Blog Post

Chinese FDI in perspective

November 11, 2011 in China by Lotsi Krisar

The rapid increase in outward financial direct investment (OFDI) from China in recent years has caused apprehension and suspicion, most notably from developed countries.  Yet if the history and context of this rise is appreciated, and the micro and macro-economic advantages are understood, the anticipated huge figure of OFDI from China over the next decade is to be welcomed rather than feared.

The issue of Chinese FDI into America was tackled earlier this year in a special report undertaken by the Asia Society’s Center on U.S.-China Relations and the Kissinger Institute on China and the United States at the Woodrow Wilson international Center for scholars.  This report entitled; An American Open Door? Maximizing the Benefits of Chinese Foreign Direct Investment, was authored by Daniel H. Rosen and Thilo Hanemann, and since it’s launch in May 2011 it has received massive worldwide attention from the press, government officials and academics alike.  The report provides an understanding of the nature of Chinese FDI over recent years and it gives a forecast for the global flow of OFDI from China that cannot go unnoticed or ignored.  It calls on China and America to address the issues that may hinder the flow of FDI between these two countries resulting in lost opportunities.  The aim of this article is to similarly outline the history of Chinese FDI and relate the impact and benefits to BBMC Global’s future partners.

Developed countries are accustomed to the experience of high levels of outward flow of FDI towards developing countries rather than an influx of such investment from developing countries.  In fact, following the economic reforms in China in 1978, the flow of FDI from developed countries into China was vital for its economic growth through the expansion of it’s manufacturing capabilities.  China’s own suspicions concerning the flow of foreign investment into their country meant that the inward FDI gathered pace only slowly at first, as restrictions and controls remained tight.  The advantages of the inward FDI soon became apparent to China and from those humble beginnings in 1978 the annual inflows of investment have risen exponentially from $4 billion in 1990 to nearly $40 billion in 2000 and $100 billion in 2009 with an inward FDI stock that year of nearly $1 trillion.

In contrast, the kick-start to the build up of outward flow of FDI from China took considerably longer.  Initially this was due to limited capital, however, even when capital was more available, the fear of asset stripping and capital losses meant that strict controls on OFDI were maintained by China.  In 2004 China’s OFDI averaged just $2 billion annually.  It was the sudden unexpected boom in growth in China in the mid 2000’s which resulted in the need for China to look elsewhere for the raw materials for it’s rapid urbanisation and growth in heavy industries.  Acquiring equity stakes around the world enables China to spread the risks of supply, negotiate within the market place more effectively and take advantage of highly profitable deals.  In the latter half of the 2000’s, China increased it’s OFDI so rapidly that in 2009 it made the top10 list of global investors.  China’s current OFDI stock is $230 billion.  This is higher than other emerging economies but considerably lower than advanced economies, however, it is the rapid rise in annual outflow that has been impressive.  It is predicted that by 2020 more than $1 trillion in direct Chinese investment will flow worldwide. 

The OFDI from China has thus far focused on natural resources, mainly from Asia, Australia, Africa, and South America.  The beneficiaries of this investment have included those making the deals, venture partners, sellers, and local inhabitants through job creation and improved infrastructure and urbanisation.  Now China is looking to new more advanced markets for investment abroad and the developed countries have expressed unease as they perceive a threat to security and to the freedom of their own market place, given the state controls of China in the past and present.  Yet this expansion of investment into advanced countries is likely to be to the advantage of all those who deal with Chinese investors.  As stated earlier American analysts have called for US officials to address obstacles to the flow of Chinese FDI and to be open to it’s benefits as well as to call upon China to improve their corporate governance and transparency in order to alleviate foreign suspicions. 

To reiterate, the aim of this brief overview is to alert BBMC Global’s current and potential partners to the rapid rise and predicted levels of global flow of OFDI from China into developed as well as undeveloped countries and to see how this is to be welcomed in order for the benefits and rewards to be appreciated.

 

Laszlo Krisar, Chairman, General Manager. Dr Clare Murphy, economist, public relations consultant.