We need to calm down about China's outward investments

PUBLISHED : Thursday, 07 July, 2011, 12:00am
UPDATED : Thursday, 07 July, 2011, 12:00am


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Over the coming decade, the world's business landscape will be changed radically by massive outward flows of Chinese capital.

According to a report published in May by the Asia Society, China is likely to make more than US$1 trillion in foreign direct investments between now and 2020.

Such a huge recycling of money should be invigorating for the global economy. But US$1 trillion is a tonne of cash by anyone's standards, which means the investment process will often be disruptive and sometimes painful.

So it would help if everyone involved - including commentators in politics and the media - took a deep breath, calmed down, and adopted a level-headed approach to China's outward investments. There are too many misconceptions around as it is.

Consider an article in last week's edition of The Economist, which contrasted US aversion to inward investment from China to the openness of countries in Asia, Latin America and Europe.

According to The Economist, in 2009, China's stock of direct investment in Asia reached US$185 billion. Its investments in Latin America hit US$30 billion and reached US$9 billion in Europe. In contrast, its stock of investments in the whole of North America came to a relatively meagre US$5 billion. Because of 'public attacks by wealthy lobby groups and frothing congressmen', the magazine argued, the US is losing out.

There is merit in The Economist position. But it does not help that its numbers are wildly misleading.

That US$185 billion invested in Asia, for example, includes US$166 billion 'invested' in Hong Kong and Macau. In reality, much of that money was either round-tripped back into China, or channelled onward into investments elsewhere, including the US.

Similarly, the figure for Latin America included capital routed through Caribbean tax havens before being reinvested in China, while the number for Europe included China's investments in Russia, much of which have been channelled into the Siberian far east.

Strip out these anomalies, and as the chart (below) shows there is an altogether more balanced picture, with US$3.3 billion of Chinese capital sunk into the US, compared with US$6.5 billion in Europe (US$3.9 billion excluding Luxembourg) and just US$2 billion in Latin America.

But even this is misleading. Certainly it understates Chinese investments in the US. According to data compiled by specialist research house the Rhodium Group, at the end of the first quarter of this year, China had 246 separate direct investments in the US, worth a total of US$12.5 billion.

Still, there is no doubt that Chinese investors have got a bad press in the US. Everyone remembers how CNOOC, China's largest producer of offshore crude oil and natural gas, withdrew its 2005 bid for US oil company Unocal after the attempted takeover prompted an outcry on Capitol Hill.

Don't forget Chinese telecoms giant Huawei has twice been knocked back, after trying to buy into 3Com in 2009 and again this year, when it attempted to buy assets and patents from California-based 3Leaf.

High-profile rejections like these have created the impression that the US is hostile to Chinese investment, and deterred other Chinese firms.

But knee-jerk hostility is by no means the whole picture. Huawei's bids were turned down by the US government largely because of the company's lack of transparency.

In a forthcoming paper, Friedrich Wu of Nanyang Technological University in Singapore, points out that as a private company Huawei publishes no accounts. Its chief executive, a former People's Liberation Army officer, has never given an interview, and at the time of its 3Com bid, the company did not even employ an official spokesman.

Wu contrasts Huawei's failure to invest in the US with the success enjoyed by domestic-appliance manufacturer Haier.

Although Haier's entry into the US market was not smooth - it dropped its 2005 bid to acquire Maytag - today the company operates a manufacturing plant in South Carolina and boasts US sales worth more than US$1 billion. More to the point, it makes a handsome 20 per cent profit on its operations.

Wu credits Haier's success to its willingness to adapt culturally, to employ locals in senior positions and to behave as a good US corporate citizen.

Clearly Chinese outward investment can work well. That's good news, considering the prospect of another US$1 trillion in outflows over the next 10 years. But if the experience is to be a happy one, everyone involved must first show some flexibility and bury their prejudices and misconceptions.