China's War of Financial Investments

Daniel Wagner

Security, Asia

China is in the process of beating the West at its own game by identifying what it sees as the West’s “weakness” on the grand chessboard and filling in the gaps.

Consistent with so much about China’s thrust onto the global stage over the past decade, its outward foreign direct investment (OFDI) has grown far faster than OFDI from most other transitional economies. Chinese OFDI is largely politically driven, aimed at achieving specific nationalistic objectives, such as securing natural resources, acquiring strategic assets in key technologies and service industries, and creating national champion companies. China’s approach to OFDI, which is often aggressive and brusque in nature, is increasingly coloring its relationship with recipient nations at all levels of development and income.

Until the year 2000, OFDI from China was negligible. Since then, China has tailored its approach to OFDI based on the relative economic and political strength of the recipient country, in exchange for specific benefits. So, in heavily indebted poor countries (HIPCs), China tends to offer to build infrastructure in exchange for the right to access to raw materials. In developing countries, China may offer to help develop an indigenous industry; in emerging markets, it may grant greater access to the Chinese market. In developed countries, it may offer to expand reciprocal agreements related to cross-border investment. In each case, China weighs the relative costs and benefits associated with expanding its relationship with a given country vis-à-vis what it will receive in return.

China’s overall strategy for state-owned-enterprises (SOEs) is to “grasp the large and let go of the small,” aiming to create national champions from large SOEs through extensive government support while giving small and medium-sized SOEs greater exposure to the market. SOE’s receive direct financial support from the government in the form of below-market rate loans, direct payments, and other subsidies associated with official aid programs. The China Development Bank, China Export and Import Bank, and Sinosure (China’s national political risk insurer) are the primary government organs that provide such support, although other state-owned banks and specially created funds also provide backing.