China Inc on a spending spree
Last year the Asian giant’s outbound foreign direct investment exceeded inbound for the first time
THERE are 95 Chinese firms on the Global Fortune 500 list of the world’s largest companies (the US has 128) that last year jointly posted $5.8trillion (R82.8-trillion) in revenues. A large number of these companies are emerging as multinationals as they take their businesses global.
What was once a sometimes clumsy attempt by a handful of stateowned enterprises to invest abroad has evolved into a sophisticated strategy to acquire leading global companies.
In 2000, China’s outbound foreign direct investment stock amounted to $27.77-billion. By the end of last year, this stood at about $870-billion, almost half of which is in the energy sector. Last year, China’s overseas direct investment increased 14.1% to $102.9-billion — with the highest increases in investment going to the EU and US.
Last year marked a major shift in that China’s overseas direct investment exceeded the amount of foreign direct investment into the country for the first time. Quoted in the Financial Times, China’s assistant minister of commerce, Zhang Xiangchen, said: “China is already a capital-exporting country and it is now poised to become a net exporter of capital.”
China Inc’s international forays have been mostly financed by preferential capital through its so-called policy banks, namely China Export-Import Bank and China Development Bank.
They have been at the sharp end of financing the internationalisation of China Inc and have been instrumental in helping state-owned firms establish a beachhead in international markets, including Africa.
Aligned to this state-heavy approach, China created several dedicated sovereign wealth funds to direct capital abroad in support of its state-owned enterprises. China Investment Corporation, which is the largest, with about $650-billion in assets under management, initially focused on investing in equities and in the US financial sector. Its investment strategy has shifted into long-term assets (infrastructure and agriculture in particular) in developed and emerging economies. The China-Africa Development Fund, with $5-billion, invests in Africa.
In the initial stages of China’s “Go Out” strategy, crafted by the Hu Jintao administration, the strategy was aligned to political stakeholders pursuing a geo-economic interest
In many cases, China is the major source of credit for emerging economies
rather than to private shareholders. State-owned Chinese policy banks allowed for capital to be invested in a manner that is generally aligned to the broad interests of the state. It also resulted in the very rapid deployment of capital, especially in what could be considered risky assets or countries. The traction that China Inc has gained in Africa speaks to this.
China’s ability to deploy capital even during cyclical downturns — think of the financial crisis after September 2008 — has, however, won it a great deal of political capital in the emerging world. Jiang Jianqing, chairman of the state-owned ICBC, said at a previous World Economic Forum regional meeting in Africa that Chinese investment in Africa was “growing and becoming more diversified, even as the global downturn curbs investment by other countries”. In many cases, China has become the major source of credit for emerging economies.
The challenges facing Chinese firms abroad are primarily operational. Considering the government-heavy approach that often accompanies Chinese firms’ entry into developing states, these tend to rely more on political relationships than operational ability.
This has been very apparent in South Africa, for instance, where many Chinese firms have not been successful in the local marketplace. Political alignment and relations are not a remedy for lack of local knowledge and expertise. Despite the rapid traction that Chinese firms have gained abroad, the operational difficulties facing Chinese firms are no different to other foreign firms.
Chinese firms are used to dealing with tough and competitive conditions but are far less adept, in these early stages of their internationalisation, at understanding local cultural circumstances.
While observers are somewhat surprised by the rapid rise of China’s corporations, its largest firms are not its most competitive. The mistake is to confuse size with competitiveness. The vast majority of China’s largest enterprises are state-owned. These firms have grown tremendously over the past decade — mostly through a government-engineered mergers and acquisition process to bulk up in order to (supposedly) compete abroad.
In China’s 12th Five-Year Plan (2011 to 2015), leading Chinese SOEs have been set a target of 50% of their profits to come from international markets within five years. Beijing has targeted a 17% average annual growth in overseas direct investment during this period, with a target of $150-billion by the end of this year.
The government of Xi Jinping is clearly intent on deepening its international investment policy. With more than $4-trillion in foreign exchange reserves, Chinese firms will become increasingly acquisitive abroad. Despite Chinese private capital increasingly investing abroad, its investment into Africa will remain mostly state-centric, quite different to the private capital investment trend in other regions.
But one thing is for sure — as China Inc’s international investment footprint deepens, so will the geoeconomic influence of China.
Davies is MD of emerging markets and Africa at Deloitte and heads the firm’s China services group for Africa
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