Insight into China’s Overseas Investments
Derek Scissors, the resident China expert at the Heritage Foundation in Washington, DC, has done some yeoman’s independent research and produced a highly informative report on patterns in China’s overseas investment over the past several years. (For my friends on the Left, who might be dubious about anything put out by a conservative think tank, be assured that Derek is a widely respected China pro with no particular ideological ax to grind — although he has landed himself in a little hot water from time to time for his willingness to challenge the reliability of official Chinese statistics!)
Derek’s findings are summarized at Heritage’s website here. Some clarification is vital, because he presents two sets of data. The first only includes non-bond outbound investment, and roughly tracks with China’s official Ministry of Commerce (MOFCOM) outbound investment figures. Derek’s research tallied up $56.5 billion in Chinese overseas investments in 2010, for a total of $215.9 billion over the past five years.
It is interesting to note that the annual figure was growing at a rate of around 60% in the years (2007-8) leading up to the global financial crisis, but since then has more or less plateaued. It is also worth noting that, over the same period of time, China’s official foreign exchange reserves grew by over $2 trillion (from $819 billion at the start of 2006 to $2.85 trillion at the end of 2010), indicating that China’s accumulation of capital continues to far outstrip its ability to creatively and productively redeploy it. That’s good news for the U.S. Treasury (and deficit spenders in Congress), probably not such good news for Chinese workers and savers.
The second set of data, portrayed in map form, adds in large-scale engineering and construction contracts (to bring the five-year cumulative tally to up to $316.2 billion over six year, 2005-10) and breaks it down very usefully by country of final destination (a helpful improvement over the official Chinese data, which assigns the bulk of outbound investment to Hong Kong, which is usually just a pass-through point for money bound elsewhere). This second data set is less useful in understanding China’s balance of payments dilemma, but somewhat more useful in gauging China’s “global reach” and where its business ambitions have been focused.
The data, Derek notes, reveals that:
The main event in 2010 was a flood of money into the Western Hemisphere outside the U.S., led by Brazil but also featuring Canada, Argentina, and Ecuador. Almost an afterthought in 2008, this is now the leading area for Chinese spending. Brazil is the third-largest target for Chinese investment, trailing only Australia and the U.S., though Nigeria and Iran also boast large engineering contracts.
Nevertheless, if you look solely at individual countries (rather than regions), the number one recipient of Chinese overseas interest was Australia, with major investments and contracts over the past six years ringing in at $34.0 billion. Despite all the attention paid to several high-profile deals that were blocked, the United States still came in second, at $28.1 billion. Nigeria was third ($15.4 billion), Iran fourth ($15.1 billion), Brazil fifth ($14.9 billion). Canada, at #6, was the only other country that brought in over $10 billion.
If you break down the map data on a pie chart, it reveals that China’s overseas business activities have been spread fairly evenly across the various regions of the globe, keeping in mind, however, that the top five countries (Australia, U.S., Nigeria, Iran, and Brazil) together account for almost precisely 1/3 of the total.
Not all of these deals, Derek is quick to note, actually go through. He points out that “A previous rush into sub-Saharan Africa saw promised investments and contracts that did not materialize. To some extent, this will happen in South America as well.” He also calls attention to $122.2 billion in “trouble transactions” — deals that were derailed by regulators or simply fell apart. He observes that:
Initially, most troubled transactions involved energy; now metals appear to be more challenging. The countries drawing the heaviest interest—Australia, the U.S., Iran, and Nigeria—also see the most troubled transactions.
Looking solely at investment, it comes as no surprise that energy and power account for nearly half ($102.2 billion, or 47% of the total), followed by metals ($60.8 billion, or 28%) and finance and real estate ($39.2 billion, or 18%). Together, these top three categories account for 94% of China’s investments abroad. In addition, major engineering and construction projects, almost by definition, are concentrated in energy and power ($43.6 billion, or 47% of the total) and transport ($35.0 billion, or 38%).
If you think about it, it’s striking: in many ways, the nature of China’s “global reach” reflects its own economy’s overwhelming preoccupation with fixed asset investment and the raw material needs required to fuel it.