Banking on capital to go global

Since China will soon become a net capital exporter, investors and firms must be spurred to explore more lucrative markets abroad

China is expected to become a net capital exporter for the first time in its history, as its outbound direct investment is poised to cross $120 billion this year, according to the Ministry of Commerce.

Given that the actual use of foreign investment by China in the first nine months was $87.36 billion, a drop of 1.4 percent year-on-year - in sharp contrast to the 21.6 percent increase in its outward direct investment during the same period - its overseas direct investment is expected to exceed the investment in the opposite direction for the whole of 2014.

The ministry's September figures indicate China's outward direct investment reached a record $107.84 billion in 2013, an increase of 22.8 percent year-on-year, the first $100-billion-plus overseas direct investment and a nearly 40-fold increase in 12 years. Indeed, China has maintained its third-largest overseas investor status for two years.

By the end of last year, about 15,300 Chinese investors had set up 25,400 investment entities in 184 countries and regions, with an accumulated net investment of $660.48 billion. In 2013, foreign investors also injected a record $118 billion in indirect investment in China, equivalent to China's outward investment. Despite the fall in the growth of inbound direct investment in recent years, China's outbound investment is still estimated to grow by 10 percent a year in the next decade, which, in turn, s expected to raise the amount of such investment to more than $200 billion in 2020.

A country must be a big capital exporter if it wants to be a real economic power - the United States, the United Kingdom, Germany and Japan are apt examples of such countries. After more than three decades of net capital inflow, China overtook Japan to become the largest foreign exchange reserve holder in 2006. China's GDP became the second largest in the world in 2013, the year that also saw it becoming the largest trading country. These developments mean that Chinese enterprises and capital have to increasingly explore global markets for investment opportunities.

China needs to be a net capital exporter not only to integrate its economy into the global system, but also to create global investment opportunities to raise the value of its capital.

China has been the world's leading foreign exchange reserve holder and the largest creditor of the United States since 2006. But it is the US, the world's largest debtor, not China, that has harvested handsome returns from its outward investment. The accumulation of China's colossal foreign exchange reserves of $4 trillion has not stopped it from increasing its outward investment at a fast pace. But because of a high return rate for foreign capital in China and narrow channels for investment of its huge foreign exchange reserves, the return on China's outbound investment was minus $57.4 billion in 2012.

Compared with the size of its economy, the influence many of its industries exert on the world economy and its status as a trading giant, China's outward investment is low; in fact, it is highly disproportionate to its overall economic clout. Despite having the third-largest overseas direct investment - behind only the US and Germany - China still seems a small player when it comes to its accumulated volume, which accounts for only 6.6 percent of its GDP, compared with the global average of 33 percent.

By 2013, China's accumulated outward investment had reached $660 billion. But despite being the 11th largest in the world and accounting for 2.5 percent of the global total, it was only 10 percent that of the US and 50 percent that of Japan. Like its manufacturing sector, China's capital has not evolved into a force that can influence the global economic pattern.

Besides, the degree of Chinese enterprises' internationalization, too, remains low. According to a China Enterprise Confederation report, the transnationality index, which reflects the extent of a company's overseas business activities, for the top 100 Chinese transnational enterprises was 13.6 percent in 2014. That means about 90 percent of the profit for China's capital comes from the domestic market.

International practices indicate the influence of a country's economy does not depend on how many products it can export but on the extent of its capital exports and, through that, its ability to influence the making of global economic rules and trading pattern.

After three decades of fast-paced growth, China's economy is cooling down and undergoing structural transformation. Therefore, efforts should be made to encourage Chinese capital and enterprises to explore markets overseas in order to put the country in an advantageous position in global industrial and capital redistribution.

The author is a Beijing-based researcher in economics.

(China Daily 11/01/2014 page5)