China is the largest foreign holder of U.S. public debt. In just the last few years, it has also invested roughly $100 billion in Africa, the Middle East, and elsewhere.
The financial crisis highlights the role of Chinese bond investment in the United States and prompts questions about whether Chinese investment in equities or other assets in addition would be helpful. Some in Congress are concerned that China will stop buying American bonds. At the same time, there is alarm over the extension of Chinese investment beyond bonds in the U.S. and around the globe.
Chief among the questions raised by China's outward investment is its intent. The objectives of the key actors involved are largely opaque. Many analysts believe that the investment is driven by political, not commercial, goals. This possibility is troubling in light of the massive financial resources at China's disposal.
This paper is a step toward providing open-source information to help evaluate Chinese foreign investment based on facts, both reassuring and disturbing. Using in part an original Heritage Foundation dataset on recent Chinese foreign non-bond investment, the paper begins to answer the questions of why, who, where, and how much the People's Republic of China (PRC) invests overseas, as well as why there has not been even more investment.
Many of the answers to these questions may be surprising. For example, China is not particularly interested in the highest return on its outlays. Also, the much-touted China Investment Corporation is in fact a secondary player, with the State Administration for Foreign Exchange (SAFE) dominant. And while SAFE is the single largest global investor at close to $2 trillion, total Chinese outward investment is still dwarfed by total American outward investment.
As is well known, China buys principally U.S. bonds. In terms of global non-bond spending, acquisitions in metals have recently been a bit larger than acquisitions in energy. Australia is the biggest national target for non-bond spending, there is significant planned spending in sub-Saharan Africa, and the Arab world has received comparatively little.
Perhaps a final surprise is that the PRC's involvement in global capital markets could be significantly larger. The Heritage dataset includes approximately $100 billion in troubled transactions, impeded by market conditions, foreign opposition, or a veto from Beijing itself. The expansion of Chinese foreign investment is, therefore, not inevitable and its form can be shaped from both within and without.
Despite these obstacles, Chinese foreign investment is very likely to continue in large quantities. Bond investment is almost sure to be much larger than non-bond investment. Mineral resources will continue to predominate within non-bond investment, but emergence from the financial crisis and accumulated experience will encourage a broader scope.
If Beijing does not enhance the transparency of its outward investment and permit greater foreign access to Chinese assets, developed markets could be walled off and competition for assets in the developing world politicized. In the worst case, violation by a Chinese state firm of American or international sanctions could trigger an economic clash.
In the best case, China offers both greater transparency in outward investment and greater reciprocity for inward investment, addressing both major foreign objections. Then, Chinese outward investment could take off, especially in non-bond outlays. Chinese foreign spending could grow to constitute a third wave, following petrodollars in the 1970s and Japanese spending in the 1980s.
Even if Chinese foreign non-bond investment increases only mildly, it will sharpen competition for global assets. American policymakers face known costs in attempting to manage China's entry into the global economy on free-market principles. An attempt to foil that entry, however, would be far more costly.
Given that foreign investment by the PRC should continue, the main problem is lack of transparency. China has embraced the Generally Accepted Principles and Practices for Sovereign Wealth (GAPP) guided by the International Monetary Fund (IMF), but has a great deal of work to do to make its outward-investment practice transparent. Less pressing, but potentially helpful, is additional transparency on the American side to welcome legitimate Chinese investment as well as negotiate with the PRC for greater market access.
An ideal course for American policy includes the following actions:
- The Department of the Treasury and U.S. Trade Representative
(USTR) should insist during global talks that SAFE and other
Chinese government arms, not only China Investment Corporation
(CIC), be considered sovereign wealth funds subject to
international voluntary best practices now being created.
- The Committee on Foreign Investment in the United States
(CFIUS) and other government review processes should be made as
transparent as possible while preserving flexibility in the review
process. The criteria by which foreign investment is judged should
be set before a submission, rather than created after the
- USTR and CFIUS should coordinate to ensure that negotiators
have information necessary to make reciprocity an explicit factor
in USTR market-access negotiations.
- The Department of the Treasury should work to ensure the success of multilateral efforts to compile better information on the activities of sovereign wealth funds around the globe, not only in the more developed economies.
Derek Scissors is Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation.