China: becoming the world's investor

As China continues its global expansion, the balance of the world economy is changing. Assessing this change and the future of China as a world player requires an understanding of the socio-economic narrative that underlies China’s growth. As China’s international investment presence continues to grow, the focus of this article will be to ask whether China’s ‘Go Out’ strategy towards overseas direct investment is a threat or an opportunity for the world economy. In particular, what are the implications of Chinese policy for developed countries such as Britain?

China has rapidly become one of the world’s top recipients of foreign direct investment. Between 1979 and 2010, China absorbed a total of more than $1 trillion (Shambaugh, 2013). Now the situation is reversing. By the end of the year, current trends suggest outward investment is estimated to exceed inward investment. Understanding this trend requires us to look at China’s development over the last thirty years.

In China’s state-led economy, rhetoric always precedes phenomenon. The first mention of China’s ‘Go Out’ policy towards overseas investment was in 1996 when President Jiang Zemin returned from a state visit to Africa. The aim of Jiang’s statement was to further China’s expansion by encouraging Chinese enterprises to establish themselves globally through exploring overseas markets.

The turn of the century marked the beginning of China’s expansive investment. In 2001, outward investment reached $6.9 billion, more than six-times the previous year’s total (Shambaugh). Between 2000-2002, the first series of state decrees was issued to regulate investment. Aside from the brief fall in 2002, there has been an upward trend since 2003. Continued deregulation and the formation of Bilateral Investment Treaties (BITs) protect foreign investors and provide a stable investment environment (Dutson and Batada, 2011). As of 2011, China has BITs with 127 nations, including Britain.

Why has China adopted such a bold strategy towards the global economy?  

To understand China’s political strategy, we must see the world from the Chinese perspective. China is home to one-fifth of the world’s population and is the world’s second largest economy. China has always referred to itself as the ‘Middle Kingdom’ due to its global historic significance. There is a nationalist rhetoric behind China’s desire to shake off its ‘developing country’ status. In China, they speak not so much of China’s ‘rise’ but of its ‘rejuvenation’ as an historic superpower.

China’s overseas investment policy embodies this national goal. Beijing has encouraged Chinese enterprises to increase their foreign investments in order to make them more competitive globally and as a method of securing supplies of natural resources, expertise and technologies.

By 2010, China had established 13,000 overseas enterprises in 177 countries (MOFCOM, 2011). It has also accrued $3.2 trillion in foreign exchange reserves and maintained a current-account surplus of 2.7% of GDP as of 2012. And the country shows no signs of stopping.

So what is the nature of China’s overseas investment and how should host nations respond to the country’s expansion?

The most common form of overseas investment are mergers and acquisitions, because buying shares in already established foreign firms is easier than setting up competitors from scratch.  While China’s demand for natural resources and expansive investment into Africa is well known, more recently- as emphasised in China’s Twelfth Five Year Plan (2011-2015)- China has begun to diversify into finance, telecommunications, and research and development. William Callahan explains how the financial crisis sparked an opportunity for China; “While in 2011 the European and American economies teetered on the edge of a double-dip recession, the Chinese economy grew at the enviable rate of 9.2%. The People’s Republic of China (PRC) thus has emerged as an economic superpower.” (Callahan, 2013).

China’s European expansion has been characterised by the purchasing of MG Rover, PetroChina’s stake in British oil refiner INEOS, and Chinese banks such as ICBC’s presence in the financial sector. In 2011, Chinese direct investment into Europe tripled to $10 billion. It is estimated that this is just the tip of what is estimated to reach between $250bn and $500bn in the region by 2020.

How should Britain react to China’s expansion? The obvious challenge for the host nations of the developed world will be to create an environment in which their own businesses and consumers can prosper. This will require a fine balance between providing regulations to manage new investment projects while at the same time providing incentives to China to make sure they feel welcome and continue to invest.

Given Britain’s relative economic position, the government must avoid discriminating against Chinese investment. The blacklisting of Chinese companies and use of regulatory barriers in the United States has created a tense investment climate.

The expansion of Chinese firms will become a defining trend in the global economy. China’s increasing presence on the world stage is driven by a strong nationalist policy and favourable economic circumstances. Therefore the response of countries such as Britain should aim to foster long-term sustainable relations. Engaging with China at such a time is crucial as the benefits of China’s participation in globalization offer opportunities for all to prosper. 

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