Risky rewards for China's overseas investment boom

Published Wed, Nov 19, 2014 · 04:42 AM
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[BEIJING] China's inexorable economic rise is set to see it become a net global investor after decades of Western money flowing into the country, but analysts warn the change offers risks as well as profits.

Chinese oil behemoth CNOOC's US$15 billion acquisition of Canada's Nexen, completed last year, was just a fraction of the US$625 billion the country has invested abroad, much of it resources driven and also taking in other sectors including agriculture, manufacturing and banking.

But the looming changeover may be a sign that China is becoming less attractive as an investment destination itself, while some deals have been less successful than others.

Chinese external acquisitions were strictly controlled until 2000 when the Communist Party listed overseas investment as a new growth strategy, widely described as "going out" to secure technology, resources and market access.

Overseas direct investment (ODI) has since ballooned - along with China's foreign exchange stockpile - and reached US$90.2 billion in 2013, more than 30 times what it was a decade previously.

Incoming foreign direct investment (FDI) stood at US$117.6 billion last year, official data showed, and the latest figures on Tuesday showed the gap between them has narrowed substantially in 2014.

China invested US$4.19 billion in non-financial sectors in the US alone in the first 10 months of this year, the commerce ministry said, almost twice as much as the US$2.32 billion that flowed in the other direction.

"It is a matter of time before China's overseas investment exceeds the foreign investment it receives," assistant commerce minister Zhang Xiangchen told reporters last month.

"Even if it is not realised this year, it will in the near future. China is soon to become a net capital exporter." China is now the world's third largest investor after the United States and Japan, according to the United Nations Conference on Trade and Development, and Beijing's figures show the US and Australia as its top recipient nations.

But the spending spree has been largely driven by big state-owned enterprises (SOEs), backed by state banks as they purchase mineral and energy resources, sparking concerns over China's growing economic power and possible political motives.

At the same time, some projects have not proved as profitable as hoped.

Auto manufacturer SAIC Motor took a controlling stake in South Korea's SsangYong Motor Company but lost several billion yuan when it went bankrupt and suffered a bitter strike, which ended only with a police raid featuring commandos rappelling from a helicopter in a hail of missiles.

Insurer Ping An saw its US$3.5 billion investment in European financial group Fortis wiped out in the global financial crisis of 2008.

Wang Jiahua, executive deputy chairman of the China Mining Association, an industry group, said 80 per cent of Chinese mining investment abroad had "failed", the state-run Economic Information newspaper reported in June.

China Power Investment Corporation is reported to have lost at least 7.3 billion yuan (US$1.2 billion) on the controversial Myitsone hydropower plant in Myanmar, where President Thein Sein ordered the project halted in 2011.

Analysts blame Chinese investors' inexperience and decisions driven by government policy rather than business sense.

Tao Jingzhou, managing partner of law firm Dechert LLP China, told AFP that the "primary cause" of problems was poor thinking, and failures to carry out sufficient due diligence.

"A merger and acquisition contract is logged as an achievement of the SOE (head) once it is signed," he said. "It will be none of his business when it incurs losses in two years' time." Experts also caution that having more funds flowing out of the world's second-largest economy reflects declining confidence in China.

"If capital finds the rest of the world more appealing on the whole, it indicates that opportunities in China are being prematurely closed off, most likely by government policy," Derek Scissors, of the Washington-based American Enterprise Institute (AEI), told AFP.

Beijing has denied that a swathe of inquiries in sectors ranging from auto and pharmaceuticals to software are targeting foreign firms, but China's growth has slowed in recent years, while land and labour costs have risen.

Equally, many destination countries are wary of Chinese investment, sometimes provoking angry accusations of bias by Beijing.

Analysts say private firms' share of Chinese investment is rising and state-owned firms scaling back, so that "sensitivity about government involvement and thus scrutiny should also ease", according to Brian Jackson of research firm IHS Economics.

But data compiled by AEI and the Heritage Foundation think-tank showed more than 100 projects or acquisitions worth US$100 million or more have fallen through for non-market reasons since 2005.

Chinese technology giant Huawei in 2008 abandoned a joint US$2.2 billion bid for US firm 3Com because of opposition by Washington's Committee on Foreign Investment over security concerns.

Nexen buyer CNOOC earlier mounted a failed US$18.5-billion bid for US oil and gas producer Unocal in 2005.

Under a free trade agreement sealed by Australia and China this week, Canberra has retained the right to examine all investments by Chinese SOEs, despite Beijing reportedly seeking an exemption for deals up to around US$940 million.

"A lot of buyers are irrational, pushing prices up and making people suspect whether China's political, military or other ends are behind such deals," said Tao.


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