China Research

Kina – sämre finansiella förutsättningar för investeringar utomlands (FDI)

Sammanfattning / Summary in Swedish

# På senare tid har det utvecklats en hel del oro över de kinesiska direktinvesteringarna (FDI) i vår del av världen. Man befarar främst ett för snabbt växande kinesiskt inflytande på den egna hemmamarknaden och på de viktigaste exportmarknaderna. FDI-statistik visar emellertid att siffrorna för den faktiska kinesiska FDI-utvecklingen utanför Kina alltjämt ter sig klart mindre skräckinjagande än vad tongångarna i den offentliga debatten återspeglar.

# Utvecklingen av den kinesiska bytesbalansen borde framöver ägnas mer uppmärksamhet än vad det på bred front varit fallet under det gångna årtiondet. Utvecklingen av bytesbalansen spelar en avgörande roll vad gäller den kinesiska potentialen för framtida FDI-satsningar. Det aktuella läget ser klart mindre lovande ut för kineserna än vad vi vant oss vid under rätt många år.

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The analysis of a balance of payments (bop) receives clearly less (careful) analytical focus these days than ten or twenty years ago. The reasons for this development are not easy to single out. One reason may have been that global trade tensions until Donald Trump’s takeover received decreasing attention by global (financial) markets, policymakers and papers or articles – and that bop problems indeed became less acute and/or irritating.

More recently, however, things started to be reversed – mainly triggered by the American president and his hostile trade position against China and to a (still) milder extent against the EU (Germany). These tensions should indeed provoke a better understanding and practical application of bop studies.

Where does the money for Chinese outgoing FDI come from?

In general terms, there are only a few ways for a country to create foreign money for so-called direct investments outside China. Fresh foreign money can be made available

– by attracting new FDI (normally the best way as the invested money usually comes to stay),

– by borrowing money in foreign currency (but an ever increasing foreign debt hurts later on),

– by selling stocks and bonds to abroad (risky as foreigners may decide on sudden sales),

– by selling foreign currency from the own reserves (cannot last for a long time).

However, one can assume that the Chinese preferably would like to return to reasonable surpluses in the current account and to persisting good inflows of FDI to China for being able to make more strategically important investments abroad. Is this a realistic objective?

Are German (Western) concerns about Chinese FDI exaggerated?

In Germany and quite a number of other Western countries doubts about Chinese FDI have become more noisy. However – at least so far – such doubts are not confirmed by statistics, particularly when it comes to the number of different new FDI projects. Obviously, Chinese FDI in Germany represent mostly a limited number of larger FDI – but they are not broadly spread (se IfW, Kiel, 2019, April).

Another issue in this context remains more or less undiscussed – China’s strongly weakening current account. Through many years, China noted remarkable surpluses – with a record at 10.1 % in 2007. In 2018, however, the current account came in close to zero (+0.4 % of GDP). This quite weak result has certainly to a high extent been caused by trade protectionism and a still lagging development of new competitive products for exports. Thus, there may be both temporary and structural components in the the nowadays more or less balanced current account.

The outlook – less Chinese money for FDI around the world

China’s foreign trade faces currently very tough challenges and will continue to do so in the foreseeable future. These challenges are both linked to international political developments and domestic reform achievements. In this latter respect, both exports of goods and services need to be modified and modernized, and imports substantially substituted by domestic production; all this according to textbooks for getting back on track for a stronger balance on current account and improved new resources for future FDI. As indicated above, borrowing heavily abroad for FDI in other countries is certainly only a short-term option. Creating major capital inflows to China by attracting high amounts of portfolio investments from other countries should be regarded as risky and assumes far-reaching further financial reforms and deregulations of the capital balance (the counterpart of the balance on current account).

Altogether, all these possible attempts to achieve a rejuvenation of the current account balance need time to become successful. With current conditions, the outlook for the Chinese current account balance seems to be neutral in a sense that no return to major surpluses seems to be in the cards any time soon – but no major deficits either.

Consequently, financial resources for future Chinese FDI in other countries seem to develop less rapidly than in the past. This means that China – if it wants to remain an active investor in other countries – needs also to reorganize its strategy for the already existing financial assets, for example by gradually reducing the big share of American bonds and t-bills in Chinese portfolios.

Obviously, it becomes increasingly important to find the relevant statistics for these assets – and to become familiar with the interpretation of the balance of payments and its sub-balances.

Only a few days ago, I read all the positive comments on the ongoing progress of trade negotiations between the U.S. and China. A trade deal any time soon was almost anticipated by financial markets.

However, new signals and threats are now coming in about the trade war between the U.S. and China which may be even escalating in the near future – developments that I have pointed at several times before in this blog (e.g. on chinaresearch.se from March 18 on the last page).

A big problem is that many analysts neither understand the psychology of the American president sufficiently since he regards China really as a major and unfair competitor nor do they understand the psychology and culture of China very well.

This means indeed poor conditions for interpreting the negotiations between the world’s two largest economies. One should be careful. Trade talks continue to be complicated.