Energy and technology needs drive Chinese overseas investment

23 October 2006

Beijing, China, 23 Oct – The needs to safeguard access to energy resources and raw materials and acquire technology, brands and know-how are factors that will contribute to the expansion of foreign Chinese investment, according to a recent study by Deutsche Bank.

The German bank’s research department also says China’s Foreign Direct Investment (FDI) benefits from Beijing government incentives and that overseas mergers and acquisitions are already the main conduit for Chinese FDI.

“China is emerging as a global investor, reflecting increasing integration of the country in the global economy as well as the need for China to open markets abroad,” says the study, noting that Chinese FDI between 2005 and 2010 is set to increase more than 20 percent, or by a value of US$ 60 billion.

The Deutsche Bank report warns, however, that despite Chinese foreign investment soaring by 93 percent in 2004 to US$ 5.5 billion and 26 percent in 2005 to reach US$ 6.9 billion, between 15 and 20 percent of the total value for 2005 was capital leaving the country to return later as foreign investment in China, benefiting from Beijing’s preferential conditions for overseas investors.

Ensuring access to energy sources and raw materials is the key incentive for Chinese companies investing overseas and it is impossible to separate this from the Beijing government’s political and diplomatic goals, says the study.

“However, the Chinese authorities have come to aggressively court governments of receiver countries, bolstering bilateral relations and giving development aid and offering transport and communications infrastructures,” adds the Deutsche Bank report.

The second main spur for Chinese investors in the global market is an attempt to acquire what is still lacking in China’s business environment, such as patents, logistical systems, trade marks and know-how.

“Foreign investment by Chinese companies is also attached to the effort to acquire advanced technology, established brands, distribution networks and management abilities, which has gained more impetus with the recognition by state and private companies of the need to strengthen competitiveness, especially after entry to the World Trade Organization in 2001,” says the study.

A third factor has driven Chinese firms to invest outside of the country – pressure from competition in the domestic market with a consequent ebbing of profit margins, the study notes.

“The goal is the creation of platforms outside China from which firms can gain entry to local markets, as well as competitive advantages through economies of scale and greater production efficiency, a trend that has mostly been seen in the production of domestic appliances and high-consumption electrical goods,” according to the Deutsche Bank analysts.

The same report says “access by Chinese firms to preferential loans from state-owned banks can assist the expansion,” adding that the Beijing government is banking on the internationalization of the country’s mainly state-controlled companies due to a “political agenda of economic nationalism, focused on questions of energy security, geopolitical positioning and national competitiveness.”

“Chinese support to the internationalization of its national companies is made in various manners, with the easing of debt controls in 2003, direct and indirect subsidies and the offer of favorable finance in the form of credit lines and low-interest credit and loans by state financial institutions,” says the study.

Another more indirect means of Chinese support to internationalize state firms is Beijing’s offer of conditional aid to the economies of developing states in Africa, Asia and Latin America to fund projects being implemented out by Chinese companies.

According to Deutsche Bank, while China continues to need secure supplies of energy and raw materials to fuel an economy that expanded 10.4 percent in the first half of 2006, 10.7 percent in the first nine months of this year and 10.2 percent in 2005, it is predicted the country will be the source of investment in other countries. China will also be the third-biggest target for foreign direct investment, according to the 2006 World Investment Report by the UN Conference for Trade and Development.

Regarding future perspectives for China, Deutsche Bank’s analysts forecast the increasing internationalization of the Chinese economy will become more important than political and diplomatic goals, which will be reoriented to maximize the country’s factors of competitiveness abroad.

“The majority of Chinese companies planning foreign investment in the coming five years and sectors of the economy, such as light industry and manufacture of electrical goods, but excluding the automobile industry, will benefit from global comparative advantages,” concludes the Deutsche Bank study. (macauhub)