China’s OFDI Finance in Comparative Perspective Pt 2

Chapter 2 Explaining  China’s  High  Lending   One  major  reason  for  China’s  disproportionately  high  OFDI  lending  compared  to   Japan  and  Korea  is  that  the  Chinese  state  has  more  power  to  dictate  how  its   borrowers  use  the  money.  Scholars  have  noted  that  one  major  stumbling  block  for   OFDI  loans  has  been  the  fact  that  governments  cannot  control  the  spending   priorities  of  the  borrowers.  Governments  would  lend  more  if  they  could  ensure  that   the  companies  would  only  use  the  money  for  the  government’s  stated  goals   (acquiring  natural  resources  and  foreign  technology,  increasing  global  market  share   and  perhaps  outsourcing  sunset  industries),  but  they  cannot  prevent  companies   from  using  the  money  to  outsource  or  outcompete  domestic  industries  the   government  wants  to  protect  (Safarian  1993,  Solís  2003b).  While  the  “national   champions”  in  Japan  and  Korea  are  privately  held,  the  Chinese  state  is  lending   primarily  to  statem owned  enterprises  (SOEs).  Through  additional  analysis  of  our   database,  we  found  that  SOEs  receive  95m 97%  of  the  total  finance.  This  agrees   with  Dussel  Peters  (2012),  who  argues  that  SOEs  are  responsible  for  lion’s  share  of   OFDI.     It  is  worth  noting  that  China’s  economic  planners  do  not  exercise  perfect  control   over  its  SOEs.  These  SOEs  range  from  nationally-­‐owned  oil  companies  to  locally-­‐ held  manufacturing  companies.  China  scholars  have  noted  that  the  Chinese   government  is  not  a  monolith  and  it  does  not  retain  perfect  control  over  the  SOEs.  In   fact,  Ye  (forthcoming)  argues  that  SOEs  are  investing  abroad  partly  because  by   reinvesting  company  profits  they  can  avoid  paying  dividends  back  to  the  state.     Still,  it  seems  clear  that  the  Chinese  government  can  control  the  SOEs  more  easily   than  earlier  developmental  states  could  control  their  privately-­‐held  national   champions.  The  Communist  Party  appoints  the  corporate  heads  of  these  state-­‐ owned  companies,  and  accordingly  these  officials  hold  the  government  rank  of   “Minister.”  As  a  result,  they  are  certainly  paying  close  attention  to  government   policy  (Chin  2009).    In  the  case  of  national  SOE,  the  State-­‐Owned  Assets  Supervision   and  Administration  Commission  (SASAC)  owns  a  controlling  portion  of  their  shares   (Reilly  and  Na  2007).  Even  the  private  companies  receiving  3-­‐5%  of  the  OFDI   lending,  including  Huawei  and  Geely,  are  intimately  tied  to  the  state.  Indeed,  foreign   governments  consider  Huawei  to  be  so  close  to  the  Chinese  state  that  they  classified   it  a  national  security  risk.  NDRC,  the  economic  planning  giant  that  signed  the  notice   encouraging  OFDI  lending  with  CHEXIM  in  2004,  holds  veto  power  over  all  major   investment  projects  in  China  today.  It  also  coordinates  China’s  economic   restructuring  process  in  general,  giving  it  immense  power  to  punish  and  reward   companies.  In  general,  this  national  regulatory  framework  has  relaxed  considerably   since  the  beginning  of  the  Go  Abroad  policy  (Reilly  and  Na  2007).    Since  the  Chinese   state  is  lending  to  SOEs  and  close  friends,  it  exercises  far  more  control  over  their   priorities,  and  thus  can  justify  greater  lending.     China’s  SOEs  may  not  be  dictating  the  government’s  lending  priorities,  but  so  far   neither  has  shifted  away  from  natural  resource  acquisition.  We  have  seen  that  over   70%  of  OFDI  lending  goes  to  natural  resource  acquisition.  According  to  data  from   the  Heritage  Foundation,  foreign  direct  investment  by  China’s  SOEs  is  also   concentrated  in  natural  resource  acquisition,  including  46%  in  energy,  22%  in   mining,  and  5%  in  agriculture  (Scissors  2014).  This  does  not  mean  that  the   government  will  continue  to  pattern  its  investment  after  the  existing  makeup  of   China’s  OFDI,  however.  When  Japan  and  Korea  shifted  from  natural  resource   acquisition  to  industrial  adjustment  it  happened  abruptly  rather  than  gradually.   Japan’s  abrupt  shift  responded  to  sudden  global  events,  including  the  collapse  of   Bretton  Woods  and  the  oil  crisis.  China  may  encounter  similar  triggers.  Or  as  China’s   currency  appreciates  and  its  heavy  industry  stagnates,  the  government  may   gradually  choose  to  shift  its  support  to  industrial  adjustment,  technology-­‐seeking   M&A,  tariff-­‐hopping,  or  other  motives.   It  is  unlikely  that  disproportionate  Chinese  lending  results  from  Chinese  companies   needing  greater  state  support  because  of  limited  access  to  private  capital,  as  some   have  suggested.  It  is  true  that  Western  investors  may  have  been  more  comfortable   funding  emerging  Japanese  and  Korean  private  companies  than  they  are  funding   Chinese  SOEs  today.  Korean  companies  in  particular  sought  out  foreign  loans  to   finance  OFDI  in  the  late  1980s  and  1990s.  However,  Kim  (2000)  points  out  that   foreign  finance  allowed  only  the  largest  Korean  business  groups,  or  chaebol,  to   invest  abroad.  Even  the  wealthiest  chaebol  had  to  rely  on  host  country  finance,  a   precarious  situation  that  almost  bankrupted  Daewoo  when  the  Asian  Crisis  hit  in   1999.     Indeed,  we  found  that  69%  of  China’s  OFDI  funding  went  to  companies  that  have   access  to  foreign  capital.  They  sell  shares  on  the  New  York  Stock  Exchange,  issue   international  dollar-­‐  and  Euro-­‐denominated  bonds,  and/or  receive  loans  from   syndicates  of  international  banks.  An  additional  6%  sell  shares  on  the  Hong  Kong   Stock  Exchange.  While  all  of  these  funding  sources  are  dependent  on  both  their   economic  performance  and  the  implicit  backing  from  the  Chinese  government,  their   access  to  foreign  capital  is  at  least  as  good  as  that  of  Korean  and  Japanese  companies   during  equivalent  stages  of  development.  Thus,  China’s  high  OFDI  lending  does  not   appear  to  stem  from  a  need  to  compensate  for  external  funding  constraints.     If  anything,  the  explanation  seems  to  be  the  opposite—that  China  gives  more  OFDI   loans  because  it  has  fewer  funding  constraints,  since  the  central  bank  is  awash  with   savings  and  foreign  exchange  reserves.  China’s  gross  savings  as  a  percent  of  GDP   climbed  from  40%  in  2002  to  51%  in  2012.  Over  the  same  period,  Japan’s  savings   fell  from  25%  to  22%  and  Korea’s  rose  from  30%  to  31%.  In  addition  to  saving  more   than  its  Asian  Miracle  counterparts,  China  has  the  highest  savings  rate  in  the  world.   Its  foreign  exchange  reserves  have  climbed  to  $3.8  trillion,  roughly  three  times  as   high  as  second-­‐place  Japan.  In  2002,  China’s  ratio  of  reserves  to  GDP  was  15%,   compared  to  17%  for  Korea  and  10%  for  Japan.  In  2012,  despite  the  fact  that  China’s   GDP  more  than  quintupled,  its  reserves-­‐to-­‐GDP  ratio  reached  40%,  with  Korea  and   Japan  at  27%  and  22%,  respectively.  This  ratio  is  higher  than  at  any  time  in  its   recent  history,  or  in  the  recent  history  of  Japan  or  Korea.  Its  significance  is  quite   clear  when  one  considers  that  Japan  and  Korea  both  limited  OFDI  lending  until  they   had  amassed  significant  forex  reserves  (Komiya  and  Wakasugi  1991  51;  Kim  2000   109).  OFDI  lending  only  increased  as  the  governments  became  confident  in  their   reserves.  China  has  reached  this  point  much  earlier  in  its  development.  With  this   rapid  accumulation  of  savings  and  reserves,  China  has  had  to  diversify  its   investment  strategy  away  from  U.S.  debt.  In  2007  it  established  China  Investment   Corporation,  a  $500  billion  sovereign  wealth  fund.  But  it  has  also  sought  to  directly   invest  its  dollars  abroad.  It  seems  highly  plausible  that  this  excess  of  foreign  capital   could  explain  the  government’s  proactive  OFDI  efforts,  as  illustrated  by  the  3158%   ratio  of  OFDI  lending  to  total  OFDI.     Conclusion   Numerous  studies  compare  the  policies  behind  China’s  rise  to  those  of  its  “Asian   Miracle”  predecessors,  including  liberalization,  inward  FDI  attraction  and  export   promotion.  In  this  paper,  we  focus  on  the  less  conventional  tool  of  outward  foreign   direct  investment  (OFDI)  promotion.  Starting  in  the  1950s,  Korean  and  Japanese   banks  gave  billions  of  dollars  in  loans  to  “national  champion”  companies  in  order  to   encourage  overseas  investment,  and  until  recently  has  remained  the  global  leader  in   OFDI  lending.  Today,  Chinese  state-­‐owned  banks  are  loaning  billions  to  state-­‐owned   companies  to  invest  abroad  as  part  of  the  government’s  Go  Global  policy.  By   cataloguing  loans  to  China’s  leading  companies,  we  estimate  the  total  value  of   China’s  OFDI  lending  from  2002-­‐2012  at  $140  billion.  This  is  remarkably  close  to   Japanese  and  Korean  OFDI  lending  as  a  percentage  of  GDP  during  the  same  period.   As  a  percentage  of  total  OFDI,  though,  China’s  lending  is  roughly  55%  higher,  31%   compared  to  under  20%  for  Japan  and  Korea.  It  is  higher  than  Japan’s  most   concentrated  lending  during  industrialization.  It  appears  that  Chinese  development   banks  are  pushing  OFDI  more  proactively  than  Japan  ever  did.  Japan’s  lending   history  suggests  that  increasing  OFDI  lending  does  increase  OFDI.  Thus,  as  more   companies  follow  the  Chinese  state’s  enthusiastic  lead,  we  expect  Chinese  OFDI  to   greatly  increase.  The  two  chief  lenders  are  China  Development  Bank  (CDB)  and   China  Export-­‐Import  Bank  (CHEXIM),  “policy  banks”  created  to  support  government   policy  rather  than  to  attain  commercial  profits.  Over  95%  of  the  loans  go  to  China’s   SOEs  rather  than  private  companies.  China’s  OFDI  loans  bear  interest  rates  that  are   roughly  equal,  or  if  anything  higher,  compared  to  those  of  Japan.     In  terms  of  motives,  scholars  have  suggested  that  in  the  case  of  Japan,  the  loans   were  designed  first  to  acquire  primary  resources,  then  to  outsource  dying   industries,  and  finally  to  enter  foreign  markets  and  gain  access  to  advanced   technology.  The  Chinese  government  and  numerous  scholars  agree  that  China   encourages  OFDI  for  all  of  these  motives  except  for  outsourcing.  These  scholars  base   their  arguments  about  the  government’s  motives  on  OFDI  figures,  which  represent   the  priorities  of  China’s  companies,  not  of  the  government.  We  argue  that  the  state’s   own  OFDI  lending  is  a  better  measure  of  its  motives.  We  use  our  OFDI  loan  database   to  evaluate  both  the  sectors  and  motives  behind  China’s  OFDI  lending.  We  find  that   the  mining  and  oil  sector  received  80%,  followed  by  infrastructure  at  12%  and   manufacturing  at  4%.  In  terms  of  motives,  natural  resource  acquisition  comprised   81%  of  the  loans,  followed  by  15%  for  market  entry  and  4%  for  advanced   technology.  These  breakdowns  show  that  China  seeks  to  secure  resources  far  more   single-­‐mindedly  than  either  Japan  or  Korea.  Also,  China’s  market  entry  has  more  to   do  with  developing  power  project  expertise  and  supporting  energy  exports  than  it   does  with  tariff-­‐hopping,  unlike  Japan  and  Korea.  Finally,  China’s  M&A  loans  for   advanced  technology  bypass  the  expensive  foreign  licensing  process  that  Japanese   and  Korean  firms  underwent.       We  note  two  major  reasons  for  China’s  high  (31%)  ratio  of  OFDI  lending  to  total   OFDI.  First,  China  has  a  greater  incentive  to  give  OFDI  loans  because  it  greater  has   more  power  to  dictate  how  its  borrowers  use  the  money.  Second,  China  has  a   greater  capacity  to  give  OFDI  loans  because  it  has  significantly  higher  savings  and   foreign  exchange  reserves.   Appendix  I:  Complete  list  of  Chinese  OFDI  finance   Sector Foreign Purpo Owne Funding se rship Access? 1 Shanghai Baosteel Group 2003 10000 CDB Yes No Steel A SOE Y 2 Shanghai Baosteel Group 2012 20000 CDB Yes No Steel A SOE Y 3 Shanghai Baosteel Group 2010 11760 BoC Yes No Steel A SOE Y 4 China National Petroleum (CNPC) 2009 30000 CDB Yes Yes Oil A SOE Y 5 China National Petroleum (CNPC) 2005 4200 CDB Yes Yes Oil A SOE Y 6 China Minmetals Group 2005 2000 Ex-Im Yes Yes Mining A SOE Y 7 China Minmetals Group 2007 500 CDB Yes Yes Mining A SOE Y Yes Yes Yes Yes Yes No No No Mining Manufacturing Manufacturing Infrastructure A C C C SOE Y SOE Y SOE Y PrivateY Number Parent company Project Year Amount Could Will Source use ($m) use 2009 2005 2005 2004 2000 732 976 600 12 Zijin Mining Group 2006 1200 CDB Yes Yes Mining A SOE Y? 13 Zijin Mining Group 2008 1430 BoC Yes Yes Mining A SOE Y? 14 Zijin Mining Group 2007 350 CCB Yes No Mining A SOE Y? 15 SAIC Chery Automobile 2005 610 Ex-Im Yes No Auto C SOE N 16 SAIC Chery Automobile 2006 6580 CDB Yes No Auto C SOE N 17 SAIC Chery Automobile 2008 1430 Ex-Im Yes No Auto C SOE N 18 Jiangxi Copper 2008 500 CDB Yes Yes Mining A SOE Y? 2008 (Chalco) 2000 Ex-Im 19 Aluminium Corporation of China (Chinalco) Yes Yes Mining A SOE Y? 2008 (Chalco) 20 Aluminium Corporation of China (Chinalco) 2000 BoC Yes Yes Mining A SOE Y? 2007 (Chalco) 21 Aluminium Corporation of China (Chinalco) 1000 CDB Yes Yes Mining A SOE Y? 22 Haier Group 2004 1500 Ex-Im Yes No Manufacturing C SOE Y 23 Wuhan Iron and Steel Co Ltd (Wisco) 2007 2310 CDB Yes No Steel A SOE N 24 Wuhan Iron and Steel Co Ltd (Wisco) 2009 11720 CDB Yes Yes Steel A SOE N 25 Wuhan Iron and Steel Co Ltd (Wisco) 2010 13230 Ex-Im Yes No Steel A SOE N 26 China National Chemical (ChemChina) 2006 428 CDB Yes Yes Chemical B SOE N 27 China National Chemical (ChemChina) 2011 960 CDB Yes Yes Chemical B SOE N 28 China National Chemical Engineering Group 2003 Corporation Yes 86(CNCEC) Ex-Im 29 State Grid Corporation 2010 Yes 1000 CDB 30 Chongqing Grain Group 2011 Yes 1560 CDB Yes Yes Yes Infrastructure Infrastructure Agriculture C C A SOE SOE SOE N N Y 31 Goldwind Science and Technology Co Ltd2011 1540 ICBC Yes No Manufacturing C SOE Y 32 Goldwind Science and Technology Co Ltd2011 6000 CDB Yes No Manufacturing C SOE Y Ex-Im CDB CDB Ex-Im Yes Yes Yes Yes No Yes No Yes Manufacturing Infrastructure Infrastructure Infrastructure C C C C SOE SOE SOE SOE Y N N Y 8 9 10 11 33 34 35 36 China Minmetals Group TCL TCL Huawei Technologies Aviation Industry Corporation of China Three Gorges Corporation Three Gorges Group China Huadian Corporation 2011 2012 2012 2004 14600 2048 4000 144 Ex-Im Ex-Im CDB Ex-Im 37 Huaneng 2005 5000 Ex-Im Yes Yes Infrastructure C SOE Y 38 Huaneng 2009 2000 BoC Yes Yes Infrastructure C SOE Y 39 Huaneng 2009 300 CCB Yes Yes Infrastructure C SOE Y 40 Zhejiang Geely Holding Group (Geely Holding 2008 Group) 1000 BoC Yes Yes Auto B PrivateY 41 Zhejiang Geely Holding Group (Geely Holding 2013 Group)800 CDB Yes Yes Auto B PrivateY 42 China Petroleum and Chemical (Sinopec) 2002 Yes No Oil A SOE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes Yes Yes Yes Yes Yes No No No Yes Oil Oil Steel Oil Oil Chemical Infrastructure Mining Mining Manufacturing Steel Manufacturing Entertainment Textiles Manufacturing Manufacturing Infrastructure Mining A A A A B C C A A B A B C D C C C A SOE Y SOE Y SOE Y SOE Y SOE Y SOE Y SOE Y? SOE Y SOE Y PrivateN SOE N SOE N PrivateN SOE N SOE N SOE N PrivateY PrivateN 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 966.4 Ex-Im 7240 CDB China Petroleum and Chemical (Sinopec) 2004 1710 CDB China International Trust & Investment (CITIC) 2004 1365 CDB CITIC, Anshan, Baosteel, Shougang, Taiyuan 2011 1987 Ex-Im China National Offshore Oil Corporation (CNOOC) 2006 230 CDB Sinochem 2003 700 Ex-Im Sinochem 2004 350 CDB China Merchants Group 2012 1120 CDB Sinosteel 2005 1320 Ex-Im Sinosteel 2008 105.6 CDB Jiangsu Jinsheng Industry 2010 1200 Multiple Anshan Iron and Steel 2010 84.48 CDB Shenyang Machine Tools Co 2012 2600 Multiple Dalian Wanda Group 2012 39.6 Ex-Im Shanxi Tianli Enterprises 2007 China National Machinery Industry Corporation 2005 3000 Ex-Im China National Technical Import and Export 2005 Corporation 1500 (CNTIC) Ex-Im Wuxi Suntech Ltd 2010 731.3 CDB Sichuan Hanlong High-Tech Development2010 Co. 140 Ex-Im Y Primary  purpose:  A=Natural  resource  acquisition, 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