Exploding the myth

Concurrent with its rise as an economic power, China has also risen as a world investor. Between 2002 and 2009, outbound foreign direct investment grew from US$2.9 billion to US$56.5 billion, an average increase of more than 50% per year. It was the fifth-largest outbound investor in the world last year, according to Ministry of Commerce data.
 
Even more significant is the resilience of the Chinese investment trend. While overall world FDI fell 43% in 2009, Chinese spending increased by 1.1%, with non-financial FDI gaining a robust 14.2%.
 
The rise of China as a player has given rise to two varieties of myth: First, Beijing is using its FDI muscle to make politically motivated investments in "pariah" regimes as bulwark against the West; second, it is taking advantage of the global economic crisis to snap up key assets around the world at bargain prices.
 
Sudan is routinely flagged up as the example of Chinese investment in undeveloped and repressive regimes, but it hardly represents a consistent theme. Chinese outbound FDI is disproportionally focused on highly developed modern financial centers such as Hong Kong (63%), Cayman Islands (9.5%), Australia (4.3%), Luxembourg (4%), British Virgin Islands (BVI, 2.9%), Singapore (2.5%) and the US (1.6%).
 
In fact, the bulk of Chinese FDI is indirect. Most investment is made in financial centers, with the money spent by professionals on behalf of the Chinese.
 
Africa? Not so much
 
Neither is the Chinese FDI program a land-and-resources grab focused on underdeveloped regions like Africa. Only 2.6% of total Chinese investment reached Africa in 2009, the lowest for any region in the world. The figure of US$1.44 billion was down 73.8% on the previous year. Asia was the overwhelming target, attracting 71.4% of FDI, followed by Latin America (13%, primarily in the Caymans and BVI).
 
The major investment trend in 2009 was the about-turn on Africa, which was compensated by a marked rise in capital entering Europe (up 280% year-on-year) and North America (up 320%).
 
A probable source of this particular myth is that China doesn’t treat any country or region as off-limits to outbound FDI, in contrast to the US and other Western nations, which restrict FDI based on political considerations. As a result, some investments are made in regimes that are not approved by Westerners.
 
As for claims that China is engaged in a land grab in the undeveloped world to secure access to land and other food resources in order to feed its growing population, again they are not borne out by the statistics.
 
Chinese investment in 2009 in agriculture, forestry, fisheries and animal husbandry amounted to US$340 million, a mere 0.6% of the total. This compares with 51.2% for finance and commercial services – largely investment funds in tax havens such as Hong Kong, Singapore, the Caymans and Luxembourg. These sophisticated financial investments are worlds away from purchase of raw land for farms that is a centerpiece of a common myth about Chinese FDI.
 
In pursuit of minerals
 
It is true that China does emphasize investment in mineral assets. Last year, FDI targeting minerals and mining amounted to US$13.34 billion, concentrating on petroleum, natural gas, and ferrous and non-ferrous metals. While this is a tiny amount compared to the investments of the Western energy and mining giants, it does constitute 23.6% of China’s FDI for 2009.
 
It is certain that China will compete with the West for these key assets for the immediate future.
 
However, the notion that China has been grabbing up other valuable assets around the world is clearly false. There is no evidence whatsoever that Chinese companies have made any moves to acquire key productive assets and real estate around the world during the global financial crisis: Investment in these areas is remarkably low: real estate (1.6%), manufacturing (4%), research and development (1.4%), energy production (0.6%).
 
China’s failure to make such investments during this period of low prices and reduced investment barriers is truly puzzling. Figuring out what is really behind the country’s strategy is much more productive than pursuing the myths that seem to be occupying most analysts of the recent Chinese FDI experience.