Chinese overseas investment is booming right now by virtually all measures, with new projects and deals being signed on a daily basis across the globe. At the same time, a quiet yet highly significant shift is underway in the international investment patterns of Chinese entities.
The drive to invest outside mainland China has been traditionally led by China’s state owned enterprises (SOEs), but it is increasingly now the private sector which is taking the lead rather than SOEs. The People’s Bank of China have made it more straightforward to invest abroad by easing the restrictions on capital outflows. Of equal importance is the fact that there is a growing desire by these same firms to step outside of their domestic market and try their luck overseas. The other less spoken reason is that many firms see overseas operations as a hedge against a downturn at home.
From the perspective of the Chinese state this is of course in one sense an encouraging sign as it demonstrates the ambition and success of home grown firms, but it also means less control over these companies as they move overseas. Ventures in private hands are less pliable in terms of achieving the Party’s wider foreign policy goals, or as the Chinese proverb goes “they lie beyond the reach of the whip”. Although running a major business in China without significant Communist party ties is a no-no, and anyone stepping out of line are likely to be met with a corruption charge or two handed down by the leadership. When operating overseas, issues like this might be less noticeable, but it is fair to say the Beijing leadership still has a lot of leverage over private firms.
Host countries for Chinese investment might seemingly prefer private Chinese firms, fearing the influence of the Communist party behind SOEs. However, they would do well to remember that the much vilified Huawei electronics firm is privately owned, and has been accused of spying on foreign countries by including spyware in electronic devices which got them barred from operating in the US.
Much of the recent charge to expand abroad has been led by tech and telecoms firms. Being so new to the scene, they do not have a history of being under state ownership. Recent deals include Huaxin buying French firm Alcatel-Lucent, as well as China Mobile plowing money into operations in other Asian countries including Pakistan and Thailand. Alibaba, the internet shopping giant, has embarked an international shopping spree in an attempt to become a global internet player, rather than one focused solely on China.
In addition to major companies like Wanda, Alibaba and Shandong who grab headlines, there are hundreds even thousands of smaller firms below the radar that are expanding overseas. From medium sized construction firms previously focused in Xingjian or Yunnan province now expanding into Central Asia to work on the Belt and Road Initiative, to small trading companies who go from shipping products abroad to setting up operations overseas to sell directly to the consumer.
Watching this trend it seems to confirm the stereotype that state owned firms are more interested in construction, natural resources and heavy industry, while the private sector is concerned with tech, property and consumer goods.
In another twist, both local and national Chinese government departments are encouraging outbound investment by SMEs via a loosening of capital restrictions. Many SMEs are taking the opportunity to do exactly that, unshackled from these constraints these firms could collectively make a major impact overseas.
Internationally, this could also mean a more flexible approach to ownership by Chinese firms with joint ownership and partnerships with other country’s firms rather than Chinese firms taking 100% ownership with minimal outside involvement.
Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.