Outbound Investment from China Holds Concerns About Investment Review
Our latest post last week referenced the June 2009 Peterson Institute policy brief discussing China’s outbound foreign direct investment, authored by Daniel H. Rosen and Thilo Heinmann. The paper points out that global economic turbulence has made potential outbound investors in China hesitant to go abroad, citing three compelling pieces of evidence:
- The value of approved nonfinancial overseas projects announced in Q1 2009 decreased to $3.7 billion from more than $10 billion in Q1 2008.
- A recent study reported that more than 50% of Chinese firms are scaling back their overseas investment plans.
- Chinese government has withheld approval for deals in the financial sector and chastised firms in other sectors for their overseas investment plans.
The brief predicts that despite these “short-term anxieties,” OFDI by China will increase substantially in both the medium and long terms. The key driver behind the increase is China’s need to transform its model for achieving internal growth from domestic manufacturing alone to more integrated activities carried on internationally.
If, however, there is reluctance or unwillingness on the part of Chinese firms to make outbound direct investments, then to what extent are these attitudes attributable to changes in investment review policies of investee nations.
The issue of review policies by recipient nations is taking central stage. The brief predicts that China’s OFDI will increasingly target higher-value assets in advanced economies, such as high technology firms. As it targets these businesses, governments and businesses alike may raise national security rationales to impede the investments. In anticipation of this transformation the brief warns that potential recipients of Chinese investments may use national security inappropriately as a basis for blocking investments and requests clarity as to which business sectors are not available for OFDI investment.
With specific reference to the U.S., the brief notes that earlier efforts to expand the U.S. investment review system to include economic security were resisted. The discussion, however, is restarting. This reaction is due to the perception that China’s government is robustly involved in its nation’s businesses. The brief argues that
- Chinese executives need clear U.S. policy to determine beforehand whether bids may be rejected on national security grounds and
- greater clarity on this issue would benefit the United States by maximizing its asset values and preventing retaliatory treatment abroad.
The brief points out that many governments have tightened investment rules in recent years in response to increased outbound investments from China and the Middle East. A chart included makes the point convincingly:
On that basis, the brief asserts that in many countries investment protection is growing, investment rules lack transparency and domestic interest groups affect the review process. The attempted takeover of Unocal by Chinese National Offshore Oil Corporation and the involvement of Huawei Technologies in Bain Capital’s attempted acquisition of 3Com Corporation are cited as examples. As a result, politicized reviews are an obstacle in the view of outbound investors.
Businesses throughout OECD economies are likely to receive investment offers from Chinese firms in the near future. Consequently, the brief advises that it is imperative, in light of the many benefits to arise from China’s OFDI, that each country, including the U.S., consider the broad image of policy issues and articulate an approach conducive to that incipient inbound investment.
Last week also brought reports that Chinese security officials had detained four Rio Tinto executives on grounds that the four had stolen state secrets. According to the Australian CEO World blog, the arrests have shocked both the business world and the Australian government. Sources cited in the blog attributed the arrests to sensitivities in the Chinese leadership arising from economic stagnation and a search for scapegoats. Australian press is reporting that China’s spy and security agencies have been promoted to top strategy-making positions for the purpose of managing China’s economy through the downturn. Demonstrating that virtually every issue has an OFDI aspect, however, the China Securities Journal reported that shortly before last Thursday’s detentions the state-controlled Aluminum Corporation of China (Chinalco) bought $1.5 billion of Rio Tinto shares.
The international reactions and press allegations are likely to make Chinese executives and officials even more reluctant to proceed with their OFDI plans and affect the receptivity of recipient economies as well. Resolution of the conflict will provide greater insight into when and in what ways expanded OFDI by China may materialize.
