Chinese Art Of Foreign Investment

Business



Ashok V Desai
Columnist BusinessWorld.in
March 19 2014

There is no sign of imperial designs in Chinese acquisitions abroad

There was a time when China exported workers; that is how Chinese minorities ended up in Calcutta, Malaysia, Indonesia and California. More recently it came to be known for its manufacturing prowess — for making goods of German or Japanese quality at much lower costs.

Industrial competence led to success in exports, which soon outstripped China’s imports, and the difference ended up in the Chinese central bank as foreign exchange reserves, matched by piles of cash in the accounts of Chinese companies. They started looking for businesses to buy or set up; China soon owned hundreds of businesses abroad.

Their buying spree set off alarms abroad; when, for example, Huawei decided to take a share in an Indian telecommunications company, Indian media went berserk with nightmares of Peking mandarins spying into the innermost recesses of the Indian government.

China is sensitive to Indian hostility; its companies invested only $2.5 billion in India between 2005 and 2012 — less than 1 per cent of its total investment abroad.

The investments started in a small way. In 2005, China invested $10 billion; by 2012, its annual investment had gone up to $80 billion. The countries that received the most investment were Australia and the USA ($51 billion each); Canada ($37 billion) and Brazil ($25 billion) came next.

Neighbouring Russia ($13 billion) and Kazakhstan ($10 billion) were also important. But China has no favourites; its total investment of $384 billion is extremely well spread. It made 395 investments; that gives an average under a billion.

The biggest was $15 billion in Nexen Oil of Canada, which is just across the Pacific from China. The next biggest was $13 billion in a joint venture with Rio Tinto to mine bauxite in Australia.

The third was in Addax Petrol of Switzerland. The fourth was $7 billion in the Brazilian offshore oil assets of Repsol, a Spanish company. But most of the investments were small; 209 were under half a billion (the list excludes investments under $100 million).

A dozen corporations accounted for almost two-thirds of the investments. The foremost was China Petroleum and Chemicals Corporation (Sinopec), which invested $53 billion. China National Petroleum Corporation ($39 billion) and China Offshore Oil Corporation ($32 billion) were the other major investors in oil abroad.

China Investment Corporation ($39 billion) and State Administration of Foreign Exchange ($10 billion) were sovereign wealth funds. Then there were many industrial companies such as China Metallic, China Nonferrous Metals and China Railways, which invested in search of oil, minerals and raw materials, or had technologies for which there was a market abroad, especially in developing countries. The investments were pretty decentralised, but when necessary, companies could get help from Peking.

Ownership data are scarce, but China is known to have taken a majority stake in only 40 of the ventures. It has generally sought joint management, usually with a local partner. Often it took a token stake of 1-10 per cent, which could not even earn a seat on the board; these were evidently portfolio investments.

My reading of China’s investment does not support suspicion of a craze for control, power or monopoly.

I think China is learning to invest internationally and get access to minerals, energy and other resources that it needs to continue growing. I also sense a certain hesitation or restraint. China is sitting on foreign exchange reserves of $3.7 trillion.

The investments in the Heritage Foundation list which I have used come to less than a tenth of that. These direct investments are only a minor outlet for the reserves.

China keeps a good deal of the reserves in US treasury bonds and such low-yielding securities; it could make much more money from direct investments. So I read a certain reluctance to make waves. No one knows in what form India keeps its own $294 billion; it could learn something from China about how to invest it.


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