China’s Investment Practices, China’s Investment Practices, Patterns, and Strategies Patterns, and Strategies James R. Barth James R. Barth Auburn University and Milken Institute Auburn University and Milken Institute 1 Auburn University and Milken Institute Auburn University and Milken Institute [email protected][email protected]China 2015: China’s Outward Direct Investment China 2015: China’s Outward Direct Investment Sponsored by the Office of Asian Pacific and Latin American Analysis Sponsored by the Office of Asian Pacific and Latin American Analysis Washington, DC Washington, DC July 17, 2008 July 17, 2008
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China’s Investment Practices, Patterns, and Strategies
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China’s Investment Practices, China’s Investment Practices, Patterns, and StrategiesPatterns, and Strategies
James R. BarthJames R. BarthAuburn University and Milken InstituteAuburn University and Milken Institute
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Auburn University and Milken InstituteAuburn University and Milken [email protected]@milkeninstitute.org
China 2015: China’s Outward Direct InvestmentChina 2015: China’s Outward Direct InvestmentSponsored by the Office of Asian Pacific and Latin American AnalysisSponsored by the Office of Asian Pacific and Latin American Analysis
� How are Chinese firms financing their overseas investments, including through IPOs and corporate earnings? � Most Chinese firms fund overseas investments through their own
earnings or earlier IPOs when they obtained foreign exchange through IPOs abroad. It is unlikely that firms did IPOs because they wanted to invest abroad.
� What role do foreign exchange reserves, through the CIC (or more recently SAFE) in supporting the overseas expansion of Chinese firms?� It is stated that SAFE and CIC are portfolio investors and do not engage
in direct investments or make loans. As indicated above, Chinese SOEs invest abroad through a combination of own earnings and bank loans. They do not obtained funds from China’s foreign exchange reserves. The CIC has indicated that they are investing through fund managers and acquire direct holdings of listed securities and private equity.
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Talking PointsTalking Points� What are the roles of the China Development Bank, China Export Import Bank,
and China's state-owned "commercial" banks in providing financing for Chinese firms going global?� Export Import Bank lends according to the policy-based rules, which would be
either aid-loans or follow OECD rules of export financing. The CDB and listed Chinese banks are supposed to lend according to commercial terms that are set according to the risks involved. The PBC allows them some discretion in setting lending rates according to their risk levels, but the rate are nonetheless subject to ceilings. My impression is that they do not subsidize such loans.
� How important is "below market" financing for Chinese firms' expansion overseas?� How important is "below market" financing for Chinese firms' expansion overseas?� My understanding is that typically Chinese firms do not get below market
financing, but there are aid programmes where the borrower may get below market rates, (e.g. where these are grant related) that may facilitate overseas investments. However, in 2004, a policy was introduced by the Ministry of Finance and the Ministry of Commerce to subsidize investment by Chinese companies in overseas natural resources.
� What is the significance of CIC's ownership of Central Huijin? Does CIC have a special dispensation, or are its investment choices reviewed at higher political levels?� Central Huijin was part of the package taken over by CIC, so it is part of its
portfolio. The official policy is that CIC is charged with delivering better returns on its resources and it has an independent governance system to allocate its resources.
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Talking PointsTalking Points
� What is Beijing doing to ensure Chinese banks can adequately support Chinese firms' overseas activities?� The Chinese banks follow their customers just like banks in other countries
that also follow their customers abroad. The CBRC supervises the banks and is supposed to ensure that they lend according to risk criteria and have the proper internal controls and capital resources to back such risks. Chinese banks are still quite conservative with respect to overseas expansion and the outward direct investment trend is still in its infancy. I personally do not see the direct investment trend is still in its infancy. I personally do not see the Chinese banks venturing abroad on the same scale as the Japanese banks in the 1980s.
� Concluding Comment� There are a lot of emotional views on SWFs, particularly the view that they
will try to gobble up Western assets. Given the global imbalances, why should the surplus countries invest only in bonds? Each country has its own takeover rules so that there are limits to any acquisitions by any single party. In addition, there are National Security policies that would apply for strategic assets. It seems reasonable to assume that SWFs want to protect their principal and total returns, without evidence to the contract.
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� We will strengthen and improve foreign exchange administration, and actively explore and develop channels and means for appropriately using state foreign exchange reserves.
� China is preparing for the establishment of a foreign exchange investment company, which will not be affiliated to any government department or institution.
Motivation for China’s Outward Motivation for China’s Outward Foreign Direct InvestmentForeign Direct Investment
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institution.
� We will strengthen and improve foreign exchange administration, and actively explore and develop channels and means for appropriately using state foreign exchange reserves.
� The new company will not have any adverse impact on U.S.-dollar denominated assets.
- Chinese Premier Wen Jiabao
Source: Embassy of the P.R. China in the USA, 2007.
� According to the “10th Five-Year Plan for National Economic and Social Development,” China will “proactively make use of overseas natural resources, establish overseas supply bases for both oil and gas, diversify oil imports, build up a strategic petroleum reserve and maintain national energy security.” (Source: People’s Daily)
� In 2004, a policy was introduced by the Ministry of Finance and the Ministry of Commerce to subsidize investment by Chinese companies in overseas natural resources. (Source:
Motivation for China’s Outward Motivation for China’s Outward Foreign Direct InvestmentForeign Direct Investment
to subsidize investment by Chinese companies in overseas natural resources. (Source: Ministry of Commerce)
� The National Social Security Fund has been allowed to invest abroad since 2006 with an upper limit of 20% of the fund’s total assets, currently amounting to over RMB400 billion (USD55 billion). (Source: Economic Focus, Hang Seng Bank, February, 2008)
� “[A] force driving outward FDI by large countries such as China and India has been the desire to secure long-term supplies of natural resources (particularly oil and natural gas, iron ore and other minerals) to meet domestic demand.” (Source: Carlos Fortin, UNCTAD)
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� The State Asset Supervision and Administration Commission (SASAC) was set up in April 2003 with the mandate of turning the country's top state-owned enterprises (SOEs) under its control into 50 global multinational corporations that feature on the global Fortune 500 list. (Source: China Economic Review, February 2004)
� It is not only the biggest SOEs that are being encouraged to go abroad. Every company that wants to invest overseas must get regulatory approval, but in 2003 the Ministry of
Motivation for China’s Outward Motivation for China’s Outward Foreign Direct InvestmentForeign Direct Investment
that wants to invest overseas must get regulatory approval, but in 2003 the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE) introduced a program that allowed overseas investments of less than US$3 million to be approved at the local government level rather than through the lengthy and complicated process of applying to Beijing. (Source: China Economic Review, February 2004)
� Domestic companies can develop business in a new market, exploit benefits of economies of scale, or even acquire valuable resources and strategic assets in the form of outward FDI. Moreover, local enterprises can make use of their capital to buy a stake in an overseas institution for raising returns and gaining expertise of management. (Source: China Economic Review, February 2004)
Sources: National Bureau of Statistics of China, State Administration of Foreign Exchange, and World Economic Outlook Database 2008.
(US$ billions)Year
Established
Standard Chartered, October 15,
2007
Wall Street Journal,
September 10, 2007
Breakingviews.com,
October 25, 2007
Abu Dhabi Investment Auth., UAE 1976 625 875 650
GIC, Singapore 1981 215 330 100 - 330
Government Pension Fund, Norway 1990 322 300 322
Top Ten Sovereign Wealth FundsTop Ten Sovereign Wealth Funds
1010
China Investment Co., China 2007 200 200 200 - 400
Stabilization Fund, Russia 2004 128 100 128
Temasek Holdings, Singapore 1974 108 100 108
Kuwait Investment Authority, Kuwait
1953 213 70 213
Australian Future Fund, Australia 2004 42 40 30
Permanent Reserve Fund, U.S. 1976 40 37 40
Brunei Investment Authority, Brunei 1983 30 30 30
Total 1,923 2,082 1,821 – 2,251
Initial Capitalization of CICInitial Capitalization of CIC$78 Billion of $200 Billion Special Treasury Bonds$78 Billion of $200 Billion Special Treasury Bonds
China Agricultural China Agricultural BankBank
Ministry of FinanceMinistry of Finance
China Investment China Investment
(1) Special Treasury Issue
(4) Inject Capital
Short–Term Money Market
China Investment China Investment CorporationCorporation
People’s Bank of ChinaPeople’s Bank of China
(3) Special Treasury Sale (entire amount)
Sale of Special Treasuries (PBC operations)
(2) Use Yuan to Buy Foreign Reserves
Source: Nomura Capital Market Review, Vol. 10, No.4.
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Investment Plan of CICInvestment Plan of CIC
� 1/3 of the capital would be used to purchase Huijin, founded in 2003, that now controls China’s major state-owned commercial banks: ICBC, CCB, BOC and ABC.
� 1/3 of the capital would be invested in global financial markets.1. May 22, 2007 - invested 3 billion U.S. dollars in the U.S. private equity firm
Blackstone Group.Blackstone Group.2. Nov. 20, 2007 – invested about 100 million U.S. dollars in the IPO of the
China Railway Group in Hong Kong.3. Dec. 19, 2007 - invested 5 billion U.S. dollars in Morgan Stanley.
� The remainder would replenish the capital of the Agricultural Bank of China and China Development Bank.
- Li Yong, Vice Minister of Finance July 7, 2007
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Most Bank Loans Go to State Owned EnterprisesMost Bank Loans Go to State Owned Enterprises
Contribution to GDP
State-owned
enterprises23%
Share in corporate bank loans
State-owned enterprises
35%
Private and foreign
enterprises27%
1313
Collective enterprises
6%
Private and foreign
enterprises52% Share-
holding enterprises
19%
35%
Shareholding enterprises
27%
Collective enterprises
11%
Outward Nonfinancial Direct Investment Outward Nonfinancial Direct Investment FlowFlow
19821982--20072007
12
14
16
18
20US$ billions
1414
0
2
4
6
8
10
1982 1987 1992 1997 2002 2007
Sources: UNCTAD and Chinese Ministry of Commerce.
Note: China released its own ODI figures beginning in 2002. Prior data are only available from UNCTAD.
Outward Foreign Direct Investment Flow Outward Foreign Direct Investment Flow of Selected Countriesof Selected Countries
20062006
119.5115.7
101.1
80
100
120
140US$ billions
1515
45.8 45.6 42.9 39.7 38.8 34.1 32.625.9 21.2
13.16.2 4.3 2.5
0
20
40
60
Netherla
ndFra
nce
United
King
dom
Japan
Germany
Swi tzerla
ndIta
lySpa
inCan
ada
Hong
Kong
Sweden
China
Russia
Mex
icoSou
th K
orea
Brazil
Source: Chinese Ministry of Commerce.
Outward Foreign Direct Investment Stock Outward Foreign Direct Investment Stock of Selected Countries of Selected Countries
December 2006December 2006
2,051
1,2381,500
2,000
2,500US$ billions
1616
967853
641
387 381 293159 118 118 91 120 72 36 28
0
500
1,000
United
Stat
es
United
King
dom
GermanyFra
nce
Nethe
r land
Japan
Spain
I taly
Austra
liaDen
mar
kIre
land
China
Russia
Brazil
South
Korea
Mex
ico
Source: Chinese Ministry of Commerce.
GDP and Composition of Outward GDP and Composition of Outward Investment Stock for Selected CountriesInvestment Stock for Selected Countries
Equity BondsUS$ Billions
GDP
Percent of GDP
Outward Portfolio Investment Stock
Other Outward Investment
Stock (including bank
loans)
Outward Direct
Investment Stock
Source: IMF, State Administration of Foreign Exchange, and US Bureau of Economic Analysis.
Note: 2007, except * denotes 2006 and ** denotes third quarter 2007.
China’s ODI Flow Is Relatively SmallChina’s ODI Flow Is Relatively Small
World: ODI flow/ GDP
3%
4%
5%
GDP: China/ World total
4%
5%
6%
Source: IMF and UNCTAD.
China: ODI flow/ GDP
0%
1%
2%
3%
1982 1986 1990 1994 1998 2002 2006
ODI flow:
China/ World total
0%
1%
2%
3%
1982 1986 1990 1994 1998 2002 2006
1818
China’s ODI Flow Is Relatively SmallChina’s ODI Flow Is Relatively Small
World: ODI
stock/ GDP20%
25%
30%
GDP: China/ World total
4%
5%
6%
Source: IMF and UNCTAD.
China: ODI
stock/ GDP
0%
5%
10%
15%
1982 1986 1990 1994 1998 2002 2006
ODI stock: China/ World total
0%
1%
2%
3%
1982 1986 1990 1994 1998 2002 2006
1919
Hong Kong and Caribbean OffHong Kong and Caribbean Off--shore Centers shore Centers Account for More Than 80 Percent of China’s Account for More Than 80 Percent of China’s
Nonfinancial ODI StockNonfinancial ODI Stock
Total ODI stock as of December 2006: US$ 75 billion
Europe3%
Africa3%
North America2%
Oceania1% Latin America
1%
Asia ex-HK
2020
3%Asia ex-HK8%
Caribbean off-shore centers
26%
Hong Kong56%
Source: Chinese Ministry of Commerce.
Note: Note: More than 12,000 Chinese companies have established firms in about 172 countries and regions by the end of 2007. (Source: http://chinareference.eu/cbn/news.php?action=fullnews&id=1365)
Outward Foreign Direct Investments by IndustryOutward Foreign Direct Investments by IndustryCumulative Flows, 2004Cumulative Flows, 2004--20062006
Oil, natural gas and other minerals
32%
Real estate1%Transportation,
warehousing & postal service
7%
Agriculture, forestry,
husbandry, fishery1%
Others3%
2121
32%
Business service and leasing
26%
Finance and banking
9%
Manufacture10%
Wholesale and retailing
11%
Source: Chinese Ministry of Commerce.
StateState--owned Enterprises Account for Majority of owned Enterprises Account for Majority of Outward Nonfinancial Foreign Direct Investment Outward Nonfinancial Foreign Direct Investment
ODI FlowODI Flow
16
20ProvincialCentral
US$ Billions
$12.2
$17.6
2222
Source: Chinese Ministry of Commerce.
0
4
8
12
2003 2004 2005 2006
$2.9
$5.5
$12.2
Composition of Outward Foreign Direct Composition of Outward Foreign Direct Investment FlowInvestment Flow