How Much is China Investing?
Available data provide only a partial answer to the question of exactly how much China is spending overseas. We know that China's acquisition of overseas assets using accumulated foreign currency, though extremely large, is far from the largest in the world. US portfolio holdings overseas stood at USD 7.2 trillion at the end of 2007, having expanded by USD 1.2 trillion in 2007 alone. In comparison, China's official reserves stood at USD 1.53 trillion in 2007, or less than one-fourth of the US total. Official reserves increased by USD 460 billion in 2007. In addition, foreign currency holdings in the hands of CIC and state banks rose by as much as USD 160 billion. Combined with official reserves, that is still only about half of American investment for 2007.
Most Reserves Held in US Bonds
A relatively small proportion of foreign currency is held for any length of time as actual cash. Much, perhaps even most, of China's reserves are held in US bonds and China is the largest foreign bond investor in the United States. With so much money on the move, China's positions are fluid. Chinese US Treasury bond holdings were USD 727 billion at the end of December 2008, and holdings of US government agency debt were approximately USD 527 billion at the end of June 2008 (the latest figure available). Treasuries are more closely watched but, as foreign money poured into China from trade and investment, return purchases of US agency debt soared in the middle of this decade. Investment categories also include corporate bonds and positions in the money market. Chinese holdings of these types in the United States were less than USD 60 billion combined at the end of June 2008.
During the financial crisis, agency debt, corporate debt and money market positions have all fallen in value, and growth in the value of China's reserves slowed, but Chinese purchases of US treasuries increased. Total Chinese holdings of US government debt are over USD 1.1 trillion. In the current environment, this is barely one year's worth of US government bond issues. It does understate the true amount, since some investment attributed to offshore sources, such as the Caymans, is Chinese in origin. On the other side of the Pacific, the Chinese bond market is immature, and American bond holdings in the PRC are scarcely one-tenth of one per cent the size of total Chinese holdings in the United States.
The value of Chinese investment in US equities in mid-2008 was USD 100 billion and may not have increased from that point, despite fresh investment, given the magnitude of stock losses. This constitutes a negligible amount of the US equities market but is comparable to the US equity position in China. US holdings of Chinese stocks were estimated at USD 96 billion, two per cent of market capitalisation, at the end of 2007. It is worth noting, however, that China could become the dominant foreign player in US stocks were it willing and able to shift a portion of its bond investment.
What China calls "outward investment" is the focus of a great deal of foreign attention. Official data are not particularly reliable, especially when first issued. They are categorised into non-financial investment and financial investment, where the former is subject to major revisions and the latter is irregularly reported on and invariably seems far too small. Chinese foreign investment as a global phenomenon, not only aimed at a very small group of countries, was first recognised in 2005. It jumped in 2006, and then flattened out somewhat in 2007 at a level roughly five per cent of the size of outward bond investment. By the end of 2007, excluding bonds, China had invested as much as USD 117 billion overseas, whereby 7,000 domestic entities established 12,000 subsidiaries in 172 countries or customs zones. In 2008, China's outward investment soared past USD 40 billion, or over 9 per cent of outward bond investment.
Despite the leap in 2008, official figures do not appear to have kept up with the pace of activity of the past two years and may again be revised far upward. For 2005 to 2007, the Heritage Foundation dataset is expected to generate smaller totals than Chinese data. And total investment is smaller in 2005. By 2007, however, the Heritage figure shoots past the official number. The gap then widens considerably in the first three quarters of 2008. From 2005 through the third quarter of 2008, Chinese data show USD 93 billion in outward investment. The Heritage total is USD 120 billion. If these data are more accurate -- they could be more accurate while still not being particularly precise -- the stock of all Chinese outward investment at the end of September 2008 may have approached USD 160 billion. In the third quarter, the bulk of the investment was in oil, signalling a return to that market in light of better valuations. The financial crisis deterred activity in the fourth quarter and may do so as well into 2009.
In comparison, American direct investment overseas was many times higher at USD 314 billion in 2007, with accumulated stock at USD 2.8 trillion. US direct investment in China itself was USD 6 billion in 2007, with accumulated stock of USD 28.3 billion. There is no official Chinese figure for direct investment in the US, and American figures, using a different definition, show it as a negligible part of total foreign investment into the United States. Following Chinese practice in surveying foreign investment, 2007 was the most active year yet for Chinese spending in the United States. 2008 was weaker than 2007 but still the second-strongest year on record. At the end of 2007, the stock of Chinese non-bond investment in the United States was much smaller than US non-bond investment in the PRC, but this is now changing.
Where is China Investing?
Of particular interest in international affairs is where China is spending. SAFE's lack of transparency in particular and the growing role of offshore financial centres undermine the value of Chinese figures. It is clear that the PRC's bond investment is heavily focused on the United States, but it is less clear how much has been invested, on a final basis, in other markets. Reported Chinese investment in Japan is much, much smaller than in the United States, at USD 65.6 billion at the end of June 2008. The same applies to other major investment targets, such as Germany, where reported Chinese investment is much smaller than in the United States, even when granted that it is understated in light of routing through offshore centres.
The United States and Australia
While bond investment is clouded, there is unofficial additional information on China's global investment in equities, direct investment in physical assets, and large-scale engineering and construction work. Equity stakes are naturally concentrated in more developed economies where attractive companies are based. Direct acquisition of physical assets and major contracts are widely distributed. The expansion of Chinese business into Africa and the Middle East has received attention, but Australia is the single largest investment target.
Chinese non-bond investment in the United States through the third quarter of 2008 features 11 large transactions involving more than USD 15 billion, chiefly overpayment for financial partnerships such as SAFE providing USD 2.5 billion in capitalisation to a fund created by TPG (the former Texas-Pacific Group). While this is trivial compared to the size of the American financial sector, the first large investment did not occur until May 2007, so activity has picked up recently. There have also been smaller technology investments, such as Wuxi PharmaTech buying AppTec Lab Services for USD 150 million. The rest of the Western Hemisphere drew only USD 7 billion, chiefly to buy Canadian-owned assets in Latin America.
The United States is not the largest target of Chinese non-bond investment; rather, it is Australia. The Heritage Foundation dataset contains transactions worth over USD 20 billion, spearheaded by the USD 12.8 billion from Chalco. There were also several billion Dollars in large transactions from 2003 to 2004. The trend is steeply upward. The value of Chinese applications to the Australian Foreign Investment Review Board between November 2007 and June 2008 exceeded USD 28 billion, compared to a total of USD 8.5 billion in fiscal years 2006 and 2007 combined.
Asia, Africa and Europe
East Asia saw transactions valued at USD 13 billion, including more than USD 6 billion in engineering contracts, led by Singapore, which is also a leading site for small-scale Chinese equities purchases. West Asia, including Iran, the Russian Federation, and the Indian subcontinent attracted over USD 22 billion in investment, chiefly in energy. The Arab world drew only USD 7 billion in investment but, tellingly, twice that in large engineering and construction contracts. Even the latter did not emphasise energy, but transport. Some of the clamour over China's acquisition of energy assets is misplaced.
On the other hand, sub-Saharan Africa has received considerable attention as an outlet for Chinese investment and it drew USD 25 billion, led by the Democratic Republic of Congo and Nigeria. This number may be something of an understatement, since the 2005 start for the dataset neglects considerable Chinese investment in Sudan. Details on the investments are especially difficult to obtain and recent Dollar figures may be inflated for political reasons as the amounts are not being spent at present. In addition, a larger portion of outlays than elsewhere is attributable to concessionary loan financing.
Europe received USD 15 billion in Chinese investment as well as a very large port development contract in Greece. In addition, hidden investments in Britain have recently been uncovered. The Heritage dataset identifies only five large transactions valued at USD 6 billion in the United Kingdom, led by policy lender China Development Bank. However, local media in September discovered small stakes accumulated by SAFE in more than 50 British companies. The total value of SAFE's stakes was calculated at more than USD 16 billion.
Part 3 of this series will look at foreign and domestic barriers to Chinese investment overseas.
Derek Scissors is a research fellow in Asia economic policy at the Heritage Foundation.
First Appeared in BusinessForum China