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Chinese investment is coming fast
Wednesday, 23 November 2011 03:01

Growing Chinese foreign investment has been one of the strong trends in the world economy over the past decade or so.  Such investment has targeted in particular mineral and agricultural resources in economies like Australia, Africa and Latin America.  In fact, Australia has been the most important national destination for this investment.

As Lowy Institute contributor John Larum reported to last week's Australian APEC Study Centre conference, a lot more Chinese investment could be coming fast.

So why the upcoming surge in China's outward foreign direct investment?  The first observation is that China's offshore investment is way below its potential relative to its global economic footprint as measured by GDP, exports and foreign exchange reserves -- and above all compared with other leading economies like Australia, Brazil, Japan, Russia, UK and the US.   

While compared with these same economies, China seems to have put too much of its international investment eggs in the foreign exchange reserve basket, relative to direct, portfolio or other investments.

But it is not just a question of numbers.  The Chinese government is driving offshore investment through its “Go global” policy.  This policy is part of a complex strategy to improve the security of natural resource supply (notably for minerals and food), to gain access to new markets, to acquire technology, brands and know-how, and to improve domestic competitiveness.  The government is also keen to diversify its international assets away from the US dollar and to improve their financial return.

The "Go global" policy is underpinned by the prospect of continued growth in China's already huge financial resources, and in particular the high corporate savings of China's large state-owned enterprises.

Are there any factors that could hold back this wave of Chinese investment? 

First, experience shows that Chinese investors need to improve their capacity to transact and manage acquired assets.  Investing in a democratic country with critical media, stridant NGOs, and open political debates can prove to be a cultural shock for Chinese enterprises. 

Back home they may have a free hand once they have received government approval.  But in a democratic country they may not be free to bring in large numbers of Chinese workers and suppliers, and they will also have to respect environmental regulations and workers rights.

And yet while Chinese investors might balk at perceptions of tougher political and regulatory barriers in developed countries, the experience of Libya and other countries has shown that they may have underestimated the political/security risk in developing countries.

Another point is that there is now also greater regulatory scrutiny by the Chinese government of offshore investments, following some unsuccessful deals.  Further, the horsetrading, and wheeling and dealing ahead of next year's change in political leadership have given rise to greater caution by investors.

And while there were many bargain investments going at the time of the global financial crisis, today it is becoming harder to find quality assets at attractive prices.

Despite these possible constraints on outward Chinese investment, the prospects still look very strong.  Chinese foreign exchange reserves are enormous and still growing, and the government is keen to diversify investment away from the US dollar and improve returns on the current low rates earned on US Treasury Bills.

While some foreign countries may have reservations about Chinese capital, in reality much of the world today is desperate to get more investment.  And although there have been some misunderstandings been Chinese investors and their host countries, both sides are now learning to work together more effectively.



APEC Conference 2011 -- Is Australia Managing?  The Australian APEC Study Centre at RMIT University.


John Larum -- http://www.lowyinstitute.org/ContributorBio.asp?pid=857

Larum, John.  Chinese perspectives on investing in Australia.  Lowy Institute.  http://www.lowyinstitute.org/Publication.asp?pid=1616

Larum, John.  Into the dragon's den.  Lowy Institute.  http://www.lowyinstitute.org/Publication.asp?pid=1365


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