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Asia Economy Last Updated: Nov 4, 2010 - 5:55:20 AM

China's overseas direct investment strategy
By Michael Hennigan, Founder and Editor of Finfacts
Nov 3, 2010 - 2:52:20 AM

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Jia Qinglin (l), chairman of the Chinese People's Political Consultative Conference (CPPCC) National Committee, holds talks with Polish Senate Speaker Bogdan Borusewicz in Warsaw, Poland, during his official goodwill visit on Nov. 2, 2010. Photo: Xinhua

China's overseas direct investment strategy is an issue of interest in many regions of the world, given the Asian giant's position as the world's second biggest economy and its foreign exchange reserves which amount to US$2.5trn

Chinese vice president Xi Jinping said last September that in 2009, domestic investors from China made direct investments in 111 countries and regions, and China's outward direct investment in non-financial sectors totaled US$17.8bn, which represented a 44% year-on-year increase.

China’s outbound non-financial direct investment was just $143m in 2002.

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” Wen Jiabao, China's premier told Chinese diplomats in July 2010.

Chen Jian, vice minister of the Ministry of Commerce said on Monday this week that the localization of Chinese business has facilitated talent training and industrial upgrades in host countries by bringing capital, technology, jobs and tax revenue there. Statistics show that Chinese enterprises operating in overseas markets paid $10.6bn and employed 438,000 local staff in their host countries.

Chen said from 2000, Chinese enterprises have built about 70m square meters of houses, some 60,000 kilometers of road, and some 3.5m installed kilowatts of power stations in Africa. They have built a good reputation for their high quality. In a Richter 6.7 strong earthquake in Algeria in 2003, none of the houses built by China State Construction Eng. Corp. (China Construction) for local residents collapsed. They are praised as "indestructible."

He said China’s financial support has provided important opportunities for local economic development. The Chinese government has announced an $11.2bn credit commitment to African countries since the Forum on China-Africa Cooperation was established in 2000. An array of projects have been funded by that capital, such as a residence project in Equatorial Guinea, power plants in the Democratic Republic of Congo and Gabon, and highways in Ethiopia, etc.

The minister said by the end of 2009, 12,000 Chinese investors had set up 13,000 overseas enterprises in 177 countries and regions around the world with assets exceeding $1trn China’s outbound Foreign Direct Investment (FDI) totaled $246bn in terms of net value, ranking the 15th in the world and the third among developing economies, following China’s Hong Kong SAR and Russia.

Chinese companies

While China's overseas investments have a strategic purpose to secure natural resources and related investments in for example overseas ports, Chinese companies are planning to take a more cautious approach to foreign acquisitions, avoiding outright buyouts and seeking more partnerships and alliances, according to a report by the Economist Intelligence Unit published last April.

The report said Chinese companies made a record number of cross-border acquisitions in 2009 - - some 298 in total. Much of this investment has been welcomed by cash-strapped Western companies that would be hard-pressed to survive without it. But China’s buying spree has raised a number of concerns, particularly where it has involved state-owned enterprises (SOEs). And like their Western counterparts before them, Chinese companies are discovering just how difficult it can be to get mergers and acquisitions (M&A) right, especially when they are cross-border deals. These factors have encouraged companies to lower their ambitions.

The most high profile company investment in Europe was Geely Holding Group's acquisition of Ford Motor Co.'s Volvo unit for $1.5bn, which was completed in August 2010. The deal gives the small Chinese carmaker a global brand and huge management challenges.

Industry analysts said the 13-year-old Geely, barely known abroad, would face a struggle in integrating the two corporate cultures and turning around Volvo Cars, a longtime money-loser in a country with strong trade unions.


In the first half of 2010, China was the EU27's second most important trading partner after the US, accounting for 8.5% of EU27 exports and 17.8% of EU27 imports.

EU27 FDI into China was €5.3bn in 2009, compared with €6.7bn in 2006, €6.6bn in 2007 and €4.7bn in 2008, while Chinese direct investment into the EU27 stood at €0.3bn in 2009, compared with 2.2bn in 2006, 0.8bn in 2007 and a disinvestment of €0.1bn in 2008.

In November 2008, Chinese President Hu Jintao promised to expand maritime trade with Greece after finalising a $1bn container-port concession deal . Under the agreement, China's Cosco Pacific received a 35-year concession to manage two container terminals at Greece's main port of Piraeus.

Greek prime minister Costas Karamanlis said Greece would become a key transit point for Chinese goods bound for south-east Europe and the eastern Mediterranean.

Dock workers staged a 24-hour strike to protest against the agreement and several hundred dock workers marched on the then prime minister's official residence.

That was a long time  ago - -  2 years!

“I have made clear that China supports a stable euro,” Chinese Premier Wen Jiabao said last month during a visit to Greece at the start of a one-week European tour. “We will not reduce the holdings of European bonds in our foreign exchange portfolio,” he added.

Wen offered to buy Greek government bonds when Athens resumes issuing. He said China needs to diversify its foreign currency holdings and has bought $625m worth of Spanish government bonds. Wen also referred to a $4.5bn credit line that troubled Greek shipbuilders could have access to for purchasing  Chinese-made ships.

Later in Rome, the Colosseum was illuminated in communist red and Wen and Silvio Berlusconi, the Italian prime minister announced a plan to more than double bilateral trade to $100bn by 2015, with the focus on boosting investment.

Carmaker Fiat plans to close its plant in Sicily next year and the move has prompted expressions of interest from China.

Among 10 business deals signed during Wen's Italian visit, two involved investments in Italy’s broadband sector, with China's telecom firm Huawei (known for its modem sticks) expanding its co-operation with Vodafone Italia and ZTE linking up with Tiscali.

The New York Times reported on Tuesday that "struggling Ireland is also looking for a piece of the action, and moves are afoot to create an 'investment gateway to Europe' for China in the town of Athlone, which hopes for the creation of thousands of jobs. Prime Minister Brian Cowen of Ireland said in June that China had vowed to be 'as helpful as they can to a friend like Ireland in the difficult times that we have.'”

It's not clear if this project is more than puff, given the proposed location in the centre of the country.

Ireland has had a number of Japanese and South Korean FDI investments in the past few decades. However, most of them ultimately ended as failures.

The NYT also says  China won a contract last year over European companies to build a highway in Poland using a Chinese business and workers - - with European subsidies - -  prompting Chancellor Angela Merkel of Germany to call for reciprocity.


The US is wary about Chinese direct investment and it prohibits sales of some high tech products because they could be used by the Chinese military.

Huawei announced Monday it will invest $67 million to help create 164 new research jobs in Ottawa, Canada over five years.

Executives of the company, which faces intense opposition to expanding in the US because of concerns about possible ties to the Chinese military, told the Financial Times it would allow outside companies to check its network equipment when competing for contracts.


China is now Brazil's top trading partner, surpassing the United States for the first time last year. Brazilian imports from China jumped 12-fold from 2000 to 2009, and exports went up 18 times. China consumed almost 14% of Brazil's exports in 2009 -- and sent back almost 13% of Brazilian imports.

China is a big importer of raw soybeans from Brazil and  according to Reuters, China has devastated Brazilian shoemakers and its factory workers, building an Asian industry that is now the world's top shoe exporter, shipping out around 8bn pairs last year alone.

SEE also: China holds only 9% of US sovereign debt contrary to misperceptions; China's export surge is also subject to misinterpretation

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