The outside world is treating China’s emergence as a major capital exporter with a mixture of admiration, expectation and alarm. The reality, however, is less dramatic and the past year may come to be seen as a peak, at least in the short term, of China’s direct investment overseas.
There are several reasons to believe that future acquisitions will be less high-profile and in many cases more cautious than in the recent past. The first is simply that China’s external surplus is likely to contract as its own economy, driven by robust domestic demand, continues to grow faster than most others, sucking in imports and sustaining commodity prices. At the same time, foreign direct investment into China is likely to slow due to weak export demand in the West and rising costs compared with the likes of Vietnam and India.
Any significant appreciation of the renminbi would also likely be followed by an exodus of some of the short-term capital parked in the currency. Although short-term flows are not directly relevant to direct investment outflows, the government may be less keen to encourage outflows under these circumstances.
Heady days no more
There is no question that state-owned enterprises (SOEs) account for the bulk of formal capital outflows. At the height of the credit squeeze, cash-rich Chinese companies were actively sought by Western counterparts desperate for capital injections. Consequently, these Chinese players were able to acquire large stakes at low, or apparently low, prices.
Conditions have since changed, though. Liquidity positions have improved and asset prices have recovered – companies are able to raise capital from existing shareholders rather than run cap-in-hand to Beijing.
For their part, Chinese firms are becoming more cautious. Many fingers have been burned in the rush to acquire foreign assets, for some driven more by prestige than by a coherent business plan. Now they rely more on due diligence carried out by foreign investment banks, particularly in relation to purchases of interests in smaller enterprises. The government, too, is preaching caution, suggesting that firms should not venture into countries or industries in which they have little prior experience.
Beijing is also aware that lack of understanding of other nations’ cultures can create antagonisms that evolve into long-term barriers to Chinese investment. There have been several instances, particularly in Africa, which have aroused resentment – though in Africa there is also an appreciation that Chinese investment has created competition in sectors previously dominated by Western companies.
There is a sense that too much outward investment has been driven simply by the availability of cash rather than because it helps a business to grow. Of course, in the case of natural resources there is a long-term national interest rationale – even if there is no necessary connection between ownership of, say, an Australian iron ore mine, and security of supply. In other cases, it makes sense for Chinese companies to buy Western ones if it involves the transfer of a needed technology or a useful brand.
China must also take account of political opposition to some acquisitions, particularly high-profile ones in resources. Such opposition may be hypocritical – on the part of nations that have long demanded free access for their capital – but it is a reality to which China is already adjusting. Acquisition targets are increasingly medium-sized or start-up ventures that tend to draw less attention.
Ultimately, Chinese direct investment will always be welcome if it is seen to create new jobs and export opportunities. Beijing’s problem now is that it has a surplus of cash and a need to diversify foreign assets away from US Treasury bonds, but relatively few of its companies are in a position to do more than buy existing foreign assets. By contrast, when Japan started to invest heavily overseas it already had major global brand names and a need to build greenfield factories to make cars and appliances.
In time, China will have brand and technology leaders that will need to follow this path. But for now, direct investment overseas will favor resources and otherwise mostly through acquisition of minority stakes, which are little noticed and do not include board representation.
China’s foreign assets will grow steadily, but the issue has been over-hyped.