China has invested around $225 billion in 2016 mainly by buying companies abroad. It is difficult to say exactly how much has been invested as foreign investments because of how money flows out of china through areas such as Hong Kong. This chapter discusses in which way China and Chinese companies invest abroad and the recent developments regarding this.
The growth in investments
According to the Chinese Ministry of Commerce, between 2004 and 2013 foreign investment grew from $45 billion to $613 billion. In 2010, two state-owned banks had lent out more money to developing countries than the World Bank did. The income from foreign investment in continents such as Africa and South American have risen sharply since China decided to invest more in developing countries.
With the growth in foreign investment, there was also a setback. Not everyone is that excited about Chinese investors. For example, China has strict rules for foreign companies that want to do business in China. The German Minister of Economy introduced a new law in 2016 which ensures that a European Member State can interfere, when an investor from a non-European state gets over 25 percent of a company.
In 2015, the Financial Times wrote that Chinese investment abroad is likely to be higher for a short period of time than the amount invested within China. It is logical that China is looking for opportunities abroad. A lot of industries abroad are dependent on Chinese investment. China has built a huge reserve, by the end of 2014 this reserve was about $4 trillion. The United States and Australia, for China, are the countries where most of the money goes to.
During the first phase of investments, Chinese industry companies mainly sought and invested in natural resources. Due to the fact that there was a shortage of natural resources in the world, due to insufficient investment, new investment opportunities arose in the energy and metal sector. Between 2003 and 2015, half of the total foreign investment made by China was put into the global energy sector. In recent years, however, the focus has changed, more investment is now being made in real estate, transport and technology.
In America, investments in IT companies grew thanks to Chinese foreign investment. Real estate investment grew to a large extent in Australia due to Chinese foreign investments. However, since China’s lower economic growth in 2016 this has changed. China had to intervene and work harder on the transition to an consumer based economy.
The response to the new currency and capital regulation
Despite the fact that in recent years everybody has benefited from the investments made by Chinese companies abroad. It now appears that it is no longer as it has been. Foreign investment from China has fallen by 2% since 2016, and by 2017 it has already fallen by 18% according to the Chinese Ministry of Commerce.
Real estate investment abroad by Chinese companies has fallen sharply since January 2017. This is because of the new currency regulations and the stricter check for capital flight. Investments by Chinese companies in real estate is compared to 2016, down 84.3%. Real estate prices in cities such as London and Vancouver have been influenced by China’s demand for years.
As a result of the stricter measures, the acquisition of a Hollywood film studio did not go through and an earlier attempt to buy the AC Milan football club also failed because the People’s Bank of China did not want to cooperate after the new regulations.
According to Zhang Yichen, CEO of the Chinese investment company Citic Capital Holdings, it has become almost impossible for Chinese companies to invest abroad. Investment companies in China now focus domestically and not abroad. The vice president of another Chinese investment company, Zhang Li, said that there are many good projects abroad that one would like to invest in. But because of the new regulations, it is too difficult to move money abroad.
This year, Chinese companies accounted for $19 billion of acquisitions, which is 74% lower than in the previous year. Many European companies that rely on Chinese investors report that the new Chinese regulations have caused an enormous strain.
A number of CEO’s believe that the problem is in the process, so an investment may be well-tested and approved, but later disapproved by another government agency. There is therefore strong criticism of the regime currently being run by the Chinese government. At the latest congress of the Communist Party of China, no new adjustments have been announced in regards to the capital flight and currency restrictions. Predicted is to see now new adjustments before the end of 2017 as there are a lot of factors at play as well as Trump visiting China and other foreign policies that influence decision making.
The government wants a reliable and stable currency, which is made possible by strict regulations. On the other hand, companies and wealthy individuals want to invest outside of China and not bear the burden.
This was the final part of a 3 part article, if you are looking for the second part please refer to this page.