Update on China's OFDI: Interest in US and Australia May be Related to Stimulus Package

Posted on September 15, 2009 by Bill Newman

China’s outbound foreign investment strategy continues to make news. TheStreet.com and other business media reported today reported yesterday that China Investment Corp. (CIC), China’s sovereign wealth fund with approximately $300 billion in assets, may be discussing an investment into, or joint venture with, The AES Corporation of Arlington, Virginia. AES operates electrical generating facilities and distribution systems across the globe, has more 25,000 employees and a market capitalization of $9.8 billion. Reuters has reported that last week a senior CIC official said that CIC is seeking minority investments in infrastructure projects as well as green energy projects. 

To view these media reports in proper context, it may be well to review a few basic facts about China’s current outbound foreign direct investment (OFDI) program, as reported by Xinhuanet on September 8. Xinhuanet based its story on a report jointly issued by China’s Ministry of Commerce, the National Bureau of Statistics and the State Administration of Foreign Exchange that same day.

  • China’s OFDI added up to US$183.97 billion by the end of 2008. 
  • The source of China’s OFDI is more than 8,500 domestic investors, whose overseas corporate assets in 2008 exceeded US$1 trillion. 
  • Chinese overseas enterprises employed about 1.03 million people, including 455,000 overseas employees.
  • China’s net OFDI in 2008 was US$55.91 billion, an increase of 111% from 2007.
  • Chinese investors have established approximately 12,000 enterprises overseas in 174 countries or regions. Approximately 71% of these enterprises were in Asia and Europe.
  • Among Chinese outbound investors, 50.2% were limited companies, 16.1% were state-owned enterprises and 9.4% were private companies. 
  • Investment by state-owned companies declined 3.6% from 2007.

Australia is a key target for China’s OFDI, because of that continent’s abundant raw materials and other material resources. Xinhuanet also reported that Australia is seeking to attract increased amounts of Chinese investment and deepen their bilateral economic cooperation, especially in the energy and natural resource sectors. The senior trade commissioner of the Australian Trade Commission confirmed Australia’s intentions at a international trade forum held in coastal Xiamen, Fujian Province, on September 8. 

Data from Australia’s foreign review board show that Chinese investment interest in Australia is on a strong upward trend. Even so, at the end of 2008, China’s total investment stock in Australia was only $6.83 billion, and represented an increase of 26.7% from the position at the end of 2007. With this significant increase, China ranked as Australia’s 13th largest foreign investor.

China’s surge in OFDI may be rooted in its internal $585 billion recession-fighting stimulus package. That package represented 13.2% of China’s gross domestic product for 2008. During Q1 of 2009, Chinese state-owned banks increased their lending by more than one trillion dollars, or more than half of the national GDP on an annualized basis. According to published reports, over half of the new loans went into China’s stock and property markets, generating speculation-driven increases in prices. The remainder went into the Chinese economy and is likely to be doubt a substantial factor driving China’s OFDI. Recognizing that increased China OFDI may be more than desirable for generating and maintaining its economic recovery, Australia’s recently revised foreign investment rules raised the dollar threshold for investments that require regulatory review. The change is expected to result in an increase in the number of Chinese investments in smaller Australian natural resource and energy companies. According to the Australian trade official referenced above, Chinese investment has not harmed Australia’s economic security and has enhanced the reputations of the investors. 

The U.S. is on a slower path with China. It is possible that if the AES discussions mature into a deal and if CFIUS and other regulatory review supports the deal, the pace of China’s OFDI into the United States will accelerate. Adverse regulatory responses will likely have a dampening effect when this country can least needs it. 

Updated: On September 16, in a follow-up article, Xinhuanet reported that, according to China’s Ministry of Commerce, OFDI by China's 136 centrally-administered state-owned enterprises (SOEs) in 2008 was $35.74 billion.  The investment accounted for 64% of China's total OFDI for the year.   This appears to be a significantly larger share than had been previously reported.

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Australia Leads the Way in Inbound M&A and Investments Reform to Address Global Downturn

Posted on August 13, 2009 by Bill Newman

Last week Wayne Swan, Australia’s Treasurer, announced significant reforms to Australia's foreign direct investment (FDI) screening framework. The reforms will invite addition mergers and acquisition activity, with a view to supporting economic growth and positioning Australia for a more competitive recovery beyond the global recession. 

There are concerns that the current economic turndown may lead countries to restrict inbound mergers and acquisitions. Australia nevertheless has taken commendable steps. Swan’s steps -- clearly anti-protectionist and pro-globalization -- reflect his assessment of the best interests of Australia’s economy. The reforms upsize the investment screening thresholds, set as fixed dollar amounts.

According to Mr. Swan’s press release, Australia’s government has recognized that the health of its economy is linked to the global economy. The government seeks to eliminate certain impediments to further FDI by removing itself from uncontroversial business transactions. The announcement makes clear that “Foreign investment is vital to Australia’s future growth and prosperity.” Reasons underlying this linkage are that FDI:

  • creates jobs
  • increases innovation
  • promotes healthy competition

The current regulatory regime has six thresholds. The proposed regulations:

  • replace the four lowest thresholds with one threshold of AUD 219 million
  • replace those threshold that apply to U.S. investors with one threshold of AUD 953 million
  • index the threshold amounts annually against the GDP price deflator
  • eliminate the notice requirement that applies when foreign investors (other than U.S. investors) make a greenfield investment of more than AUD 10,000,000

Directly on the heels of Mr. Swan’s announcement, Yanzhou Coal Mining Co. reportedly launched its cash bid to acquire Felix Resources Ltd., based in Brisbane. Talks between the companies had begun over a year ago. According to Dealbook, Yanzhou’s bid is valued at more than AUD 3.5 billion. The offer may well test Australia’s liberalized outlook. 

To put the matter in context, China's direct investments in Australia reportedly grew from US $1.4 billion in Q1 2008 to US $13 billion in Q1 2009, a staggering 830% increase.

Dr. Peter Drysdale, emeritus professor at the Australian National University, buttresses Swan’s rationale. Dr. Drysdale, a noted Australian economist, speaks out against protectionism and in favor of cooperative, bilateral frameworks. He has told Xinhua, the official press agency of the government of the PRC  that “Anxiety over the growth of foreign investment in resources by China is unfounded.” Dr. Drysdale’s premise is that increased international cooperation brings benefits to both the investor and the host country. Outbound investments secure stakes in projects that can provide long-term supplies to China’s rapidly growing markets and also bring management know-how and technology to China. The host country receives capital, know-how and access to markets. The Australian government has clearly heard Dr. Drysdale’s appeal to put market solutions ahead of regulatory solutions. 

The Australian Government’s reform is particularly courageous in light of the current controversy over China’s July 5 detention of four Rio Tinto Ltd. employees, one of whom is an Australian national. Yesterday, there were reports that Shanghai prosecutors had approved the arrest of the employees. There is a predictable home-base backlash against FDI from China into Australia arising from China’s steps to deal with alleged thefts of secrets, particularly data with great value to China’s steel manufacturers, as well as bribery of non-governmental officials. 

Our July 16 post to this blog discussed the U.S. State Department’s support for inbound FDI into the U.S. As the Australians are proving, however, actions are louder than words.

 

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