that by 2020, Europe could see $250bn to $500bn cumulatively in new Chinese mergers and acquisitions, and greenfield investment.
There are great parallels between China's investment in both Europe and the US, particularly in terms of value, the breadth of the industrial mix and ownership patterns. The underlying difference involves the policy orientation, however.
In Brussels, China’s FDI is seen primarily as an issue of trade and investment, and only secondarily as a security issue. In the US, security interests rule over trade and investment. Take, for instance, the expansion plans of telecoms firm Huawei in the US and Europe. Despite the acceptance of the global marketplace, Huawei has encountered significant opposition in the US Congress and qualified resistance from president Barack Obama's administration. The stated US motives comprise mainly security interests. In Brussels, there has also been some anti-Huawei opposition, but primarily in trade policy.
Implications for trade
In the coming months, Washington can no longer defer the inevitable. In 2013, the president, the House and the Senate must finalise their compromises over a new debt ceiling, a deficit-cutting plan, the Bush tax cuts, automatic spending cuts, unemployment benefits and other outlays, a payroll tax cut, and capital gains and dividend taxes. Each and all of these issues have implications for US-Chinese trade and investment.
What the US desperately needs is a credible, bipartisan and medium-term adjustment plan. Any major trade friction with China would have an adverse impact on such efforts. Conversely, open FDI doors would contribute to the success of adjustment in the US.
In turn, what Europe desperately needs are credible, coordinated and medium-term structural reforms that can create a foundation for sustained growth in the region. Any major trade friction with China would have a negative effect on such objectives. Conversely, open FDI doors would contribute to the success of adjustment and integration in Europe.
What amplifies these challenges is that the triangular relations between China, the eurozone and the US remain haunted by mutual mistrust, which stems from differences in political systems, economic models and security interests. If these concerns and adverse hedging take over the triangle drama, the net effect can only result in a win-lose game.
There is a historical precedent. In 1930, Washington enacted the Smoot-Hawley Tariff Act. The objective was noble: to support US labour and protect US industry. But the result was devastating. Before the act, US recession was challenging, while unemployment amounted to 9%. After the act, unemployment soared to 25%, as other countries responded with counter-tariffs, while the lingering US recession morphed into a global depression.
What the world needs is a win-win game that can benefit each and all. In the 1990s, the US dominated the FDI game and the role China played was marginal. In the past decade, the US and Europe reigned over worldwide FDI, whereas China’s role increased mainly as an exporter.
In the coming decade – the era of progressive Chinese politicians Xi Jinping and Li Keqiang – the win-win opportunities will be increasingly synonymous with triangular partnerships among three equals. That requires structural reforms not just in China, but especially in the US and Europe. Instead of unipolar protectionism or bipolar hedging, global growth desperately needs multipolar co-operation.
Dr Dan Steinbock is research director of international business at the India China and America Institute (US) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).