China’s role in global investment is growing, but the scale remains small

PUBLISHED : Wednesday, 25 June, 2014, 11:59am
UPDATED : Wednesday, 25 June, 2014, 12:03pm

As China’s economy has grown over the past decade, so too has China’s overseas investment. This has become a highly controversial issue in a number of countries, in part due to the difficulties faced by firms and individuals when attempting to invest in China, as well as the considerable influence of state-owned enterprises in China’s major industries.

While China’s foreign direct investment has grown significantly in recent years, it still pales in comparison to major global investors such as the United States and Japan.

Data from the United Nations shows that China’s foreign direct investment (which excludes investment in financial assets) has increased strongly over the past decade – rising from around US$2.5 billion in 2002 (around 0.5 per cent of the global total) to US$84 billion in 2012 (a share of 6.1 per cent) (the most up-to-date data available), making China the third largest investor globally. In contrast, the US accounted for almost 24 per cent of global investment in 2012, followed by Japan at 8.8 per cent.

In part, the fact that China, the world’s second largest economy, lags slightly behind in terms of foreign investment reflects domestic regulatory constraints – including constraints on capital flows – as well as restrictions imposed by potential host countries for Chinese investment.

Despite the challenges in investing in China, the country is also a major recipient of foreign direct investment. In 2012, China received around US$121 billion in foreign direct investment – or around 9 per cent of the global total – second only to the US, which received over 12 per cent.

The Heritage Foundation, a US-based think-tank, maintains a database of Chinese foreign investment between 2005 and 2013, which breaks down investment by country and industry category. Over this eight-year period, China’s foreign direct investment totalled US$479 billion (a figure comparable to the UN dataset), compared with investment of almost US$2.8 trillion by private firms and individuals from the US.

The Heritage Foundation’s data shows that the US and Australia were the two largest recipients of Chinese foreign investment between 2005 and 2013 – totalling US$60 billion and US$57 billion respectively. In percentage terms, the US received around 13 per cent of the total investment over the period, while Australia received 12 per cent.

Over the eight-year period, investment by industry has been dominated by the energy sector (47 per cent of total Chinese foreign investment) and metals (22 per cent). This largely reflects efforts by Chinese firms to secure access to the raw materials required for the country’s rapid industrialisation. In contrast, the finance and real estate sectors each accounted for around 8 per cent of total investment – although smaller scale investments may have been overlooked.

Given that Australia is a major exporter of resource and energy commodities, it is unsurprising that China’s investment in Australia is focused in these sectors. The Heritage Foundation’s data shows that Australia’s metals sector accounted for around 53 per cent of Chinese investment over the eight-year period, followed by energy with 40 per cent of the total.

In contrast, investment in the US has been far more broad-based. The largest share of investment was in the finance sector – due to large-scale investments in 2007 and 2008 – accounting for around 34 per cent of the total. This is followed by the energy sector, at around 21 per cent of investment, and real estate and agriculture, at 14 per cent and 12 per cent respectively. The comparatively large share of agriculture was driven by the US$7 billion acquisition of Smithfield Foods – the country’s largest producer and processor of pork products – last year.

Global agriculture is likely to receive further investment from China in coming years, in an effort to acquire intellectual property as well as secure access to high-quality produce – particularly in the wake of food scandals that have impacted domestic producers.

One of the issues that causes controversy regarding Chinese foreign investment is the dominant role of state-owned enterprises in a range of the country’s industries. The Heritage Foundation estimates that around 90 per cent of the total investment between 2005 and 2013 was made by state-owned firms. However the share has gradually fallen over the course of the eight-year period – reflecting private sector investments such as multi-billion dollar acquisitions in the US and Britain by the Dalian Wanda Group.

This trend is echoed in Australian data produced by KPMG and the University of Sydney. State-owned firms accounted for around 98 per cent of China’s investment in Australia between 2007 and 2009. By last year, the cumulative share fell to 89 per cent, driven by private sector investment in the renewables sector.

Although there has been considerable growth in China’s foreign investment over the past decade, China’s stock of foreign-owned assets is not nearly as significant as other major investors. UN data for 2012 showed that the US controlled the largest share, at 22 per cent, followed by Britain (8 per cent) and Germany (7 per cent). China was the thirteenth largest investor overall, accounting for just over 2 per cent of the total stock.

It is highly likely that China’s foreign investment will continue to grow in coming years, as regulatory reform eases constraints on Chinese investors and continued economic growth expands the size of the country’s financial capital. The Heritage Foundation expects that China’s foreign investment could total US$1.2 trillion across the next decade.

Gerard Burg is National Australia Bank’s Senior Economist for Asia