Sovereign Wealth Fund Says Chinese Outbound Foreign Investment Still Irrational

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The vice-head of China’s sovereign wealth fund says that outbound foreign investment by Chinese companies is oftentimes “irrational” in nature, leading to a comparatively high rate of failure.

Chinese outbound foreign investment surged to unprecedented levels in recent years, with data from the Ministry of Commerce indicating that overseas non-financial investment reached a historic high of USD$170.11 billion in 2016, for year-on-year growth of 44.1%.

This leap in outbound foreign investment triggered major concern amongst regulators over capital outflows, as well as the risk-fraught nature of many debt-fuelled overseas acquisitions.

Beijing has since cracked down on outbound foreign investment, which posted a 45.8% year-on-year decline in the first half of 2017, dropping to USD$48.19 billion.

The central government has also curbed the overseas acquisition sprees of many major corporations such as HNA Group and Dalian Wanda, as well as repeatedly warned against “irrational” outbound foreign investment in certain sectors such as real estate and entertainment.

According to Qi Bin, the vice head of sovereign wealth fund China Investment Corporation, the central government’s recent crackdown is only provisional, capital flows between China and the rest of the world to resume in due course.

“Chinese capital going out and international capital coming in is a historical necessity,” says Qi Bin in a chapter he wrote for “The Rules of the International Acquisition Game – How to Raise the Rate of Success for Chinese Enterprises Going Abroad,” (国际并购游戏规则:如何提高中国走出去企业成功率) published by the China Global Global Think Tank (CGGT).

“[Foreign investment] advances global economic growth, and has become a key hub for connecting China to the world.”

While acknowledging the long-run necessity of expanded cross-border capital flows between China and other countries, Qi points to ongoing problems with Chinese outbound investment at present.

“China’s overseas investment has seen a significant number of problems and phenomena that warrant concern.

“Some companies have tended towards irrational overseas investment, and some investment is comparatively lacking when it comes to veracity and compliance, while others do not satisfy China’s industrial policy requirements for investment overseas, and have even had a negative impact on the country’s image.”

Qi notes the high rate of failure of Chinese outbound overseas investment when measured against a variety statistical benchmarks, with some claiming that the figure is as high as 40%.

“While these statistical measures aren’t necessarily complete or accurate, they nonetheless reflect to a significant extent the existence of objective problems.”

In Qi’s opinion the reason for this high rate of failure can be imputed to a number of problems, chief amongst them a lack of overseas investment experience amongst Chinese companies.

“The majority of Chinese companies have not competed on the global economic stage, and do not understand overseas investment environments,” writes Qi.

“There is a lack of clear strategy…[companies] simply believe that overseas investment is a still undeveloped ‘blue sea market’ in which opportunities abound, or consider ‘going out’ to only mean ‘going out, without combining it with ‘bringing back.'”

Qi believes that improvements to the quality and nature of Chinese foreign investment are urgently needed giving the pivotal role it is likely to play in improving long-run economic performance, and abetting much needed structural changes.

“Chinese society has undergone profound changes in the thirty years since reform and opening up, and the large volumes of wealth amassed have brought upgrades at the consumption and demand end…yet one outstanding contradiction is that on the supply end [China] is still extremely backwards, and the supply of high-quality products and services is far from on par.”

Qi cites government data indicating that China’s labour productivity continues to lag far behind that of developed economies, with unit productivity equal to only 7% that of the United States, and 40% of the global average, making supply side reforms imperative for the Chinese economy.

Foreign investment could play a key role in upgrading Chinese productivity and advancing supply-side reforms, via what Qi refers to as a “bring-it-backism.”

“Strengthening international investment cooperation and effective implementation of ‘bring-it-backism’ is a key means of advance supply-side reforms, and hastening the upgrade of economic transition,” Qi writes.

“It will become the mission and main them of Chinese overseas investment…[which will] require that we effectively formulate overseas investment strategies.

“Availing ourselves of the power of capital, pragmatically supporting Chinese enterprises ‘going out,’ and advanced technology ‘coming back,’ and connecting the Chinese market to advance international technologies and mature commercial models will expedite adjustments to the economic structure and industry upgrade, and accelerate China’s economic modernisation, achieving leap-forward development.”

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