A CLOSER LOOK AT CHINA’S OVERSEAS INVESTMENT

Emerging Actors in Development Finance

IntroductionSouth-South financial flows are changing the nature of development finance and assistance. Between 2009 and 2010, two Chinese state-owned banks lent more money to other developing countries than the World Bank.[1] During the recent financial crisis, Brazil invested $10 billion in International Monetary Fund bonds, a striking example of the country’s transformation from a debtor to creditor.[2]

Expanding South-South trade and investment provides welcome and needed sources of capital for countries in Africa, Asia, and Latin America. At the same time, these financial flows – coupled with the emergence of powerful financial actors from China, India, Brazil, and other economies – may pose new challenges for environmental and social sustainability.

Topics

The Changing Global Landscape 4

China Goes Global: OFDI & Lending by Financial Institutions7

Regional Example: China in Africa15

Sustainable Financing and Investment17

WRI’s Work & Influence Strategy19

A New Geography of Growth

Relative shifts in economic power and political influence are reconfiguring the global context for sustainable development policy. We are currently witnessing what the OECD terms “the new geography of growth” – “a 20-year structural transformation of the global economy in which the world’s economic centre of gravity has moved towards the East and South.”  Trends indicate that developing economies will “account for 57% of world GDP by 2030.” [3]

Despite sharp differences among members, the G-20 is supplanting the G-8 as the primary vehicle for global economic policy coordination.[4] Large emerging market economies are defining their own approaches to development cooperation, governance issues, and environmental and social sustainability outside of many existing normative frameworks.

South-South trade is clearly a dynamic force in the global economy. While world trade expanded four-fold between 1990-2008, South-South trade grew more than ten times. Developing countries now account for around 37% of global trade, with South-South flows making up about half of that total (19% of global trade).[5] In 2009, for example, China surpassed the US as Africa’s largest trading partner. [6] Sino-Africa trade volumes exceeded 166 billion US dollars in 2011. [7]

Expanding South-South Trade

Topics

The Changing Global Landscape 4

China Goes Global: OFDI & Banking Lending 7

Regional Example: China in Africa15

Sustainable Financing17

WRI’s Work & Influence Strategy19

China Goes Global: OFDIS

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Regional Comparison of China’s OFDI Stock (2005 -2010)

China’s outward foreign direct investment (OFDI) flows increased from under $1 billion in 2000 to $74.6 billion in 2011, while its stock of OFDI grew from nearly $27 billion in 2000 to over $424 billion in 2011.[8]

As reported by the Chinese Ministry of Commerce (MOFCOM), China’s OFDI stock is largely concentrated in Asia, although investment has increased significantly in Latin America and Africa over the past five years. However, this figure assigns flows through the offshore centers solely to the corresponding region, leading to possibly an overestimation of OFDI in Asia and Latin America.

Chinese OFDI DataHowever, the MOFCOM figure assigns flows through the offshore centers solely to the corresponding region, leading to possibly an overestimation of OFDI in Asia and Latin America. The U.S.-based Heritage Foundation investigates these discrepancies by collecting information on individual investment projects. Whereas MOFCOM designates Latin America as the second largest OFDI destination, Heritage ranks it behind all other regions except Africa, with high level of investment in Asia, Australia, North America and Europe. In 2010 whereas MOFCOM reports $2.11 billion in African OFDI, Heritage records $7.11 billion.[9].

Aggregated Data on China’s Outward Direct Investments over USD 100 Million, 2005 – 2011 (USD Billion)Data Source: Heritage Foundation

North America:

49.16

Latin America: 48.83

Europe: 42.66

Africa: 37.21 Australia:

41.52

Asia: 86.69

Enabling PoliciesChina’s decades-long rapid growth has made it the second largest economy in the world, surpassing Japan in mid-2010.[9]

A major factor contributing to China’s growth has been its integration into the global economy, a catalytic step in the country’s economic development. China’s transformation from “isolated” to “globalized” is a direct result of the government’s desire to spur and maintain lasting growth of its economy.[10]

 

In 2001, China’s tenth Five-Year Plan (2001-2005) formalized the directive for Chinese companies to “Go Global,” a strategy to gain access to needed resources, stimulate the export of goods, and grow China’s multinational businesses and brands. Beijing has provided diplomatic support, favorable tax exemptions, insurance, and, critically, access to low-cost finance.

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China's Growing OFDI and policy drivers

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2001:China joins the WTO, in advance of which China made great Progress in liberalizing its trade,Financial and investment regimes

2002: Go Global strategy confirmed at CCP 16th congress

1997: 抓大放小 (zhua da fang xiao, grasping the large andletting groof the small) Declarationat CCP 15th

Congress lays the foundationfor the modernChinese MNC

2004: MOFCOM releases Guidelines For Investment in Overseas Countries Industries; Regulatory process Further reformed, forex controls eases in his speech at the 10th National People’s Congress, Premier Wen Jiabao advocates speeding up of Go Global and more effective coordination of Chinese investments abroad

2009:May: new regulatory frameworkImplemented to further ease anddecentralize approval procedures

1992:Deng Xiaoping’s ‘Southern tour to promote overseas investment’

2006: Go Global strategy emphasized again in 11th 5 Year Plan

China Goes Global: Bank LendingRather than seeking financing primarily through the capital markets, Chinese companies obtain 80-90% of their funding from Chinese banks.[11] As part of the Go Global strategy, China’s state-owned policy banks, largely the Export-Import Bank of China (China Exim) and the China Development Bank (CDB), were mobilized to facilitate international capital flows and support mergers and acquisitions of foreign companies. Although not the largest in terms of total assets and domestic investment, China Exim Bank and CDB play the leading role in overseas investment. Other state-owned banks, such as the export and credit insurance company (Sinosure), have also contributed on a lesser scale.

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Relative lending comparison of public financial institutions 2010

China Goes Global: China Export Import Bank

The Export-Import Bank of China (China Exim) was formed in 1994 along with two other “policy banks,” the China Development Bank and the Agricultural Development Bank of China, “as tools of the government, allowing Beijing to allocate preferential or targeted finance through a hybrid of planning and market means.”[12]As a policy bank, China Exim finances and implements the government’s trade and overseas investment policies.[13] The Bank is under the direct leadership of the State Council.

China Exim has exhibited phenomenal growth over the past decade. It has increased lending volumes by 30% to 40% year-on-year – an indicator of the accelerating nature of the “Go Global” strategy. China Exim is by far the largest export credit agency in the world. It approved over $70 billion in new lending in 2009, more than U.S. Exim, JBIC, and BNDES Exim combined.

China Goes Global: China Development Bank

Formed in 1994 along with China ExIm, China Development Bank (CDB) is a state-owned policy bank that provides financing to key infrastructure projects and industries in China. It also supports the “Go Global” strategy by facilitating China’s cross-border investment.[14]

In 2008, CDB was restructured into a commercial joint stock bank, but remains under state control. CDB is now the fifth largest bank in China by total assets, equal to US$810 billion in 2010.[15]

CDB’s business presence has extended to 116 economies across the globe. By the end of 2011, 15.86% of CDB’s outstanding loans is outside mainland China.[16] A number of large, international energy projects stands out in the portfolio.

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CDB’s Total Assets

Source: CDB annual report 2011

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Loan for Resources Deals

China has executed a number of resources-for-infrastructure deals in recent years, backed not just by oil but also bauxite, chromium, iron ore, and even cocoa. In these deals, China provides loans for infrastructure development, which are repaid by delivery or sales of the borrowing country’s natural resources. This structure is used most commonly when a country does not have the financial capacity to guarantee and/or service a loan commitment but has a natural resource (such as oil) to offer as repayment. This approach follows a long history of natural resource-based transactions and is far from unique to China.

Structure of Loan-for-Resources Deal

Topics

The Changing Global Landscape 4

China Goes Global: OFDI & Bank Lending 7

Regional Example: China in Africa15

Sustainable Financing17

WRI’s Work & Influence Strategy19

Growing Investment and Trade in AfricaChina’s investment position in Africa is accelerating rapidly, rising from an OFDI stock of less than $500 million in 2003 to $13.04 billion in 2010.[17] Reportedly more than 7,900 Chinese enterprises are now established in Africa, with businesses ranging from home appliances, textiles, clothing, infrastructure, power generation, and natural resource extraction.[18] Returns on investment by Chinese companies in Africa are reportedly higher than in other developing countries: from 24%-30% compared to between 16%-18%, according to the Ministry of Foreign Affairs.[19]

Africa as a region has increased its rather minor share of China’s total trade from 2% in 2001 to 4.5% in 2011.[20] While China’s volume of trade with other regions is far more significant, the opposite is true for many African countries: China has become Africa’s largest export destination and the second largest source of imported goods. South Africa recently announced that it would prioritize China and India as these countries are now its biggest export markets.[21]

South AfricaNigeriaZambiaAlgeria

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EthiopiaAngolaEgypt

Tanzania

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(2010)

USD MillionSource: MOFCOM OFDI Bulletin 2010

Imports from Africa

The bulk of China’s imports from Africa originate from relatively few countries. While investments are spread across 48 African countries, over 70% of Chinese OFDI stock in 2008 was concentrated in five resource rich countries: South Africa, Nigeria, Zambia, Sudan, and Algeria.

However, by international comparison, China’s investments in Africa’s natural resources match well-established patterns. 50%-80% percent of all FDI to Africa goes to natural resource exploitation.[22]Despite the rapid scale-up in Chinese investment in Africa, most foreign direct investment (FDI) in Africa originates from OECD countries – 91.6% of total inward FDI stock in Africa in 2008.[23]Similarly, the bulk of U.S. imports from Africa are sourced from relatively few resource rich countries; 77% of total imports in 2009 came from five countries: Nigeria (30.5%), Algeria (17.3%), Angola (15%,) South Africa (9.2%), and Congo-B. (4.9%).[24] The top three African oil exporters – Nigeria, Angola, Algeria for the U.S. and Angola, Sudan, Libya for China – provided a quarter of each country’s total imports (27.6% or the U.S., 25.1% for China).

Topics

The Changing Global Landscape 4

China Goes Global: OFDI & Bank Lending 7

Regional Example: China in Africa15

Sustainable Financing17

WRI’s Work & Influence Strategy19

Chinese authorities have simplified regulations to facilitate investment abroad. Three governmental bodies – MOFCOM, SAFE, and the NDRC – have primary but not sole oversight of China’s overseas investment (separate from foreign assistance) regime. MOFCOM is responsible for developing regulations for outbound investment and for coordinating activities with commercial counselors posted at Chinese embassies. SAFE issued new regulations in 2009 that reduced qualification requirements

for offshore foreign currency lending and expanded the sources of funds for lending (including access to government foreign exchange reserves).[25] The NDRC reviews large outbound investments to ensure they align with the country’s political interest and overall economic development policy.

In addition, CBRC and SASAC also play an oversight role. Risk management guidelines issued by the CBRC in 2008 opened the door for Chinese banks to provide loans for merger and acquisition purposes (previously forbidden under a 1996 regulation.) They require “banks to perform due diligence regarding compliance, operational, and commercial risks relating to the parties and the transaction.”[26] MOFCOM, CSRC, CBRC and PBoC have all worked with MEP to formulate relevant environmental policies.

Regulating OFDI

Environmental and Social Standards for Foreign InvestmentsDomestically, strengthened environmental and information disclosure standardsInternationally, Developing guidelines for overseas lending and investments

2004 2010200820072005

China’s Emerging E&S Standards for Banks & Enterprises’ Investment

2004Brief environmentalguidelines by China ExIm:Impact assessments/monitoring/project impactsreview required

2005China DevelopmentBank states it has anenvironment policy

2007/2008Corporate socialresponsibilityguidelines issuedfor banks andstate-ownedenterprises

2007China ExIm significantly expandsenvironmental guidelines

China adopts a Green Credit Policyrestricts lending to pollutingCompanies

Guide on Sustainable OverseasSilviculture by Chinese Enterprisesintroduced standards for activities in forest ecosystems

2008Landmark OpenGovernmentInformationRegulations andMeasures forEnvironmentalInformationDisclosure wentinto effect

Industrial Bankbecame the firstChinese EquatorPrinciple financialinstitution

2010Proposed Guidelinesfor EnvironmentalPractices in ForeignInvestment Activitiesof ChineseEnterprises, requiringcompliance withChinese and hostcountry laws, greatertransparency,communityconsultation, andgrievancemechanisms

2012

2012Introduced new Green Credit Guidelines, calling for improved management of environmental and social risks.

Topics

The Changing Global Landscape 4

China Goes Global: OFDI & Bank Lending 7

Regional Example: China in Africa15

Sustainable Financing17

WRI’s Work & Influence Strategy19

WRI’s Work

WRI’s work on emerging actors in development finance is led by the International Financial Flows and the Environment objective. The goal of this research is to improve the environmental, social, and climate change policies that govern emerging actors’ investments, and to ensure that local communities and civil society organizations impacted by the investments are able to engage with “emerging actors” more effectively. This preliminary research focuses on Chinese and Brazilian overseas investments and begins to look at the growth drivers and geographic trends of those investments.  

A WRI Influence Strategy

Three-linked Influence Strategy

Investor Country (China & Brazil) Strategy

Engage policymakers to develop environmental and social guidelines to govern overseas investments.

Engage companies and financial institutions to develop and implement environmental and social risk management policies.

Build the capacity of local civil society organizations to create demand for stronger environmental and social guidelines.

International Strategy

Enhancing the roles of emerging actors in international and bilateral investment standards setting

Host Country Strategy

Work with host country governments and local civil society organizations to facilitate stronger environmental and social performance among foreign companies

Inform decision-makers of potential environmental and social impacts on the ground

Create enabling

conditions for local

communities to raise

concerns directly

with decision-

makers