Source: http://www.CRNTT.com 2015-04-11 07:52:58   

Data released in January 2015 by the Ministry of Commerce show that in 2014 China's outward direct investment, after excluding investment into the sector of financial services, reached $102.9 billion. Adding the reinvestment of profit earned abroad by Chinese companies and their investment through third countries, China’s total overseas investment reached $140 billion, higher than the foreign investment into China by about $20 billion. China has become a net exporter of capital for the first time.

An article published by the China Economic Times, written by Yun Yan-hui of the CCID think tank of the Chinese Ministry of Industry and Information Technology, said that this was a historic change which marked the start of China entering the ranks of trade power and was bound to have a significant impact on global trade and investment patterns.

Basic characteristics of China’s current export of capital

Here is the analysis of the article:

(1) Rapid growth of outward direct investment

In 2002 China established an accounting system for outward direct investment, while its foreign direct investment into the country was $2.7 billion. In 2014, the direct investment abroad of the industries of the whole nation reached $116 billion, a yearly increase of 15.5 percent and a growth of nearly 40 times in just 12 years. By the end of 2014, China's accumulated total investment abroad, after excluding investment into the sector of financial services, reached 3.97 trillion yuan, equivalent to $646.3 billion. Up until 2014, China was for three consecutive years ranked the world's third-largest country for outbound investment.

(2) Widely distributed investment regions and gradual switching to developed countries

At present, China's outward direct investment involves 184 countries or regions, covering 80 percent of the world’s countries or regions. At the end of 2013, China's outbound investment stocks were mainly in the developing countries. In 2014, China's global direct investment reached 6,128 enterprises in 156 countries or regions, including more rapid growth of investment in developed countries. For example, the investment in the EU grew year-on-year by 170 percent, to the US by 23.9 percent, far exceeding the overall growth rate of China's overseas investment.

(3) Investment entities moving away from central-government-led and state-owned enterprises

China's outbound direct investment entities show gradual diversification. Local businesses and non-state-owned enterprises are becoming more active in this regard. In 2014, the outward direct investment from the local enterprises reached $45.11 billion, a year-to-year growth of 36.8 percent. It accounted for a share of 43.8 percent of the total outbound direct investment in the same period and a 7.2 percentage point increase over the previous year. For the non-state-owned enterprises, as of the end of 2013, the outbound direct investment stock in the state-owned-enterprises sector, after excluding investment into the sector of financial services, accounted for 55.2 percent and the non-state-owned enterprises sector contributed 44.8 percent.

(4) Continuous allocation optimization of foreign investment industries by shifting to service sector

Foreign direct investment from Chinese enterprises is shifting from a traditional energy-resources-driven pattern to a pattern driven by combined energy resources, markets, and technologies, etc. Currently the outbound investment involves a wide range of sectors. In 2014, China's outbound direct investment involved 15 categories, including leasing and business services, mining, wholesale and retail trade, construction, manufacturing, transportation, storage and postal industries. Among them, the fastest-growing was the service sector which had a year-to-year growth of 27.1 percent, accounting for two-thirds of the total investment, whereas investment growth in the mining and other resources declined by 4.1 percent.

(5) Merger and acquisition (M&A) being important form of overseas investment

In 2013, the scale of Chinese enterprises’ overseas M&A reached $52.9 billion. In 2014, overseas M&A by Chinese enterprises showed a strong momentum and diversification of investment areas. The number of overseas M&A made by the private companies exceeded that of the state-owned enterprises. The larger acquisitions were: MMG Limited (formerly known as Minerals and Metals Group) and other enterprises jointly launched the acquisition of Las Bambas copper mine in Peru for $5.85 billion; Lenovo acquired Motorola's mobile phone business for $2.91 billion; Dongfeng Motor Co., Ltd. launched the acquisition of 14.1 percent stake in the French PSA Peugeot Citroen (the second largest car manufacturer in Europe) for $1.09 billion. In the agriculture sector, COFCO (a large dairy products processing enterprise with 29 production bases distributed across 19 provinces in China) acquired Noble Group in Singapore and Nidera in the Netherlands. They are the two largest foreign investment projects in the agricultural sector so far.

Meaning of China becoming a net exporter of capital

Here are the article’s viewpoints:

(1) Significantly enhancing the competitiveness of China and Chinese companies

Large-scale export of capital relies on a strong economic strength. China becoming a net exporter of capital is a telltale signal of its comprehensive national strength, which indicates that China's national strength and external competitiveness are significantly enhanced. In 2010, China's share of global manufacturing output was 19.8 percent, surpassing the United States as the world's number-one manufacturing powerhouse. In 2013, after becoming the world's largest exporter of goods, China became the world's largest trader of goods. In 2014, China (including Taiwan) had 100 companies listed in the Fortune 500, second only after the United States. Currently, China has nearly 30,000 off-shore companies and the size of the off-shore assets is more than three trillion US dollars. Chinese employees working abroad have exceeded 1 million.

(2) Evolution in the use of inward foreign investment

Since its reform and opening up, China has attached great importance to "bringing in capital." Up until 2014, the scale of foreign investment in China ranked first among developing countries for 23 consecutive years. But in 2014, China's investment by using foreign capital started to show gradual chasnges. The huge Chinese capital stock has turned China into a capital investment country. At present, the inherent power of China's economic growth is significantly enhanced, resulting in an increased selectivity towards foreign capital and beginning to show a turning point in the amount of foreign capital brought into China. First, the growth of foreign investment to China is slowing. In 2014, China actually used $119.56 billion of foreign capital, a year-to-year increase of only 1.7 percent; newly established enterprises by inward foreign investment numbered 23,778, a year-to-year increase of 4.4 percent. Second, the structure of utilizing the foreign capital continues to become optimized. Guided by China's industrial structure optimization, the inward foreign investment in manufacturing-based industry has turned toward service-oriented industry. In 2014, China’s service industry accounted for 55.4 percent of inward foreign investment, 22 percentage points higher than the manufacturing sector.

(3) Industries restructured , especially to reduce overcapacity

Export of capital will become the important direction for China's industrial restructuring, especially in resolving its overcapacity. In dealing with overcapacity, solely relying on expansion of the domestic market is not enough. It requires international transfer of industries. Successful examples include the US Marshall Plan to aid Europe after the Second World War, and Japan encouraging investment in its Asian neighbors in the 1980s. At present, some of China’s industries, such as steel, cement, wind-power equipment and photovoltaic systems, have more prominent overcapacity problems.  Shifting some business capital overseas not only can set aside a certain amount of growth space for the domestic industries, but also can establish overseas production bases, as well as research and development centers for these enterprises to create a global industrial chain. The shift can also effectively compensate for the weaknesses in the domestic industries, as well as effectively promote the restructuring and upgrading of domestic industries.

(4) Mechanism gradually formed to force enterprises to grow bigger and stronger

Chinese enterprises’ "going out" can be a rewarding experience, but the key is whether the enterprise itself can be bigger and stronger. China is actively promoting the "going out" of enterprises; high-speed rail and nuclear power are examples. The "One Belt and One Road" initiative also serves as an important platform for the export of capital. To a certain extent it can force the Chinese enterprises to continue to learn and adapt to the rules of international competition in the “going out” process to form their global business development strategies. It will also force the Chinese enterprises to make adjustments and innovations in the legal, institutional and human resources areas to nurture a large number of enterprises having global influence. Ultimately, they will realize the benefit of enhancing opening up by “bringing in” and “going out” for a better integration.

Suggestions to further raise the quality of China’s capital export

The article proposed the following:

(1) Setting clear objectives for internationalized development

The "going out" strategies of some Chinese enterprises were not clear, resulting in their international recklessness. They showed randomness in some investment decisions, and there were unfair competitions. Therefore, in terms of making overseas investment, China should set a clear development strategy and objectives. On the one hand, China should improve coordination mechanisms at the national level, and give full play to the role of ministerial coordination mechanisms, strengthen the government's overall plan and coordination, develop a "going out" strategic plan at the national level, and design programs for major industries. On the other hand, the enterprises should define their own development goals and develop detailed and feasible "going out" plans, including the paths for achieving foreign investment objectives, the assessments of strategies, the means of payment, the designs of risk prevention, and post-merger business policies and integration strategies.

(2) Strengthening risk prevention in overseas investments

Chinese enterprises in the "going out" process will be subject to various risks, such as political risk, legal risk, etc. Lack of preventive measures will lead to businesses suffering huge losses. For example, in 2011, in the light-rail project of Saudi Railway Construction Investment, the loss amounted to 4.148 billion yuan. In 2014, Mexico revoked the high-speed rail project of the China Railway Construction Corporation Limited (CRCC); in January 2015, the newly elected Greek government halted the purchase of its largest port by China Ocean Shipping Company (COSCO). Therefore, in the future for making foreign investment, Chinese enterprises need to further improve their risk prevention capability. First, they should improve the overseas investment insurance system in the area of the coverage and insurance conditions to reduce business losses. Second, Chinese enterprises should establish and improve their risk procurement management, and give full play to the role of the government and the industry associations to collect, evaluate and publish information on various national and regional political and economic situation, etc., thereby to establish mechanisms for national risk early warning, prevention and emergency response. Third, the enterprises should strengthen safeguards. For those enterprises investing in high-risk countries, the government should set up security audits, provide guidance for enterprises to prevent overseas risks and continue to strengthen safety training of their personnel. Fourth, the enterprises should be fully familiar with the laws and regulations of the relevant countries, including the local laws and regulations, the international law and the WTO rules, in order to use legal means to protect their legitimate rights and interests.

 (3) Enhancing the competitiveness of enterprises

At present, Chinese enterprises lack the core competitive advantage in international business capacity, technology, brand name and management. For example, the 2014 World Fortune 500 company revenues, total profits and minimum requirements for inclusion in the list were reported to be, respectively, 6.6 times, 4.8 times and 17.6 times that of the China 500 companies over the same period. In the same year, the Commerce Department data show that 25 percent of China's overseas-invested enterprises were losing money. In order for the future China to foster a number of world-class multinational companies, it is necessary to enhance the comprehensive competitiveness of the Chinese enterprises in three aspects. First, China should build a business-centered, market-oriented, and production–study–research-combined technological innovation system to encourage innovation. Second, China should pay attention to brand incubation, increase the cultivation of products with independent intellectual property rights, pay attention to the production of high technological-content and high value-added products, and improve and raise the technical standards of the products. Third, China should increase the effort of training managerial and administrative personnel by strengthening their training and hiring to improve the management and administrative quality/capability.

(4) Raising the level of government support

First, China should provide the enterprises with a good competitive environment by improving overseas investment coordination mechanisms, strengthening bilateral and multilateral cooperation with other countries or regions, and actively signing investment protection agreements. Second, China should strengthen information services and policy advisory services. China should improve the information network service system so that it can provide timely public information on the overseas investment environment and public policies. This will reduce blind investment in overseas mergers and acquisitions. Third, China should cultivate organizations in professional services. China should guide the intermediary service organizations in merger, legal, financial, asset valuation advice, and financial and independent audit services, etc., towards the direction of specialization and standardization by strengthening market supervision and information disclosure. Fourth, China should improve the management of the list of disallowed overseas investment. The Ministry of Commerce has issued the revised "Administrative Measures for Overseas Investment" for the implementation of disallowed overseas investment list to establish the "record-based, supplemented by approval" approach to facilitate gradual improvement in the implementation process.