Does China dominate global investment?

Does China dominate global investment?
Does China dominate global investment?
Does China dominate global investment? Top

    Overseas investment offers China an opportunity to not just bolster its own economy, but also to leverage its economic strength to increase its influence abroad. Driven in part by Beijing’s “Going Global” strategy that encourages investment in foreign markets, Chinese firms have actively expanded their overseas footprint in recent years and explored investment opportunities in a range of sectors. Natural resource-extraction activities in Africa, Australia, Canada, and Latin America continue to dominate Chinese FDI, but Chinese companies have also begun acquiring strategic assets in American and European high-tech sectors.

    While these targeted investments may spur domestic innovation and help Chinese industries climb up the global value chain, China’s foreign investment stocks remain relatively small compared to the advanced economies of Europe and North America. Should China’s leaders manage to successfully re-balance the Chinese economy toward a consumer-driven and high-end manufacturing model, China may very well emerge as a world leader in international investment.

    Global Foreign Direct Investment Stocks

    Calculations in the subsequent sections are derived from data provided by the American Enterprise Institute and Heritage Foundation’s China Global Investment Tracker (CGIT), which monitors China’s construction activities and global investments valued at least $100 million.

    Latin America and Caribbean

    Annual Chinese FDI into Latin America and the Caribbean (LAC) was valued at less than $5 billion prior to 2010, but it has expanded dramatically over the last several years. Investment outflows totaled $93.79 billion between 2005 and 2016, growing steadily from just $430 million in 2006 to $4.87 billion in 2009 and peaking at $24.48 billion in 2010. LAC accounted for only 10.93 percent of China’s total global FDI outflows over the past decade, and China’s investment in the region pales in comparison to other actors. According to the Economic Commission for Latin America and the Caribbean (ECLAC), Chinese investment in the region constitutes a mere 1 percent of total inflows from all investor countries. The Netherlands and the United States are the largest regional investors, accounting in 2015 for 25.7 percent ($46.02 billion) and 15.9 percent ($28.4 billion) of global investment.

    Abundant natural resources make LAC a highly desirable investment destination for China, resulting in 57.53 percent ($53.96 billion) of Chinese investment in LAC over the past decade flowing into the energy sector. After totaling $1.85 billion between 2005 and 2009, Chinese energy investment into South America surged to $18.97 billion in 2010. Fifty-seven percent ($13.89 billion) of this surge flowed into Brazil, with acquisitions such as Sinopec’s $7.1 billion stake purchase of Repsol’s Brazilian arm constituting a significant portion of this inflow.

     China FDI Top Destinations in Latin America and the Caribbean (2005 – 2016)
    Country Volume in $ billions Global Ranking Economic Development Level
    Brazil 45.61 4 Upper middle-income
    Peru 17.06 12 Upper middle-income
    Argentina 10.08 21 Upper middle-income
    Ecuador 7.72 25 Upper middle-income
    Venezuela 4.37 45 Upper middle-income

    Chinese firms made two other high-value deals involving the Brazilian energy sector within the past seven years.  Sinopec purchased $4.8 billion in Brazilian assets from Portugal’s Galp Energeia in November of 2011, and China Three Gorges Corporation made a $3.6 billion winning bid for two Brazilian hydropower plants in January 2016. In contrast, China’s slowing economy drove down domestic demand for foreign commodities, causing investment in the South American energy sector to drop from $18.97 billion in 2010 to $5.13 billion in 2011.

    While Chinese investment in the region is primarily focused on resource extraction, Chinese companies are exploring other sectors.  Chinese auto companies such as Chery and JAC Motors have invested in countries including Brazil, Argentina, Colombia since 2011 in order to bolster market access. Chinese electronics company ZTE Corporation announced a $200 million investment in a research and development facility in Brazil in 2011 to take advantage of the country’s favorable tax environment and time-to-market conditions. China may also become a key partner for the sustainable development of the region, as the China-Latin American and Caribbean Countries Cooperation Plan (2015-2019) commits China and LAC to mutual investments in a wide range of sectors and the reciprocal transfer of technology and knowledge.

    Over 70 percent of all construction contracts in Latin America and the Caribbean since 2010 have been in the energy sector.

    In addition to investments, construction contracts provide further insight into China’s involvement in LAC. Venezuela, Argentina, and Ecuador received the most high-value construction contracts over the past decade, taking in $16.24 billion, $11.98 billion, and $6.91 billion, respectively. China has signed contracts to build hydroelectric power plants in all three countries, inked deals on a variety of transportation and agriculture projects with Venezuelan and Argentinian companies, and recently become involved in real estate construction transactions in Ecuador. On the whole, LAC construction contracts have increased in frequency, funding, and diversity since 2010. Notwithstanding this diversification, 63.99 percent of all construction contracts in LAC since 2010 have been in the energy sector, with Argentina leading the way with $9.16 billion (25.66 percent of all LAC energy contracts since 2010).

    Chinese Investment Breakdown by Sector: 2005-2015

    In addition to investment from Chinese firms, Chinese banks have provided loans toward LAC infrastructure. The two primary Chinese lenders to LAC – China Development Bank and The Export-Import (Exim) Bank of China – have issued 77 loans amounting to $141.3 billion since 2005 for traditional and renewable energy, transportation, and infrastructure projects.  In 2010, China’s loan commitments of $37 billion in the region surpassed those of the World Bank, Inter-American Development Bank, and the United States Export-Import Bank combined. In 2012, Chinese lending to the region dipped to $6.8 billion, which can be attributed to economic and political instability in Venezuela, one of China’s biggest development partners. However, Chinese loans steadily picked up the pace shortly thereafter, as banks loaned countries in the region $14 billion in 2013 and $21.2 billion in 2016.

    Africa

    Chinese investment in Africa varied considerably from 2005 to 2016. There was a small downturn in 2009 and 2010, likely a result of the global financial crisis, and a considerable spike to $22.4 billion in 2013. During this eleven-year span, Western Africa received 27 percent of Chinese investment ($21.28 billion), followed by Middle Africa with 25.2 percent ($19.82 billion).

    In 2015, China was the ninth largest investor in Africa, making up 3 percent of global investment inflows behind Italy (7.4 percent), the United States (6.8 percent), and France (5.7 percent). Although China’s stock in Africa lags behind other countries, its investment share may expand considerably over the next several years. Notably, global investment flows into Africa fell 24 percent from 2014 to $66.5 billion in 2015. Middle Africa was particularly affected by this shift, seeing a 36 percent year-on-year drop in investment inflows. However, Chinese investment into Middle Africa almost doubled from $350 billion in 2014 to $630 billion in 2015. Chinese investment also rose in Eastern Africa, but declined in Southern and Western Africa.

     China FDI Top Destinations in Africa (2005 – 2016)
    Country Volume in $ billions Global Ranking Economic Development Level
    South Africa 10.58 19 Upper middle-income
    DRC 10.35 20 Lower middle-income
    Nigeria 7.55 26 Low-income
    Egypt 5.2 34 Lower middle-income
    Niger 5.18 35 Low-income

    The IMF classifies 20 African states as resource-rich, with energy and mineral resources comprising large portions of their respective exports. Unsurprisingly, Chinese investment in Africa is highly motivated by resource extraction. Of the total $78.59 billion China invested in Africa between 2005 and 2016, 40.17 percent ($31.57 billion) was invested in metals and 35.03 percent ($27.53 billion) into energy. South Africa, the Democratic Republic of Congo (DRC), Nigeria, Egypt and Niger were the five largest recipients of Chinese investment, making up 49.4 percent ($38.86 billion) of China’s total regional investment. Natural resource contracts made up four out of the five largest investment deals — $4.9 and $4.21 billion deals in Niger and Mozambique in 2008 and 2013 by CNPC, respectively, a $3.1 billion deal in Egypt in 2013 signed by Sinopec and a $2.7 billion deal in Tanzania signed by Sichuan Hanlong in 2015. In some areas, China’s FDI affords it considerable market leverage. China’s national oil companies are the largest investors in South Sudan’s oil industry, and the country’s petroleum minister Mohamed Zayed Awad remarked in August 2016 that Chinese companies constitute 75 percent of FDI in the country’s oil sector.

    Despite the magnitude of China’s investment in Africa, it still trails behind other countries. As detailed in the 2015 World Investment Report, China invested a total of $6.42 billion in Greenfield projects from 2013 to 2014, while the United States and France led all Greenfield investments over that period with inputs of $21 billion and $10.57 billion, respectively. China’s Greenfield investments also suggest that Chinese firms are diversifying their interests in Africa, as there has been a marked increase in manufacturing projects.  Chinese construction contracts show a similar trend. In recent years, the number of private investment projects in Africa registered with the Chinese government climbed from 52 in 2005 to 923 in 2012, which has promoted greater diversification in Chinese investment.

    In 2014, China was the fourth largest investor in Africa, making up 6.1 percent of global investment inflows.

    Development assistance is also critical to furthering China’s interests in Africa. A considerable portion of Exim Bank’s operations entail the financing of Chinese projects in Africa. Throughout the 2000s, the estimated $67.2 billion that Exim Bank loaned to Africa exceeded total World Bank loans by $12.5 billion. Angola, Ethiopia, Nigeria, and Sudan have consistently received Exim loans for infrastructure projects since 1994.

    Some Chinese investments are partially funded through infrastructure-for-loan arrangements.  In these transactions, Chinese companies offer loans for resource-development projects to prospective African partners in exchange for repayment in the form of resources.  Sinopec signed a deal in 2005 to provide a $2 billion loan (China added $1 billion in 2006) to Angola in exchange for oil at pre-determined prices, and other Chinese companies plan to pursue similar financing schemes with Ethiopia, Eritrea, and Tanzania for sugar cane, gold, and iron ore.

    China Bilateral Investment Outflows

    North America and Europe

    Europe and North America (the United States and Canada) have become major destinations for Chinese foreign direct investment, receiving 48.29 percent ($414.34 billion) of China’s total global FDI outflows over the past decade. Notwithstanding this considerable investment, China’s share of foreign investment stock into North America and Europe between 2005 and 2014 was less than 5 percent. Similarly, the United States is the largest destination for Chinese FDI in the world, drawing $149.69 billion or 17.44 percent of all Chinese investment since 2005. However, the U.S. Bureau of Economic Analysis estimates that China accounted for less than one percent of FDI flows into the United States in 2014, when the Netherlands and Japan constituted shares of 35.14 percent and 30.48 percent, respectively.

    Chinese firms are increasingly keen to invest in Europe and North America in order to gain access to higher-value goods and services, a key component of the innovation-driven economic agenda outlined in China’s 12th Five-Year Plan. Recent years have brought a new wave of Chinese investment into high-tech sectors on both sides of the Atlantic.

    China’s North American and European investment is driven by both the demand for energy security and acquisition of strategic assets and expanded market shares. From 2005 to 2016, Chinese firms invested $218.67 billion into Europe, which constitutes 25.48 percent of China’s global outbound FDI. Over 60 percent ($131.3 billion) of these investments were concentrated in the United Kingdom, Russia, Italy, France, and Germany.

     China FDI Top Destinations in North America and Europe (2005 – 2015)
    Country Volume in $ billions Global Ranking Economic Development Level
    United States 149.69 1 High income OECD member
    Canada 45.98 3 High income OECD member
    United Kingdom 44.73 5 High income OECD member
    Russia 28.09 6 Upper middle-income
    Italy 19.82 7 High income OECD member

    The energy sector received 29.2 percent ($63.87 billion) of China’s European investments, but falling commodity prices and political insecurity in Europe resulted in considerable year-on-year fluctuation in China’s investment in oil and gas assets. Large agreements such as the Sino-Russian $400 million Gazprom deal in 2014, however, create opportunities for Russia to counter the economic consequences of European sanctions while providing China greater access to energy resources.

    Chinese firms invested $195.67 billion into North America between 2005 and 2016, with $149.69 billion flowing into the United States and $45.98 billion into Canada. Similar to Europe, the energy sector dominated North American investment. Notably, when Chinese investment in the European energy sector dropped in 2012, it surged in both Canada (from $4.4 billion in 2011 to $20.79 billion in 2012) and the United States (from $200 million to $3.38 billion). Some Chinese firms have taken interest in the North American energy sector due to the application of innovative unconventional resource extraction techniques in the U.S. and Canada that could in time be applied to China’s largely untapped shale gas reserves.

    China’s largest investment in either North America or Europe was the $15.10 billion acquisition of Canada’s Nexen Inc. by the China National Offshore Oil Company (CNOOC) in 2013. Low global crude oil prices, challenging geological conditions, and a massive 2015 pipeline rupture in Canada have complicated the buyout, but the Canadian government has continued to strengthen its  energy partnership with China.  Sharp declines in the price of crude oil following the 2008 global financial crisis and, more recently, in response to market oversupply have put tremendous strain on the Canadian economy, galvanizing Ottawa’s effort to bolster ties with China.  A potential free trade agreement between Canada and China could reinforce this blossoming partnership. In late August 2016, Canadian Prime Minister Justin Trudeau and Chinese Premier Li Keqiang agreed to explore the feasibility of such an agreement.

    The United States is the largest destination for Chinese FDI in the world, drawing $95.41 billion or nearly 14 percent of all Chinese investment since 2005.

    In recent years, China has expanded its investment focus from resources and raw materials to strategic acquisitions intended to increase the market competitiveness of Chinese products and companies. From 2012 to 2016, Chinese firms invested $35.25 billion in the European and North American transportation sectors, marking a threefold increase from the preceding five-year period. Diversification of Chinese investment is especially evident in countries facing economic difficulties that have opted to open up previously state-controlled industries. Chinese firms have invested significant capital into Eastern European countries such as Hungary, focusing on strategic assets in the chemicals and technology industries. Wanhua Industrial Group purchased a majority of Hungarian chemicals company BorsodChem for $1.6 billion in early 2011, and Chinese technology giant Huawei invested $1.5 billion in a Hungarian research center in May of 2012.

    In North America, Chinese pork producer Shuanghui acquired American pork producer Smithfield for $7.1 billion in 2013 to glean insight into the operational, managerial, and production aspects of Smithfield’s food-safety management system. Such investments indicate that Chinese firms are navigating overseas investment with strategic intent as China aims to transition to an innovation-based economy. North America and Europe’s generally stable political and regulatory environments, coupled with its domestic high-value production and operational methods, may attract even higher levels of Chinese investment in years to come.

    Asia and Oceania

    Chinese investment in Asia and Oceania has risen steadily over the past decade from $5.68 billion in 2005 to $33.86 billion in 2016. Of the total $271.3 billion invested in the region, $84.6 billion (31.1 percent) poured into Australia and $72.1 billion (26.2 percent) into Southeast Asia. China’s regional outbound FDI is concentrated primarily in resource extraction.

    Over the last decade, Australia has been second largest recipient country of Chinese FDI after the United States. Although China has invested heavily in the Australian metals and energy industries, the Hellenic-Australian Business Council estimates that China’s investment stock constitutes a mere 3 percent of Australia’s total inward FDI. In 2014, the European Union and the United States made up 25 and 24 percent of global inward FDI stock in Australia, respectively. However, relative shares are adjusting as China and other countries are closing the gap.

    China became the largest energy consumer and producer in the world in 2011, and it is projected to account for 25 percent of global energy consumption by 2035. This need for energy has sparked Chinese investment across the region. Energy investment constitutes significant portions of outbound Chinese FDI for Southeast Asia (50 percent), Western Asia (57 percent), Central Asia (96 percent), and Southern Asia (50 percent). The largest of these investments are concentrated in Western and Central Asia, with CNPC’s $5.59 billion deal in Iraq in 2009 and $5.3 billion deal in Kazakhstan in 2013 topping the list.

     China FDI Top Destinations in Asia and Oceania (2005 – 2016)
    Country Volume in $ billions Global Ranking Economic Development Level
    Australia 84.61 2 High income OECD member
    Kazakhstan 18.06 10 Upper middle-income
    Malaysia 17.23 11 Upper middle-income
    Singapore 15.58 13 High income
    Indonesia 13.37 15 Lower middle-income

    China’s outbound investment is at times intertwined with its political objectives. For instance, Cambodia—a provider of cheap energy—received $600 million in developmental aid and loans from China after calling for ASEAN to retract a statement on the South China Sea dispute. In Western Asia, China has prioritized its own energy security and practiced non-interference, as evidenced by its rejection of American and European efforts to halt Iran’s nuclear program.

    Although energy has remained China’s primary investment sector in the region, Chinese capital gradually diversified into sectors such as transportation, real estate, technology and tourism. Zhuhai Port Holdings’ $1.62 billion investment in the Gwadar port in Pakistan is especially notable, as it is the first foreign port investment in the Belt and Road Initiative. This strategic asset at the mouth of the Persian Gulf is close to critical sea lanes and could be utilized to link Western provinces in China with Sri Lanka, Bangladesh, Oman, the United Arab Emirates, and Iraq. In Southeast Asia, Chinese investment has begun to flow into real estate and finance. Notable examples include China Minsheng Investment’s $1.5 billion banking investment in Singapore and Guangzhou R&F Properties Co.’s $1.4 billion commitment for six sites in Malaysia.

    Despite strong trade relations with Japan and South Korea, China has invested only a modest amount in East Asia, likely due to its lack of natural resources. Chinese firms have, however, invested in the finance, technology, real estate, tourism, and entertainment sectors in both Japan and South Korea. For instance, Shanghai Greenland Group’s injected $3.22 billion into the South Korean real estate market in 2015, as did CIC with a  $1.19 billion investment into the Meguro Gajoen commercial property complex.

    Over the last decade, 35 percent of Chinese FDI in Asia and Oceania flowed into Australia.

    China’s construction contracts in Asia also have grown considerably over the past decade, where it has invested a total of $284 billion since 2005. While energy remains the dominant sector, contracts have begun to gravitate toward transportation and real estate sectors. In transportation, Chinese firms contracted $11.5 billion from 2005 to 2010, and amount that increased five-fold to $51.1 billion from 2011 to 2016. In real estate, contracts tripled from $8.9 billion from 2005 to 2010 to $18.2 billion from 2010 to 2016.

    Unlike investments, which go mostly to more developed economies, contracts are more concentrated in developing parts of the world. For instance, despite receiving modest amount of investment ($7 billion), Pakistan was the largest recipient of Chinese construction contracts, totaling $33.68 billion, with one major project involving a nuclear power plant commitment of $6.5 billion in 2013.

    China has also strengthened its bilateral relations across the region through development aid. In addition to policy banks such as China Development Bank and Exim Bank, China has set up development funds like the Silk Road Fund and the China-ASEAN Fund. China and Pakistan, for example, launched an infrastructure finance plan for the 3,000-kilometer China-Pakistan Economic Corridor valued at $46 billion—a commitment that would eclipse U.S. funding in Pakistan over the last decade. Moreover, China’s leadership in the Asian Infrastructure Investment Bank (AIIB) demonstrates Beijing’s desire to create its own development lending platform. ChinaPower