By Megan Bowman (CLMR Research Fellow) and Lisa Soo (CLMR intern).

SYDNEY: 14 October 2013 - Having already overtaken Japan as the world’s second largest economy, Chinese outbound direct investment (ODI) is predicted to reach US$100 billion annually by 2016. This wave of investment and China’s position as a key global state capital actor have been regarded with some concern by media and politicians alike whose attention is captured by the potential political nature of state owned enterprises (SOEs). Nonetheless, when analysing Chinese ODI empirical data in conjunction with recent international agribusiness predictions, it is arguable that China’s investment strategy goes beyond simply seeking political purchase or even higher financial returns. Rather, China’s increasing populace and concomitant diminishing supply warrants coordinated procurement of natural resources and commodities in order to ensure a continuous supply of necessary imports.

China currently holds the most bilateral investment treaties (BITs) in the world, an investment practice that has assisted global penetration of Chinese ODI. Another modality of Chinese investment is the merger and acquisition (M&A) activity of SOEs. Indeed, in 2009, SOE investments accounted for approximately 70% of China’s ODI stock. Data from MOFCOM and The Heritage Foundation show that Australia and the U.S. have been leading recipients of Chinese ODI since 2005, with energy, power and metals accounting for over 70% of Chinese ODI. Data from Australian law firm Clayton Utz (2013) support the notion that China’s strategic focus is on securing supply to underlying commodities, with 78% of completed Chinese investments in Australia from January 2005 to December 2012 found to be for this purpose. Moreover, Chinese investment in Australia occurs predominantly in ‘boom’ sectors (i.e. mining, resources, energy & power), with emerging diversification towards energy and agriculture. Indeed, the mining sector was the largest recipient in Australia, receiving 73% of all Chinese investment from 2006-2012. However, while natural resources and mining sector investments dominate the Australia-China FDI landscape, industry experts predict that the agriculture and real estate sectors will become increasingly prominent targets for Chinese investment.

These empirics reflect Chinese government policy, namely the 11^th Five-Year plan (2006-2010), the Policy on Mineral Resources (2003), and Policies for Development of Iron and Steel Industry (2005). In the 11^th Five-Year Plan, China’s energy policy approach focused on developing domestic supply as the primary means of meeting energy demands, supplemented by foreign energy sources. The 2003 and 2005 policies give government support to Chinese investments in foreign mining assets. As a result, there was a surge in global resources investment by China during this timeframe, with the prominent modality of Chinese foreign investment being SOEs.

The 12^th Five-Year Plan (2011-2015), which stipulates increased international cooperation in the agricultural sector and the development of overseas engineering contracts, is consistent with recent international predictions and observations that China needs to secure supply for its burgeoning domestic demand. The OECD-FAO Agricultural Outlook 2013-2022 report makes clear the increasing symbiosis between global markets and China’s appetite and output. The Report predicts that China should remain self-sufficient in main food crops, but that there will be serious constraints to any further expansion of agricultural production due to a rapidly growing and urbanising population. An impact on global food patterns in the form of higher foreign imports is therefore expected as a direct consequence of reduced domestic supply and increased domestic demand.

A prime example of the emerging opportunities this presents for Western producers is the Smithfield and Shuanghui merger agreement. As reported previously on the CLMR Portal by Megan Bowman, the decision of the U.S. Committee on Foreign Investment (CFIUS) to approve the Smithfield-Shuanghui takeover on 6 September 2013 lends support to the OECD/FAO Report that markets will become increasingly open and integrated within the decade. This is to be starkly contrasted with the strong concerns voiced around Chinese acquisitions back in 2004-2005 regarding such transactions as CNOOC’s failed bid for Unocal in the U.S. (2005) and Beijing Lenovo’s acquisition of IBM’s PC unit (2004-05).

Thus, a challenge for commentators of state capital is to discern and appreciate the impacts of three factors when ascribing political and/or nefarious motives to SOEs. These factors are: (1) China’s increasing need to secure supply for its domestic demand; (2) the tensions that potentially exist between the goals of central and provincial state entities in China which add complexity to SOE investment behaviour; and (3) the possibility that SOEs may be exercising independence from the government entities that formally own or control them. On this third point, there is some evidence to suggest that the Chinese ‘Going Out’ strategy is being led by Chinese firms rather than central government, despite the Chinese State-owned Assets Supervision and Administration Commission (SASAC) framework for SOEs. For example, the CNOOC bid for Unocal in 2005 occurred in the face of central government opposition, and multiple external parties are now involved in Chinese SOE investment decision-making abroad which necessarily dilutes strict government control. Indeed, in Australia, statistics show that Chinese investors rely heavily on local talent to manage Australian companies in which the investor gains a controlling interest.

These observations can thus allow one to make a compelling argument that China is behaving like a nation that seeks to secure resources, energy, and food for growing domestic demand that will soon far exceed domestic supply. As CLMR Research Fellow Megan Bowman, Senior Research Fellow George Gilligan and CLMR Director Justin O’Brien evidence in a recent CLMR-CIFR working paper, such developments are consistent with China’s long-standing traditions of trade and ODI, albeit with different emphases over different decades.

CLMR acknowledges the financial support of the Centre for International Finance and Regulation (for project Enter the Dragon: Foreign Direct Investment and Capital Markets, E002), which is funded by the Commonwealth of Australia and NSW State Government and other consortium members (see www.cifr.edu.au).