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Economy

Angela Huyue Zhang: Don't panic, China is not buying the world

China ended 2014 as a net capital exporter, according to government data. Though a first, this should come as no surprise.

     Since the financial crisis in 2008, the growing prowess of Chinese companies and their rapid expansion in mature markets has inflamed global fears that China is "taking over" the world.

     Chinese investment abroad has a history of generating controversy. The hostile response of the U.S. Congress in 2005 to the attempted acquisition of oil company Unocal by China National Offshore Oil Corp. offers a striking example. In 2012, President Barack Obama retroactively blocked the purchase of wind farm projects in Oregon by a unit of Chinese construction equipment company Sany, the first such presidential action in 22 years.

     On the other side of the Atlantic, the European Union has tightened its scrutiny of acquisitions made by Chinese state-owned enterprises out of concern that companies are operating as arms of "China Inc."

We've seen this before

These controversies hardly mark the first time that anxiety and opposition have been directed toward a foreign nation's investment activity.

     The same sort of impulsive thinking dominated the U.S. public perception of Japanese foreign direct investment three decades ago. In the 1980s and 1990s, Japanese purchases of iconic American companies and luxury real estate, such as Columbia Pictures Industries, the Empire State Building, Rockefeller Center and Pebble Beach Golf Links, generated sensational headlines. The deals prompted fears among the American public and regulators that the Japanese were "taking over" the U.S. economy.

     These perceptions were starkly at odds with the data. During the period, the U.K. was actually the top investor in the U.S., while Japan ranked only third. Moreover, Japanese companies accounted for only a small fraction of both total and new foreign investment in the U.S.

     The current heated debate over Chinese foreign investment could be a case of deja vu. Today, media reports on Chinese investment mostly focus on its rapid growth, as evidenced by examples of Chinese companies snapping up well-known brands. These have included Swedish carmaker Volvo, French vineyard Chateau Viaud, Italian yacht maker Ferretti, U.S. cinema chain AMC Theatres and the low-end server business of IBM.

     This avalanche of news reports might easily provoke worries that Chinese companies are buying up the world. But these concerns are considerably exaggerated. To be sure, Chinese foreign direct investment has been increasing rapidly. But the base is very small. The latest official figures from the Ministry of Commerce show that while China had the third largest investment outflow in the world in 2013, it ranked only 11th in terms of cumulative FDI.

     Even these figures can be misleading, since the value of Chinese foreign investment flows is only a crude estimate. The vast majority of Chinese FDI goes to low-tax offshore jurisdictions. In 2013, 75% went to offshore destinations such as Hong Kong, the British Virgin Islands and the Cayman Islands, making the ultimate destinations difficult to discern. Some of these investments reflect the phenomenon of "round-tripping," where funds are moved abroad and then reinvested in China to benefit from advantageous terms provided by the Chinese government for foreign investors.

     This shows the important role that a proper understanding of statistics can play in informing foreign direct investment policymaking. Unfortunately, their importance is often overlooked during debates on policy. What skeptics often fail to realize is that no decision on foreign direct investment is free of risk. Regulators must consider both the benefits that Chinese FDI could bring and the potential costs of deterring such investment.

     For example, if the EU decides to treat all Chinese state-owned companies as a single entity, this could lead to unintended consequences. The bloc might no longer be able to intervene in cartels involving state-owned enterprises, or mergers between them, because the businesses involved would arguably be exempt from EU competition law. Similarly, the failed attempts of Chinese companies such as CNOOC and Sany to invest in the U.S., coupled with the opaque foreign investment review process in Washington, could potentially drive away Chinese investors that the U.S. would welcome.

     In such circumstances, governments could explore alternative and more pragmatic approaches and consider whether there are less intrusive measures that might minimize the costs of regulation. For example, a more pragmatic approach for the EU could involve treating Chinese state-owned enterprises as independent during antitrust reviews and dealing with any potential economic and political risks under the national security review regimes that exist at the member state level.

     In the words of Daniel Kahneman, the Nobel Prize-winning economist and author of the best-selling book "Thinking, Fast and Slow," when it comes to foreign direct investment, think slowly.

Angela Huyue Zhang is a lecturer in competition law and trade at King's College London. She is the author of "Foreign Direct Investment from China: Sense and Sensibility," published by Northwestern Journal of International Law and Business in 2014.

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