China’s global investment in 2019: Going Out goes small
American Enterprise Institute
- Chinese investment and construction around the world contracted in 2019, regardless of Beijing’s claims to the contrary. However, the decline is concentrated in large, headline-winning deals, and Chinese firms remain active on a smaller scale.
- A contraction in acquisitions in rich economies has boosted the relative importance of greenfield spending. The number of countries in the Belt and Road continues to expand, and power plant and transport construction continues to be preeminent.
- American policymakers were initially spurred to act by intense Chinese investment in 2016. This has dropped sharply, but there are challenges related to investment review that are more important, starting with strengthening export controls.
China’s overseas investment and construction saw a crucial shift in 2019. The nature of that shift is in question.
The China Global Investment Tracker (CGIT) from the American Enterprise Institute and Heritage Foundation reasonably tracked official government investment levels from 2005 through 2018. In 2019, official figures proclaim stability, while the CGIT sees a dramatic fall. The main possibilities are (1) China is manipulating data and (2) the average size of transactions has dropped and the CGIT is missing more of them. These are not exclusive. Most likely there is an important slump beyond what Beijing reports, but still not the plunge seen in the CGIT.
Such a slump calls for explanation. It is well-documented by now that key host countries have grown suspicious of Chinese firms.1 However, this does not also explain a simultaneous fade in the construction-led Belt and Road Initiative (BRI).
The best explanation for broad weakness is erosion of the previously abundant foreign exchange used to finance construction and investments. Since 2014, China has seen a large drain on its reserves.2 There is no reversal on the horizon, which means neither investment nor construction can reach levels anticipated a few years ago.
The CGIT is the only fully public record of Chinese outbound investment and construction worldwide. All 3,600 transactions recorded since the start of 2005 are accessible in a public data set.3 In 2019, with the same $100 million threshold as in previous years, spending plunged 40 percent to below $70 billion, on top of a similar drop in 2018. The 2019 investment results look similar to 2011, with Chinese investment returning to a local rather than global phenomenon.
Beyond lower investment, there were positive developments. Peak investment rested on financially and politically unsustainable large-scale acquisitions in rich countries. In 2019, the proportion of greenfield spending as a share of the whole was three times higher than in 2016–17. Along the same lines, the ever-expanding BRI drew a larger spending share. Most of these countries still solicit firms from the People’s Republic of China (PRC), even while richer countries are wary, making investment more politically durable.
Investment involves ownership and an indefinite presence in a host country. It is often conflated with the construction of port terminals, dams, public housing, and the like. The PRC’s construction and associated loan financing can stretch many years but is not indefinite. The average construction transaction is smaller than the average investment, but there are more $100 million–plus construction contracts than investments since 2005.
BRI expansion means it captures the vast majority of China’s construction overseas. Since its inauguration in late 2013, and using the current set of 143 members,4 total BRI construction exceeds $450 billion. Construction contracts are often reported with a lag, so the 2019 total will rise. Nonetheless, at less than $60 billion, the first estimate for 2019 is by far the lowest for a full year of the BRI. When it was launched, China was swimming in foreign exchange. As that tide has turned,5 BRI construction has been constricted.
For the US in particular, the pace of Chinese investment in 2019 is the weakest since 2011. Spending of about $3.2 billion is just 6 percent of the 2016 peak. Chinese investment has been exaggerated in its scope and potential, in the US and globally.
Rather than focus on supposedly huge sums, American policymakers should identify PRC entities involved in dangerous technology acquisition or that violate American law, assist in human rights violations, or benefit from market distortions.6 It is past time to move beyond unnecessary concern over generic Chinese investment and construction and toward punishing specific, harmful actors.
- Birgit Jennen, “Germany Eyes Tough Rules on Foreign Investment amid China Worry,” Bloomberg, November 29, 2019, https://www.bloomberg.com/news/articles/2019-11-29/germany-eyes-tough-rules-on-foreign-investment-amid-china-worry.
- People’s Republic of China, State Administration of Foreign Exchange, The Time-Series Data of Balance of Payments of China, December 27, 2019, https://www.safe.gov.cn/en/2019/0329/1496.html.
- American Enterprise Institute and Heritage Foundation, China Global Investment Tracker, January 2020, https://www.aei.org/china-global-investment-tracker/.
- At time of writing, the number of member countries stands at 143. See People’s Republic of China, Belt and Road Portal, https://eng.yidaiyilu.gov.cn/info/iList.jsp?cat_id=10076.
- Federal Reserve Bank of St. Louis, Total Reserves Excluding Gold for China, December 16, 2019, https://fred.stlouisfed.org/ series/TRESEGCNM052N.
- Chuin-Wei Yap, “How the Journal Calculated Huawei’s State Support,” Wall Street Journal, December 25, 2019, https://www.wsj.com/articles/how-the-journal-calculated-huaweis-state-support-11577280830.