Chinese ODI: half step by half step

Although China itself is the greatest destination for Foreign Direct Investment and although China has access to a domestic market with a rapidly growing middle class the size of Europe, Chinese entrepreneurs hold no hesitation when it comes to finding good reasons to invest abroad. Foreign countries provide Chinese Investors with the opportunity to secure natural resources while acquiring renowned brands, distribution networks, market shares, technologies and technical or managerial know-how.

In the past, the CCPC’s concerns, and consequent policies, about restraining outward flow of foreign currency and preventing the transfer of State-owned assets overseas, hindered investors from venturing abroad. Nevertheless, the Chinese are coming forth, slowly but securely.

In 1978, Deng Xiao Ping introduced “Open Door” policies and ever since, the process has followed several (very poetical) steps; namely “Testing the Waters”, from 1979 to 1991; “Finding the Stepping Stones”, from 1991 to 2002; and, last but never the least, “A Bridge is Built”, from 2002 to present time.

Since its access to the World Trade Organization in late 2001, China has introduced Going Global policies (走出去) with the purpose of optimizing its foreign exchange reserves while containing inflationary tendencies and brightening Chinese Investors’ outbound investment prospect. Such policies have – and will – certainly increase competitiveness of Chinese Investors worldwide.

In an attempt to achieve the aforementioned objectives, China has launched several policies in the past years. It has relaxed foreign exchange controls, made direct subsidies and government-run funds available and signed Bilateral Investment Treaties with major trading partners. And, what is more, the Chinese government has abolished the obligation to repatriate all foreign exchange benefits and relaxed its control on investment risk and economic and technical feasibility of projects.

In more specific terms, the government of the PRC introduced the Qualified Domestic Institutional Investor policy in 2006, thus allowing Chinese investment in foreign securities markets via fund management institutions approved by the China Securities Regulatory Commission. By way of illustration, thanks to this policy, on April 2008 the China Banking Regulatory Commission and the US Securities and Exchange Committee made it possible for Chinese individuals to invest in the US stock market.

Another body created for the purpose of enhancing investment is the China Investment Corporation, which serves as a sovereign investment fund with increasing autonomy. When created in 2007, its funds amounted to USD 200 billion and, at present time, have reached USD 300 billion – which, at the end of the day, translates into greater autonomy and decision-making power.

However, despite the aforementioned strides, Chinese Investors wishing to invest abroad still face multiple difficulties. Outbound investment project approval still takes an exceedingly lengthy amount of time – thus, impeding Chinese entrepreneurs to meet bidding deadlines abroad. Institutions are still controlling Foreign Exchange outflow as well as planning economic targets and quotas (via State Authority on Foreign Exchange and the National Development and Reform Commission, respectively).

In this regard, it is suggested that the Chinese State allow full convertibility of its currency and further simplify the process for outbound Investors. Although these measures may seem too demanding, it is, however, realistic to believe that they would encourage a greater number of business establishment from mainland China while dissuading Investors from using illegal methods to obtain foreign exchange.