Date
21 September 2017
Shuanghui International's US$7.1 billion takeover of  Smithfield Foods was the biggest investment by a Chinese company in the US last year. Photo: Bloomberg
Shuanghui International's US$7.1 billion takeover of Smithfield Foods was the biggest investment by a Chinese company in the US last year. Photo: Bloomberg

China morphs into capital-exporting country

Over the past 35 years, China has mesmerized the world as it transformed itself from one of the world’s poorest countries into its second largest economy and top trading nation.

Now, another transformation is taking place. While China was cash-poor in the late 1970s and early 1980s and relied on foreign economic aid and investment, it has in recent years been turning from an importer of capital into a major exporter.

True, China continues to attract huge amounts of foreign direct investment (FDI). Last year saw a record US$117.6 billion in FDI poured into China, an increase of 5.3 percent, making the country second only to the United States, which received US$159 billion, as a destination for foreign investment.

The rise in FDI is expected to continue this year, which reflects confidence in China’s ability to deliver profits. After all, while growth in China has slowed to 7.7 percent a year for the past two years, this is still much higher than the growth rate of most developed countries. Growth in the United States in 2013 was 1.9 percent.

However, the stream of capital pouring in has been accompanied by another, increasingly large, stream of capital pouring out of China as Chinese companies expand their activities abroad on almost all continents.

According to China’s Commerce Ministry, outbound direct investment by non-financial firms rose to US$90.2 billion in 2013, a 16.8 percent increase over 2012. A ministry spokesman, Shen Danyang, predicted that China’s overseas direct investment could exceed foreign direct investment in the near future.

“If not this year, it could be next year or the year after next when China’s outbound investment surpasses investment inflows,” he said.

Cumulative Chinese overseas investment is expected to rise from a little over US$300 billion in 2010 to US$1 trillion in 2020. 

As capital from developed countries turn scarce, developing countries, such as those in Africa, are increasingly turning to China for investment in their countries.

Last week, Namibia’s prime minister, Hage Geingob, before flying to China on an official visit, said that his country was ready for Chinese investment. “Namibia is ready for investment, particularly Chinese investment,” he said in an interview with the state agency Xinhua. “We believe that working with you, we will achieve that goal.”

But Namibia is far from being the only country looking forward to Chinese investment. So are the developed countries of North America and Europe.
The United States, which has long been skeptical if not hostile to Chinese investment, appears to be changing its attitude. Investment from China doubled in 2013, to US$14 billion and a continuing upward trend is likely.

While Washington was and remains suspicious of certain Chinese state-owned enterprises, such as the telecom equipment companies Huawei Technologies and ZTE Corp., the majority of Chinese companies investing in the United States are privately owned.

According to the Rhodium Group, a New York-based consulting firm, 76 percent of Chinese investment in the US last year was by private companies compared with only 30 percent before 2011. The biggest deal of 2013 was the takeover of Smithfield Foods, the biggest pork producer in the US, by Shuanghui International, China’s biggest meat processor, in a transaction valued at US$7.1 billion. Shuanghui is seeking a listing on the Hong Kong stock exchange.

Chinese investment is also being drawn to the European Union in the aftermath of the global financial crisis. Whereas Chinese investment registered less than US$1 billion a year before 2008, it rose to US$3 billion in 2009 and 2010 and soared to more than US$10 billion a year since 2011. Europe, in fact, has turned into a major destination for Chinese investment.

Similarly, Chinese investment in the US rose from under US$1 billion in 2008 to US$5 billion in 2010 and US$6.5 billion in 2012, substantially below European levels.

A recent article in the official People’s Daily, headlined “The Logic of Chinese Investments in the US,” explained that with “the rising costs of labor, land and management in China, and the fluctuations in the exchange rate of the yuan,” Chinese enterprises are going abroad “in search of high-yield investment projects”.

At the same time, “the Obama administration is looking to create more job opportunities through absorbing foreign capital”, so that Chinese investment “is creating a win-win situation”.

The US, with its mature market and advanced technology, will “continue to attract Chinese investment”, the article said.

What is happening is a dramatic shift of China from an importer of capital to an exporter of capital.

At the same time, capital from the West will be attracted to China if the economic reform announced last November are implemented and the country opens up hitherto closed sectors to foreign investment such as finance and telecommunications.

Hopefully, a freer flow of capital will be the result of ongoing negotiations between China and both the US and the European Union. China clearly has an interest now as never before in protecting its overseas investments. At the same time, it also realizes that the world is a two-way street and that greater market opening is in order.

– Contact us at [email protected]; Twitter:@FrankChing1

RA

 

Frank Ching opened The Wall Street Journal’s Bureau in China in 1979. He is now a Hong Kong-based writer on Chinese affairs.

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