China’s out­ward in­vest­ment: mile­stones on a dif­fer­ent road

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

The march of Chi­nese money around the world con­tin­ues, with 2016 set to be a year for three mile­stones. First, an­nual out­bound di­rect in­vest­ment (ODI) will cross US$100bn for the first time — in fact it has al­ready done so, ac­cord­ing to the Min­istry of Com­merce, which re­ported last week that the to­tal for the first seven months was US$103bn, a hefty 62% YoY in­crease. Sec­ond, with out­flows surg­ing while in­flows stag­nate, this will prob­a­bly be the first year that China’s out­bound in­vest­ments ex­ceed in­bound FDI. Fi­nally, the pri­vate sec­tor now ac­counts for half of China’s ODI, up from less than a quar­ter just two years ago.

These shifts sug­gest the need for a change in the con­ver­sa­tion about China’s in­ter­na­tional money flows. For years, the main ques­tion has been whether sta­te­owned en­ter­prises (SOEs) and their pol­i­cy­bank fi­nanciers would upset the rules of the in­ter­na­tional eco­nomic order, ei­ther by scoop­ing up strate­gic as­sets in ad­vanced economies, or by lead­ing a charge for in­creased Chi­nese geopo­lit­i­cal in­flu­ence through chan­nels such as the Belt-and-Road ini­tia­tive. But the driv­ing force be­hind Chi­nese ODI is pri­vate-sec­tor in­vest­ment in rich coun­tries, while the Belt-and-Road in par­tic­u­lar has yet to gain trac­tion. The key ques­tion now is how long ad­vanced economies will put up with large in­flows of pri­vate Chi­nese cap­i­tal while their own firms con­tinue to be shut out of the fastest­grow­ing parts of China’s econ­omy.

China’s shift from net im­porter to net ex­porter of di­rect in­vest­ment cap­i­tal partly re­flects sim­ple fi­nan­cial re­al­ity: pri­vate Chi­nese firms have more in­cen­tive to put their mar­ginal in­vest­ment dol­lars abroad. Re­turns to cap­i­tal in China have fallen from strato­spheric to more nor­mal lev­els, and ac­cess to for­eign tech­nol­ogy and mar­kets look at­trac­tive. And with the ren­minbi at risk of con­tin­ued ero­sion against a strong US dol­lar, pick­ing up as­sets with strong dol­lar­de­nom­i­nated cash flows is a sen­si­ble port­fo­lio hedg­ing strat­egy. This lat­ter fac­tor per­haps ex­plains the tripling of Chi­nese in­vest­ment in the US in 1H16, to US$18bn from US$6bn in the year-ear­lier pe­riod.

But the shift­ing bal­ance be­tween out­ward and in­ward flows also re­flects a deeply asym­met­ric in­vest­ment en­vi­ron­ment. De­spite its rep­u­ta­tion as a mag­net for for­eign in­vest­ment, China in fact runs one of the most re­stric­tive FDI regimes in the world ac­cord­ing to the OECD, and is far more closed than other big emerg­ing economies in­clud­ing Brazil, In­dia and Rus­sia. China is es­pe­cially un­wel­com­ing to in­vest­ment in the fast-grow­ing ser­vice sec­tors. Chi­nese of­fi­cials love to com­plain about na­tional-se­cu­rity in­vest­ment re­view pro­ce­dures in the US and Aus­tralia: last week they slammed the Aus­tralian Trea­surer’s de­ci­sion to block China State Grid’s bid to take con­trol of na­tional power net­work Aus­grid. But these mech­a­nisms — which gen­er­ally do not even ex­ist in Europe — re­view only a tiny hand­ful of sen­si­tive deals, and do far less to curb cap­i­tal flows than China’s vast ar­ray of pro­hi­bi­tions and re­stric­tions.

This im­bal­ance — Chi­nese firms free to in­vest as they please in ad­vanced economies, while many for­eign firms feel shut out of the world’s fastest-grow­ing big mar­ket — is re­plac­ing trade and the ex­change rate as the big­gest ir­ri­tant in China’s in­ter­na­tional eco­nomic re­la­tions. In both the US and the EU, there is pres­sure to im­pose some kind of a “rec­i­proc­ity” stan­dard on Chi­nese in­vest­ments. It is not clear how this could work: no one has the lever­age to force China to bring its FDI regime up to rich-coun­try lev­els of open­ness, and for rich coun­tries to be­come as closed as China is to for­eign cap­i­tal would be ru­inous.

The ac­cel­er­a­tion of Chi­nese pri­vate cor­po­rate in­ter­est in the rich world con­trasts sharply with the strug­gles of the vaunted state-led Belt-and-Road ini­tia­tive to gain ground in the devel­op­ing world. Iron­i­cally, Chi­nese engi­neer­ing firms en­joyed a decade of rapidly ris­ing rev­enues from for­eign projects, right up to the mo­ment that the gov­ern­ment de­creed such projects to be a na­tional pri­or­ity. Al­most at that mo­ment, growth stopped, and rev­enues have ba­si­cally flat-lined over the last two years.

The sim­plest ex­pla­na­tion for the slow­down in over­seas con­struc­tion in­come is the 2014-15 com­mod­ity price col­lapse. Much of China’s for­eign engi­neer­ing work fo­cused on re­source ex­trac­tion—mines and pro­cess­ing plants, and re­lated road, rail and port in­fra­struc­ture—and the eco­nom­ics of many such projects failed to with­stand a halv­ing of com­mod­ity prices.

The ques­tion is whether the Belt-andRoad ini­tia­tive can reignite growth. There has been a leap in the value of new con­struc­tion con­tracts, to around US$18bn a month in 2015-16, from around US$14bn in the prior two years. This could por­tend a fu­ture surge in rev­enues, as projects move toward com­ple­tion and pay­ments roll in.

But the ris­ing gap be­tween con­tracted and re­al­ized rev­enues in­vites the sus­pi­cion that Chi­nese firms are re­spond­ing to po­lit­i­cal pres­sure by rush­ing to sign all sorts of ques­tion­able deals, and let­ting them qui­etly rot away. Prov­inces and ci­ties have been as­signed Belt-and-Road quo­tas, and are busy send­ing del­e­ga­tions abroad to find projects. There is an ob­vi­ous in­cen­tive to sign MOUs to ful­fill one’s quota, re­gard­less of whether the projects can be ex­e­cuted or not. For now, it seems that prom­ises of a Belt-and-Road bo­nanza were pre­ma­ture, and that en­thu­si­asts over­stated the abil­ity of new fi­nanc­ing chan­nels such as the Asian In­fra­struc­ture In­vest­ment Bank to off­set the dearth of vi­able new projects.

So in­stead of fret­ting whether tri­umphant Chi­nese state cap­i­tal­ism will change the na­ture of the global econ­omy—it won’t— pol­i­cy­mak­ers glob­ally need to fo­cus on en­sur­ing that the largely ben­e­fi­cial flows of pri­vate Chi­nese in­vest­ment cap­i­tal aren’t choked off by an un­der­stand­able but self­de­feat­ing drive for sim­ple “rec­i­proc­ity.” And they need to keep the heat on Bei­jing to start se­ri­ously hack­ing away at its ab­surd and out­dated thicket of re­stric­tions on in­ward in­vest­ment. The world has avoided an out­break of trade pro­tec­tion­ism; it needs to en­sure it doesn’t fall prey to in­vest­ment pro­tec­tion­ism in­stead.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.