Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
South African Instit
ute of Inte
rnat
iona
l Affa
irs
African perspectives. Global insights.
China in Africa Project
O C C A S I O N A L P A P E R N O 7 3
China’s Overseas Foreign Direct Investment Risk: 2008–2009
J a n u a r y 2 0 1 1
W a n g D u a n y o n g
A b o u t S A I I A
The South African Institute of International Affairs (SAIIA) has a long and proud record
as South Africa’s premier research institute on international issues. It is an independent,
non-government think-tank whose key strategic objectives are to make effective input into
public policy, and to encourage wider and more informed debate on international affairs
with particular emphasis on African issues and concerns. It is both a centre for research
excellence and a home for stimulating public engagement. SAIIA’s occasional papers
present topical, incisive analyses, offering a variety of perspectives on key policy issues in
Africa and beyond. Core public policy research themes covered by SAIIA include good
governance and democracy; economic policymaking; international security and peace;
and new global challenges such as food security, global governance reform and the
environment. Please consult our website www.saiia.org.za for further information about
SAIIA’s work.
A b o u t t h e C h I N A I N A F R I C A P R o J e C t
SAIIA’s ‘China in Africa’ research project investigates the emerging relationship between
China and Africa; analyses China’s trade and foreign policy towards the continent; and
studies the implications of this strategic co-operation in the political, military, economic and
diplomatic fields.
The project seeks to develop an understanding of the motives, rationale and institutional
structures guiding China’s Africa policy, and to study China’s growing power and influence
so that they will help rather than hinder development in Africa. It further aims to assist African
policymakers to recognise the opportunities presented by the Chinese commitment to the
continent, and presents a platform for broad discussion about how to facilitate closer
co-operation. The key objective is to produce policy-relevant research that will allow Africa
to reap the benefits of interaction with China, so that a collective and integrated African
response to future challenges can be devised that provides for constructive engagement
with Chinese partners.
A ‘China–Africa Toolkit’ has been developed to serve African policymakers as an
information database, a source of capacity building and a guide to policy formulation
SAIIA gratefully acknowledges the generous support of the main funders of the
project: The United Kingdom Department for International Development and the Swedish
International Development Cooperation Agency.
Project leader and series editor: Dr Chris Alden, email: [email protected]
© SAIIA January 2011
All rights are reserved. No part of this publication may be reproduced or utilised in any form by any
means, electronic or mechanical, including photocopying and recording, or by any information or
storage and retrieval system, without permission in writing from the publisher. Opinions expressed are
the responsibility of the individual authors and not of SAIIA.
Please note that all currencies are in US$ unless otherwise indicated.
A b S t R A C t
Since the implementation of its ‘going-out’ strategy, China’s outward foreign direct
investment (FDI) has experienced a rapid development, which has already become an
important part of its overseas interests. This paper briefly analyses the current situation and
its main features, the losses suffered as well as the major risks that China’s outward FDI
faced during 2008 and 2009. The preliminary conclusions include: (1) China’s overseas
FDI has experienced rapid development, but is still low in absolute terms, while the
concentration trend of geographical and industrial distribution is obvious. This indicates
that the ‘going-out’ strategy has been faithfully implemented, but also contains high risks.
(2) The risks of China’s outward FDI emanate from four main aspects: breach of contract and
unexpected transactional costs; exchange loss; premium-value transactions; and failure
of integration. (3) Overseas FDI faces systemic risks. The internal causes from the Chinese
side include a high concentration of investment, excessive government intervention, low
international business management ability and a lack of overseas investment strategies.
(4) Based on a country risk analysis of China’s overseas FDI, the most important issues are the
legal, political, social and other institutional differences and conflicts. Through interpretation
of reports on Outward FDI and Co-operation Country (region) Guide (2009 Edition) issued
by the Ministry of Commerce, this paper argues that the primary risk of China’s overseas
direct investment is the incompatibility of institutions.
This research project is supported by a grant by the Shanghai Planning Office of
Philosophy and Social Science (Project No: 2009EGJ001) and the Shanghai International
Studies University (Project No: 2008115002).
A b o u t t h e A u t h o R
Dr Wang Duanyong is a research fellow and director of the Center for China’s Overseas
Interests at the School of International and Diplomatic Affairs, Shanghai International Studies
University, China. His research fields include China’s outward foreign direct investment and
the diplomatic protection to overseas Chinese. The author wishes to thank Mr Ji Xiaoyu
who translated the Chinese version of this paper to English, and Dr Chris Alden and Ms
Ana Alves, who modified the paper.
4
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
A b b R e v I A t I o N S A N d A C R o N y m S
AUD Australiandollar
BCG BostonConsultancyGroup
BIT BilateralInvestmentTreaty
CAD Canadiandollars
DRC DemocraticRepublicofCongo
FDI foreigndirectinvestment
IMF InternationalMonetaryFund
KRW Koreanwon
M&A mergersandacquisitions
OECD OrganisationforEconomicCo-operationandDevelopment
RMB renminbi(Chinesecurrency)
RV recreationalvehicle
SAIC ShanghaiAutomotiveIndustryCorporation
SOE state-ownedenterprise
SUV sportutilityvehicle
WTI WestTexasIntermediate
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
5
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
I N t R o d u C t I o N
Since2000,whenthe‘going-out’strategywasofficiallymadepublic,China’soutward
foreigndirectinvestment(FDI)hasexpanded,exceeding$10billionfiveyearslater
andmakingChinathelargestoutwardFDIinvestoramongdevelopingcountries.Inthe
wakeoftheinternationalfinancialcrisisof2008–2009,unlikemostcountries,Chinese
outwardFDIincreased.Thisphenomenonhasplayedanimportantroleinfacilitating
thetransferofChina’sproductioncapacitytoothercountries,deepeninginternational
reciprocalco-operationonnaturalresources,ensuringaneffectiveresponsetocrisisand
evenincreasingBeijing’srighttospeakaboutimprovingtheinternationaleconomicorder.
AsacrucialcomponentofChina’s‘going-out’strategy,FDIispartof‘agrandstrategy
relatedtotheoverallsituationandfutureofChina’sdevelopment’.1ForChina,thelong-
termstrategicsignificanceisthattherapiddevelopmentofoutwardFDIcancontribute
todeepeningdomesticreformandtheopening-upprocess,andleadtogreaterChinese
participationinfosteringamoreequitableformofeconomicglobalisation.OutwardFDI
makesitpossibleforChinatoattainandsafeguarditsdevelopmentinterests.Atthesame
time,asthepaceofChina’soverseasinvestmentcontinuestogrow,thisstrategycarries
certainrisks,whichwillhavesignificantimplicationsforChina’soverseasandnational
developmentinterests.
ThispaperreviewsandanalysestherisksofChina’sFDIfrom2008to2009.Itfirst
looksatthecurrentstatusandmainfeaturesofChina’sFDI,givingabriefanalysisofits
risks.Itthenexaminesthecauseoftheserisks,analysingtheroleofChina’spublicand
privatesectorinrelationtotheserisks.Finally,itprovidesaninterpretationofaseriesof
reportsinChina’s Outward FDI and Co-operation Country (region) Guide (2009 Edition).
C h A R A C t e R I S t I C S o F C h I N A ’ S o v e R S e A S F d I
Overseas FDI accounts for a small fraction of China’s outward FDI
AstrikingfeatureofthestatisticaldataforChina’soutwardFDIisthat‘outward’doesnot
meanoutsidetheborder,butratheroutsidethecustomsboundary,whichincludesall
regionsoutsidemainlandChina.2Thus,separatecustomsterritoriessuchasHongKong,
MacaoandTaiwan,whichfallunderthejurisdictionofChina’ssovereignty,areincluded
inChina’soutwardFDIstatistics.At thesametime, thecomplexityandrisksof the
economicandtradeexchangesamongMainlandChina,HongKong,MacaoandTaiwan
differgreatlyfromreal‘outward’investment,duetothepolitical,culturalandgeographical
proximityoftheseareas.AccordingtotheStatistical Bulletin of China’s Outward Foreign
Direct Investment, inrecentyearsHongKongandMacaorepresentedthelargestshareof
China’stotaloutwardnon-financialFDI,surgingto70.3%in2008,whiletheFDIstock
roseto63.8%atendof2008.Thisdoesnotaccuratelyreflecttherealeconomicrelations
betweenChinaandtheoutsideworld,orgiveatruepictureofthecloserelationship
betweenChina’soverseasandnationaldevelopmentinterests.3Therefore,tounderstand
therealpatternofChina’sinvestmentbeyondnationalboundaries,‘overseas’FDIwillbe
6
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
usedasameasuretoreflectinvestmentinforeigncountriesandregionsoutsidethescope
ofChina’seffectivesovereigntyandjurisdiction.
Another defect is that China’s outward FDI statistics also include traditional
internationaltaxhavenssuchastheCaymanIslandsorBritishVirginIslands,where
inflowFDIdoesnotusuallymeanreal investment.According tohistoricaldata, the
CaymanIslandsandtheBritishVirginIslandsrepresented52.1%ofChina’soutwardFDI
in2005,and16.7%in2008.ThisaspectofChina’soutflowFDIisknownasthe‘virgin
phenomenon’.WhileitisdifficulttobesureofthefinaldestinationoftheinflowFDIto
thoseinternationaltaxheavens,mostoftheseinvestmentscamebacktoChina,enabling
domestic investors tobe treatedas foreigncompaniesandsoacquire super-national
treatmentconcessions.Inotherwords,the‘virginphenomenon’usuallyrepresentsa‘fake
FDI’phenomenon.4Therefore,forthepurposeofthispaper,China’sinvestmentinthe
CaymanandBritishVirginIslandsisexcludedfromthe‘overseasFDI’andcountryrisks
discussed.
AftereliminatingthestatisticsforHongKong,Macao,Taiwanandthetwotaxhavens,
China’soverseasFDIrepresentedabout20%ofoutwardFDIinrecentyears.Forinstance,
in2008,overseasFDIflowswere$13billion,whilethestockreached$35.74billion.
Table 1: Outward FDI versus overseas FDI, 2003–2008 ($ billions)
Category
Year
Outward FDI Overseas FDI
Total value
Proportion of Hong
Kong and Macao
Proportion of Cayman
Islands and British
Virgin Islands
Absolute value
Proportion of
outward FDI (%)
2003 flows 2.85 1.18 1.02 0.66 23.1
2004 flows 5.50 2.66 1.67 1.16 21.2
2005 flows 12.26 3.43 6.39 2.45 20.0
2006 flows 17.63 6.89 8.37 2.37 13.5
2007 flows 24.84 13.78 4.48 6.58 26.5
2008 flows 55.91 39.28 3.63 13.00 23.2
2008 stock 183.97 117.41 30.80 35.76 19.4
Source:AnnualStatistical Bulletins of China’s Outward Foreign Direct Investment.In2003–2007:
Non-financialoutwardFDIdata.In2008,theflowsandstockarealloutwardFDI
Overseas FDI is concentrated in certain regions
Underthe‘going-out’strategy,China’soutwardFDIisrapidlyexpandingaroundtheworld.
Inrecentyears,Chinahasinvestedinagrowingnumberofeconomies:from2003to2008,
newinvestmentsreached35countriesandregions.Atthesametime,Chineseinvestment
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
7
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
isconcentratedincertaingeographicalareas,withthetoptencountries/regionsreceiving
over60%oftotalinvestmentinrecentyears,reachingapeakof81.1%in2008.Untilthe
endof2008,theinvestmentstockinthetoptencountries/regionsaccountedfor55.1%
ofthetotal.Inaddition,thenumberofthecountries/regionsincreasedsharply,fromfour
to21,representinginvestmentflowsofmorethan$100millionin2007.Asaproportion
ofoveralloverseasFDI,investmentflowssurgedfromlessthan40%in2004to80%,and
even90%,in2008.ThesechangesshownotonlythesizeofChina’overseasFDI,but
alsoimplyarapidincreaseinlarge-scaleprojects,whichinturnmeansmanyinvestment
projectsfocusedonspecificsectorsthatrequirehugefunding.
Table 2: Concentration of China’s overseas FDI
Total flows of China’s
overseas FDI
($ billion)
Invest-ment stock cover
countries or regions
Investment flows more than $100 million in the country/
region
Investment flows in the top ten countries/
regions
Number of
countries/ regions
Invest-ment
($ billion)
Proportion of overall overseas FDI (%)
Invest-ment
($ billion)
Proportion of overall overseas FDI (%)
2003 0.66 135 1 0.15 23.6 0.51 77.2
2004 1.16 145 3 0.39 33.5 0.75 64.6
2005 2.45 159 6 1.45 59.3 1.78 72.5
2006 2.37 168 4 0.90 37.9 1.42 59.9
2007 8.25 169 21 6.86 83.1 5.28 64.0
2008 13.00 170 18 11.68 89.9 10.55 81.1
Source:AnnualStatistical Bulletins of China’s Outward Foreign Direct Investment.In2003–2007:
Non-financialoutwardFDIdata.In2008,theflowsandstockarealloutwardFDI
In termsof flows and stock, theAsian regionhas enjoyed amajor shareofChina’s
overseasFDI,althoughChina’sinvestmentinAfricaisgrowingrapidly.In2008,flows
toAfricasurgedtofirstplace,infrontofAsia,mainlybecauseChina’sinvestmentsin
SouthAfricaweretentimesgreaterthanthepreviousyear.In2008,SouthAfricawas
China’stopFDIdestination,accountingfor87.6%ofinvestmentflowsinAfrica.Asthe
demandformineralresourcesrose,China’sdirectinvestmentinOceaniaalsoexperienced
rapidgrowth.Currently,AustraliaisthecountrythatreceivesthelargeststockofChina’s
overseasFDI.
TheprioritiesandtrendsofChina’soverseasFDIcanbeidentifiedbyexaminingthe
proportionoftotalinwardFDItohostcontinents.In2008,AfricaandOceaniaaccounted
for thebiggestproportionofChina’s investment.China’soverseasFDI inAfricaand
Oceaniaoccupied6.26%and3.93%oftheirinwardFDI,comparedtoonly1.01%inAsia
andlessthan1%inLatinAmerica.5China’sdirectinvestmentstockaccountedfor1.53%
and1.14%ofAfricaandOceania’sinwardFDIstocks.InAsia,thecontinentwhichowned
8
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
thehighestabsoluteamountofChina’sinvestmentstock,theproportionwasonly0.49%,6
whileinEurope,China’sinvestmentaccountedforonly0.07%ofthetotalinwardFDI
stocks.ThisdatathereforereflectsmoreclearlythegeographicaldistributionofChina’s
overseasFDIandalso(tosomeextent) theorientationofChina’s investment inthe
industryandtheeaseofaccessofrecipientmarkets.
Table 3: Regional distribution of overseas FDI ($ billions)
2003 flow
2004 flow
2005 flow
2006 flow
2007 flow
2008 flow
2008 stock
Asia 0.318 0.343 0.942 0.773 1.603 4.267 13.914
Africa 0.075 0.317 0.400 0.520 1.570 5.490 7.800
Europe 0.150 0.170 0.510 0.590 1.090 0.880 5.130
North America 0.058 0.126 0.320 0.260 1.130 0.360 3.660
Latin America 0.023 0.088 0.080 0.102 0.420 0.052 1.436
Oceania 0.034 0.120 0.200 0.130 0.770 1.950 3.820
Total amount 0.658 1.164 2.452 2.375 6.583 12.999 35.760
Source:AnnualStatistical Bulletins of China’s Outward Foreign Direct Investment.In2003–2007:
Non-financialoutwardFDIdata.In2008,theflowsandstockarealloutwardFDI
Table 4: China’s total inward FDI in all continents ($ billions)
Chinese investment
flows in the host
continents
Local absorption of the total investment
flows
China’s investment
flows accounted
(%)
China’s investment stocks in the host
continents
Local absorption of the total investment
stocks
Chinese investment
stocks accounted
(%)
Asia 4.27 421.89 1.01% 13.91 2,835.85 0.49%
Africa 5.49 87.65 6.26% 7.80 510.51 1.53%
Europe 0.88 632.70 0.14% 5.13 7,352.94 0.07%
North America
0.36 360.82 0.10% 3.66 2,691.16 0.14%
Latin America
0.05 144.38 0.04% 1.44 1,184.37 0.12%
Oceania 1.95 49.63 3.93% 3.82 334.45 1.14%
Total value
13.00 1,697.35 0.77% 35.76 14,909.29 0.24%
Source:ThelocalabsorptionofthetotalinvestmentdataisfromWorld Investment Report 2009,
UnitedNationsConferenceonTradeandDevelopment(UNCTAD).Authordidtheratio
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
9
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
Target industries in the energy and mining sectors
Cross-bordermergersandacquisitions(M&A)areconcentratedintheenergyandmineral
industries,mainlybecauseofChina’slong-termeconomicdevelopmentstrategy.In2008
and2009,Chineseenterprisestookpartinatleast34cross-borderM&Aabove$100
million,representingatotalvalueofupto$57.13billion.7Ofthese,13M&Awereinthe
energyindustry,accountingfor$27.754billionor48.6%ofthetotal$100million,while
15M&Awereintheminingindustry,worth$26.234billionor45.9%oftotaltransactions.
UtilitiesandbusinessserviceseachhadoneM&Aworth$1.58billionand$858million
respectively,whilethethreemanufacturingM&Aamountedto$704million.8
The economy’s rapid growth in recent years has put strong pressure on China’s
domesticreservesofnaturalresources,suchasoil,non-ferrousmetalsandironore.China
needstoensureitsenergysupplysecurity,pricestabilityandanadequatesupplyofraw
materials throughco-ordinatedarrangementsaround theworld.Thesewillnotonly
beconducivetosustainedeconomicdevelopment,butalsoenableChinatoenterand
competeincommoditymarkets.China’sinevitablechoiceistoseektocontrolasmanyoil
andotherresourcesbyexpandingitsoverseasinvestments,whicharemainlyconducted
byChina’slargestate-ownedenterprises(SOEs)duetothecapital-intensivenatureofthe
resourcesector.9
t h e R I S k o F C h I N A ’ S o v e R S e A S F d I : S t A t u S q u o
Studieshaveshownthat,internationally,thesuccessrateoflarge-scaleenterprisesM&A
waslessthan50%,while67%ofChina’soverseasacquisitionsinthepast20yearsdidnot
succeed.10AccordingtostatisticsoftheMinistryofCommerceofthePeople’sRepublic
ofChinain2007,65%ofChineseenterprises’overseasinvestmentswereinthered.11
Anotherstudyestimatedthat,in2008,cross-borderM&AbyChineseenterpriseslost
morethanRMB12 200 billion,whichisequivalenttoabout$29.3billion.13Basedonrecent
casestudies,M&Aexperiencefourcategoriesofproblems:breachofcontractanddelay
totransactions;currencyexchangelosses;premium-valuetransactions;andintegration
failures.
Breach of contract and delay to transactions
Acommonproblemwasunexpecteddelaystotransactionsorbreachesofcontract,dueto
bothcommercialandnon-commercialfactors,whichincreasedtheinvestmentcostsand
risksofoverseasFDI.
Inrecentyears,thelargestcommercialbreachofcontractwaswhenRioTintotore
upthecapitalinjectionagreementwithAluminumCorporationofChina(Chinalco).
In2008,Chinalcoheld9.3%ofRioTintosharesandwasthelargestsingleshareholder.
On12February2009,ChinalcoandRioTintoannounced the signingofa strategic
co-operationagreement,whichincludedacashinjectionprovisionof$19.5billionby
Chinalco.Ifthistransactionhadbeencompleted,Chinalcowouldhaveowned18%ofRio
Tinto’stotalshares,19%ofRioTintoplc(UK)and14.9%ofRioTintoLimited(Australia).
On5June2008,RioTintoannouncedaunilateralbreachofcontract,ofwhatcouldhave
10
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
beenChina’slargestcross-borderM&A.However,Chinalcoonlyreceived$195millionin
finalcompensation.AlthoughRioTinto’srejectionofChinalco’shugecapitalinjectionwas
notsurprising,whatwasamazingwasthatthefinalpenaltyfortheliquidateddamages
wasonly1%ofthetotalcontract.Afterwards,inordertoremainRioTinto’ssinglelargest
shareholder,Chinalcowasforcedtoacquiresharesontheopenmarketatacostofabout
$15billion.
TheunforeseenrisksfacingChineseenterprises’overseasFDIaremainlyintheenergy,
mineralandotherstrategicresourcessectors,andcomefromincreasedprotectionism.
OneexamplewasinFebruary2009,whenPetroChinaCompanyLimitedbidCAD14 499
million($460million)toacquireasmallCanadianoilcompany,VerenexEnergy,Inc.,
whosemainbusinesswasinLibya.AccordingtoLibyangovernmentregulations,any
change in control of the foreign assets requires theLibyanNationalOilCompany’s
writtenconsent.Initially,inMay2009,theLibyanNationalOilCompanyexpressedan
interestintheoffer,butdidnotapprovethedealorexercisetherightofpreemption
untilannouncing,inJune,thatVerenex’sacquisitionoftheexploitationconcessionin
Libyawasillegal.On22June,VerenexdenouncedtheLibyanNationalOilCompanyina
publicnotice,notingthattherealmotiveofitsreluctancetoapprovethetransactionwas
to‘cutoffprice[tobuyontheirown],ortoraisetheapprovedfee’.Followingmonths
ofcontinuedefforts,PetroChinaandVerenexdecidedtoterminatetheacquisitionon7
SeptemberbecauseLibyawasblockingthedeal.15VerenexwaseventuallysoldtoaLibyan
sovereignwealthfundforonly$340 million,30%lowerthanthePetroChinaoffer.16
InadditiontodirectinvolvementbystakeholdersinChineseoverseasFDItransactions,
thirdpartieshavealsointerferedforinternationalpoliticalreasons.Forexample,on22
April2008,thegovernmentoftheDemocraticRepublicofCongo(DRC)signedapackage
ofco-operationagreementswithChinesecompanies,includingtheChinaRailwayGroup
Limitedand theSinohydroCorporation.17Theagreementscentredon investment in
copperandcobaltoreprojectsandinfrastructureconstructionprojectsintheDRC,based
onthe‘projectforresources’mode(asitischaracterisedbytheWorldBank),worth$9.25
billion.Chineseenterprisescommittedtobuildhundredsofclinics,hospitalsandschools,
twohydroelectricdams,3 300kilometresofhighwaysand3 000kilometresofrailways
intheDRC,inreturnforobtainingrightstodevelopcopperandcobaltmines.18Atthat
juncture,theDRCwasfindingitverydifficulttoobtainlargeamountsofcapitalthrough
otherchannelsand,althoughthefinancingagreementswere‘win–win’andconformed
tocommercialprinciples,someinternationalforceswereuneasy.Atthetime,Kinshasa
andforeigndonorswerediscussinghowtorelievethecountry’shugeforeigndebt,and
negotiationswereatadelicatestage.19The‘ParisClub’creditorsandtheInternational
MonetaryFund(IMF)wereopposedtosomeprovisionsoftheagreements.20TheIMF
stated:‘Justco-operationagreementsofChinaandtheDRCshouldbeconsistentwiththe
requirementsofdebtsustainability’,21andrequestedthattheagreementsbeamended.22
Underpressure,aslargedebtreliefwasbeinglinkedtoChinesecommercialloans,the
agreementsweredrasticallyrevised:the$3billioninfrastructureprojectsinthesecond
phaseand$3billionofgovernmentguaranteesforminingprojectswereremoved,reducing
theoverallsizeoftheagreementsto$6billion.23Onthesurface,theIMFintervention
wasmotivatedbyconcernsthattheagreementscouldaggravatethedebtburdenofthe
DRC.However,themediaintheDRCbelievedthatthetruereasonfortheIMF’sfierce
oppositionwastoobstructtheexpansionofChinese‘resourcesforinfrastructure’or‘loans
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
11
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
forenergy’intootherfieldsinAfrica.Thisexpansionwasbelievedtoposeathreattothe
oldcolonialmodeofacquiringresourcesbyEuropeandtheUS.24
Exchange loss
OverseasFDInecessarily involves foreigncurrencyassets,which inevitably leads to
exchangeriskscausedbytheuncertaintyofexchangerates.Traditionally,China’soverseas
investmententerprisessellproductsdenominated indollars,andhaveproductcosts
denominatedinthehostcountries’currencies,whiletheircreditathomereliesmainlyon
renminbiloansfromChinesestate-ownedbanks.Inrecentyears,withtheappreciationof
therenminbiandthedepreciationtrendofforeigncurrencies,especiallythedollar,25the
overseasFDIofChineseenterpriseshavefacedmoreandmoreseriousexchangerisks.
Since2008,traditionalhedginginstrumentshavehaddifficultydealingeffectivelywiththe
tumultuousfinancialsystem,furtheringtheprospectsofuncertaintyduetosystemicrisk.
Moreover,Chineseoverseasenterpriseshavesufferedenormouslossesduetoexchange
ratemovements.
Infirsthalfof2008,exchangelossesofoverseasFDIcamemainlyfromtheappreciation
oftherenminbiandthecontinueddepreciationofthedollar.Ofthe745Chineselisted
companiesthatincurredexchangegainsandlossesinthefirsthalfof2008,488companies
sufferednetexchangelossesofupto65%,atotallossofmorethanRMB5.2billion–
PetroChinarankednumberonewithmorethanRMB1billioninexchangelosses.26The
secondhalfof2008sawadramaticfallinthevalueofthepoundsterling,theeuroandthe
Australiandollar(AUD),oneafteranother.Inthethirdquarter,inlessthantwomonths,
thepoundsterlingdepreciatedbyabout25%andtheeurobyabout21%againsttheRMB.
InSeptemberandOctober,theReserveBankofAustraliacutinterestratestwiceandthe
Australiandollardeclinedbynearly40%againstthedollar,whichresultedinanumberof
ChinesecompaniesinAustraliasufferinghugeexchangelosses.Accordingtoinformation
publiclyavailable,atleast12largeChineseSOEssufferedexchangelossesrelatedtothe
depreciationoftheAustraliandollar.27AtypicalexampleoftheeffectoftheAustralian
dollar’sdepreciationwasChinalco,whichsufferedtotalexchangelossesofRMB2.351
billioninthefirstthreequartersof2008.28ThemostdramaticwasthefateofChinalco’s
investment in the Aurukun bauxite project in Australia, for which Chinalco paid
AUD2.92billioninMarch2007,whentheexchangeratewasaboutAUD1for$0.68.
However,overayearlaterinJuly2008,theratereached$0.9848,a40%appreciation,
whichmeantthatChinalcoalsohadtopaymorethan40%foritsmainforeigncurrency
assetsthatwereindollars.Furthermore,aftertheAustraliandollar’ssharpdeclineinJuly
2008,equipmentorderedpreviouslyinAustraliandollarsfacedtheriskofsubstantial
depreciation.AsChinacurrently lackshedgingtools,especiallyfinancialderivatives,
somecompanieshavechosentousethecorrespondingcountry’sderivativesashedging
instrumentstoavoidforeignexchangelosses.Inaperiodofextremecurrencyfluctuations,
thisstrategycanleadtomoreseriouslosses.Suchwasthecasein2008forCITICPacific,
whichexperiencedhugelossespursuingthisrisk-offsetstrategy.Seekingtoreducethe
currencyriskassociatedwithacquiringan ironoreproject inwesternAustralia, the
companyleveragedforeignexchangecontracts,whichledtolossesofmorethanHKD29
14.6billionastheAustraliandollarplummeted.30
12
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
Losses from premium-value transactions
Between2002and2009,Chinamorethandoubleditsnumberofenterprisesestablished
overseas,anaverageannualincreaseof10.8%.31Duringthesameperiod,thestockof
China’soutwardFDIincreasedby5.4times,anaverageannualgrowthrateof30.3%.The
investmentgrowthrategreatlyexceededthegrowthrateofthenumberofcompanies,32
whichinferredanexpansionofthescaleofinvestmentprojectsandgreaterconcentration.
However, thegapbetween the twonumberswasmuchhigher than similarChinese
domesticdata,33whichsuggeststhatotherfactorswereinplay.
Inrecentyears,formanyhigh-valueoverseasFDItransactionsbyChineseenterprises,
theactualpurchasepricewasnotonlymuchhigherthanthedomesticprice,butalso
higherthansimilardealsbetweenotherforeignfirms.Evenafterthefinancialcrisisin
2008,whentheoverallglobaleconomywentintorecessionandmanyforeignenterprises
suffered financial difficulties, several overseas ‘bargain-hunting’ M&A by Chinese
enterpriseswereunsuccessful.Thepopularimageofmakingacquisitionsatalowprice
didnotcometrueasexpected.Onthecontrary,theoutbreakandcontinuationofthe
financialcrisisledtomanyChineseenterprises’overseasFDIprojectssufferingahuge
discountduetofinanciallosses.
Onesourceofpremiumlosswasthedramaticfluctuationofpricesintheinternational
market:in2008and2009,thepricesofoil,oresandothercommoditiesininternational
marketswerevolatile.In2008,theaveragepriceofUSWestTexasIntermediate(WTI)
andNorthSeaBrentcrudeoil(Brent)wasrespectively$100.06and$97.26perbarrel,up
38.66%and34.37%comparedtothesameperiodinthepreviousyear.On11July2008,
theWTIpricereachedarecordhighof$147.27perbarrel.However,fromthebeginning
ofAugust,asthefinancialcrisisandglobaleconomicrecessionspread,thedemandfor
oildeclinedandinternationaloilpricesbegantofallsharply.On19December2008,
WTIpricesfellto$33.87perbarrel,thelowestlevelinnearlyfiveyears,afallofmore
than70%comparedtoJuly’srecordhighs.34Moreover,in2009,theinternationaloilprice
trendroseto$80perbarrelbytheendoftheyear.However,theannualaveragepriceof
WTIandBrentfellrespectively38.2%and36.5%comparedtothepreviousyear.35As
theoilpricesfell,manyChineseenterprises,whichwereinvolvedincross-borderM&A
whentheinternationaloilpriceswerehigh,sufferedlosses.Forexample,ChinaOilfield
ServicesLimitedacquiredAwilcoOffshoreASAofNorwayforRMB17.1billion(about
$2.5billion)whentheinternationalpriceofoilreachedarecordpeakinJuly2008,after
whichtheinternationaloilpriceslumped.Oneyearlater,thecompanyannouncedthat
theacquisitionhadresultedinavaluelossofRMB820million.36Itisnotsurprising
that,initsacquisitionofRioTintoshares,Chinalcosufferedapaperlossofmorethan
$8 billion (equivalent to about RMB 54.4 billion) during one year, as in 2008, the
internationalpriceofprimaryaluminumdroppedfrom$3,260to$1,471perton(the
LondonMetalExchangealuminumspotprice).37
Anothertypeofpremiumloss isobviouswhenanalysingsomeoftheactualdeals
negotiated.Forexample,inMay2008,Chinalcoenteredintoajointventureagreement
withforeignenterprisestobuildamillion-tonelectrolyticaluminumplantinSaudiArabia
anda1860megawattscaptivepowerplant,investingatotalof$4.5billion.Chinalco
wouldhold40%sharesinthealuminumfactory(becomingthelargestshareholder)and
20%sharesinthepowerplant(makingitthethird-largestshareholder).38Atthattimein
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
13
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
China,investmentsinelectrolyticaluminumproductionwasRMB40–70millionperten
thousandtonsandinpower,RMB4–6millionpermegawatt.Basedonthis,investingin
similarprojectsinChinawouldhaverequireduptoRMB18.1billion(onlyabout$2.65
billion).39
Integration failure
ThegreatestchallengeofM&Acomesfromthepost-acquisitionintegration,asmaking
adeal(whethersuccessfulornot)isonlythebeginning.Thepost-mergercompanyhas
tochangethemanagementstructureandtheinternalandexternalenvironmentofthe
company.Indeed,thebestmeasurementofasuccessfultakeoveristheabilityofthe‘new’
companytocontinuestableoperationsunderthenewframework.
Incross-borderacquisitions,integrationinvolvesnotonlyproductlines,saleschannels
andbusinessstrategies,butalsocorporateculture,whichisarguablymoreimportant.A
surveybyDeloittefoundthat60%ofM&Adonotachievethedesiredbusinessvalue.Of
these,two-thirdsfailtointegrateculturesafterthemerger.IntheM&Abusiness,amajor
challengeisbridgingtheculturegapandblendingbothcorporateculturesintoanew
corporateculture.40ManyofChina’soverseasM&Athatwereconsideredas‘successful’
ultimatelyfailedbecauseofineffectiveintegration,whichledtomorelosses.
InOctober2004,theShanghaiAutomotiveIndustryCorporation(SAIC)contributed
KRW41 90billion($500million,oraboutRMB4.1billionatthetime)tobuy48.92%ofthe
SouthKoreanSsangyongMotorCompany(Ssangyong),becomingitslargestshareholder.
This first acquisitionbyaChineseenterpriseof a foreignvehiclemanufacturerwas
consideredalandmarkeventfortheChineseautoindustrytocompeteinternationally.
Although SAIC injected huge funds, the already troubled Ssangyong’s operational
difficultieswerenotreversed,andthe2008saleswere30%lowerthanexpected.Bytheend
of2008,Ssangyongsufferedaseriousliquiditycrisis,whichledtoitsfinancialsituation
deterioratingfurther,affectingSAIC’sfinancials,whichdeclinedsharply.SAICthenwent
ontoaccruelong-termequityinvestmentstooffsetthedepreciationofaboutRMB 3.076
billionforSsangyong.42Thefinancialdifficultiescausedafurthercrisisofconfidenceon
bothsides.SAIC’sproposedreorganisationplanincludedhighjobcuts,whichwereill-
receivedbytheSsangyongunion.ThebreakdownoftheSsangyonglabournegotiations,
attheendof2008,wasfollowedbyabankruptcycrisis.On9January2009,Ssangyong
attemptedtorestorecontroloverthemanagementofthefirm,whichsubsequentlyled
toSAIClosingcontrolofthecompany.On22May2009,theSsangyongunionbegana
strike,whichlasted76daysandresultedinfurtherdeterioration;SAICmadeaRMB1.182
billionprovisionforimpairmentoflong-termequityinvestment,43whichmeantthatthe
SAICassetinvestmentlossescausedbySsangyongweremorethanitsinitialinvestment.
At theendof2009theSouthKoreancourtapprovedthereorganisationplan,which
dilutedSAIC’sshareinSsangyongfrom51.33%to11.2%.Thus,theSAICinvestmentin
Ssangyongappearstohavebeenacompletewasteofhumanandmaterialresources.
The failure of SAIC’s integration of Ssangyong demonstrates some fundamental
mistakes made before and after M&A. Firstly, there was the lack of an adequate
pre-mergerinvestigation.SAICthoughtthatSsangyong,asKorea’slargestmanufacturerof
sportsutilityandrecreationalvehicles(SUV/RV),haddevelopedtheoriginaldieselpower
technologythroughitslongstandingco-operationagreementwiththeGermancompany,
14
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
Mercedes-Benz,andthereforeexpectedSsangyongtohaveagoodlevelofproduction
management,technicalequipmentandresearchanddevelopment.However,afterthe
merger,Ssangyong’sviability turnedout tobe largelydependentonMercedes-Benz’s
technicalsupport,especiallyfordiesel-poweredtechnologiesandaccessories.
Secondly,asthemanagementcapacityofthecombinedenterpriseswasinadequate,
themarketsituationdidnotimprove.Ssangyong’straditionalmarketswereinKoreaand
itsmainmodelswerethehighfuel-consumptionSUVs.Withtherisinginternationaloil
pricesinrecentyears,thecompetitivenessofthecompany’sproductsdeclined,whilenew
modelsweredelayed.NotonlydidSsangyong’sproductlinesremainfundamentallythe
same,butalsonewinternationalmarketswerelimited.SAIChelpedSsangyongtoexport
itscarstoChinaandtoestablishtheappropriatesaleschannels.However,Ssangyong’s
brandcommunications,imageandcustomersatisfactiondidnotperformedwellinChina,
andthecompanyfailedtoachievethedesiredmarketshare.Ssangyongsalesdidnot
improveaftertheacquisition,withtheexceptionof2007,annualearningsfrom2004to
2008showedadeficit.
Mostimportantly,thekeyreasonforthefailureofM&Aistheinabilityofbothsides
toachievesuccessfulculturalintegration.AtSsangyong,themostseriousshortcoming
wastherelationshipbetweenmanagementandtheunions.Duringthefiveyearsafter
theacquisition,thetradeuniondidnotsupportanyofthecompany’smajordecisions.
Themainconflictsweretodowithtechnologytransfercontractsandlayoffprogrammes
to reduce production costs, which have yet to be implemented because of strong
resistancefromtradeunions.Underthebannerof ‘topreventtechnologyleakage,to
fulfillinvestmentcommitments,tocrushrestructuringplanandforfullemployment’,
Ssangyong’slabourunionaccusedSAICofnotbeingsincereaboutlong-terminvestment
inKoreaandlaunchedanumberofdemonstrationsandstrikes.Thetwosides’sharp
oppositioncausedasignificantlossofbusiness.Thelaststrawwasthecollapseofthetalks
betweenemployersandemployees,whichledtobankruptcyandreorganisation.
AfteracquiringSsangyong,SAICreplacedtheheadofthecompanywithasuccessor
(whowasalsoKorean).Concernedwithpersonnelchangesandlayoffs,theSsangyong
labourunionthreatenedtostrike.Eightmonthslater,anotherpersonnelchangesawthe
arrivalofanewdirectorwhoproposedstructuraladjustmentprogrammesthatwouldlead
to550jobcuts.TheSsangyonglabourunion’s‘diestrike’lasted20days,causedabout
16 000motorvehiclestobecut,andalossofaboutKRW 370billion(RMB3billion).
Despiteaslightimprovementin2007,withtheinternationalfinancialcrisisfrom2008,the
Ssangyongbusinesswasonceagainindeeptrouble,requiringacapitalinjectionfromSAIC
inordertodevelopanewvehiclemodel.Inreturnfora$200millioncapitalinjection,
SAICaskedSsangyongtocarryoutastructuraladjustment,whichincludedlayingoff
2000productionlineworkers.Labourunionsresistedtheplanand,whennegotiations
betweenemployersandemployeesbrokedown,Ssangyongwentintobankruptcyand
reorganisationtosavethecompany.Duringthelabournegotiations,beforeandafterthe
bankruptcyproceedings,thelabourunionaccusedSAICof‘steal[ing]KoreaAutomotive
Technology,contradict[ing]theoriginalinvestmentagreements’.Labourunionmembers
evenbesiegedtheChineseEmbassyinSouthKorea,askingChinesebusinessgroupsto
leave,andseizedChinesemanagementpersonnel.
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
15
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
I N t e R N A l F A C t o R S A F F e C t I N g o v e R S e A S F d I R I S k
TheTenthFive-YearPlanningOutlinein2000firstproposedthe‘goingout’strategyand
madecleartheneedto‘regulateforeigninvestmentthroughsupervision’.Thisshowsthat,
fromtheoutset,the‘goingout’strategywasconsciousofoverseasFDIrisks.Fiveyears
later,theEleventhFive-YearPlanningOutlinewasevenmoreemphaticabouttheneed‘to
strengthenco-ordinationofoverseasinvestment,risksmanagementandsupervisionof
state-ownedassetsabroad’.In2009,thegovernmentworkreportadoptedbytheSecond
Sessionof theEleventhNationalPeople’sCongress emphasised ‘strengthening risks
controlandsupervisionofenterprisesinvestmentabroad’.Thegovernmentworkreport
approvedbytheNationalPeople’sCongressin2010againsuggestedthattheenterprises
implementing ‘going out’ needed to avoid risks. At present, losses in overseas FDI,
especiallycross-borderM&A,havefarexceededthenormalleveloflossesinthedomestic
market.Accordingly,inadditiontonormalbusinessrisksandspecificcompanyrisks,the
moreseriousproblemsfacingoverseasFDIofChineseenterprisescomefromthesystemic
externalrisks.Thesecross-borderinvestmentsystemicriskscomefrombothdomestic
factorsofhostcountriesordifferencesbetweencountries(oftencalledcountryrisks),and
thebehaviourofChineseenterprisescausedbytheirowninvestmentobjectives,means
andprocesses.
Investment over-concentrated in a few industries
China’soverseasFDIhasfocusedonafewindustriessuchasenergyandmining,where
thelargestM&Atransactionshavebeenconcentratedinafewhostcountries.Thefocus
oninvestinginlargefinancialtransactionshas,insomecases,producedtensionsand
concernswithinhostcountries,whichprobablyexacerbatedthepotentialeconomicand
politicalrisks.Asaresult,China’soverseasinvestmentsfacegreaterrisksthanitsshareof
worldinvestmentwarrants.Forexample,whenChinalcoacquired$14billionofRioTinto
sharesinearly2008,theAustraliangovernmenthadbeenencouragingthemanagement
tolookforforeigninvestment.However,in2009,Australia’sForeignInvestmentReview
BoardsaidthatforeigninvestmentinAustralianminingcompanieswouldbelimitedto
15%oftheshares,andnewinvestmentinminingprojectsshouldbelessthan50%.These
provisionsaregenerallyaimedatChina’soverseasFDI.Suchproblemscannotsimplybe
attributedtotheeconomicnationalismofhostcountriesorprotectionism.Infact,Chinais
inrealdangerofbecomingoverdependentonimportedresources,whichwillweakenany
obligationtoupgradetheChineseindustrialstructureandenforcetheexisting‘backward’
modeofeconomicgrowthandtheirrationaleconomicstructurethatstillprevailsinsome
industries.Therefore,toreduceoverseasFDIrisks,themosteffectivemeasureswould
be tochangeChina’seconomicgrowthpattern, improve industrystructure, increase
economicefficiencyandeffectivelyco-ordinateinternationalanddomesticmarketsand
resources.Foralongtime,China’soverseasFDIwillcontinuetobemostlyinenergyand
rawmaterials,44whichmeansthattheconcernsandpossiblefrictionsofhostcountries
willnotberapidlyeliminated.
16
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
Excessive government involvement and intervention
China’soverseasFDIreliestoagreatextentonlargeSOEsforcross-borderM&A.Although
theadvantagesoflargeSOEsareevident,thisapproachisnotwithoutitsproblems.Inno
matterwhatindustry,businessstrategyneedstoreflectthenatureofcapitalexpansion,
bothwithinandoutsideitsborders.However,Chinesecross-borderM&Aareoftensaid
tobemotivatedbytheinterestsoftheChinesegovernment,althoughthemajorityofthe
Chinesepeopleconsiderthisbelieftobetheproductofanti-Chineseprejudice.However,
inviewofthegeneralrulesoftheglobalmarket,anobjectiveattitudetosuchopinions
isnecessary.TheopaquerelationsbetweengovernmentandSOEswillinevitablymake
expansionoverseasmoreexpensiveandeven,attimes,actasafatalobstacle.Inearly2008,
theAustraliangovernmentissuedaforeigninvestmentreview,basedonsixprinciples,
thatwouldexamine‘whethertheoperationoftheinvestorisindependentoftherelevant
foreigngovernment’anditscorporategovernanceandfinancingarrangements.Inessence,
foreigninvestment(includingM&A)shouldbeacommercialactivity,enterprisesshould
bethemainforce,andgovernmentshouldonlyprovideexternalinstitutionstoprotect
business.Atpresent,theChinesegovernmenthasdonemuchtopromoteoutwardFDIby
buildingmechanismstoguaranteeitseffectiveness.Asofmid-2009,Chinahadestablished
bilateraleconomicandtradeagreementswithover100countriesandregionsalloverthe
worldandsignedatleast127BilateralInvestmentTreaties(BITs),45makingChinanumber
twointheworldforBITs.46Nevertheless,forthe‘goingout’strategytobetrulyeffective
andmoreefficient,thegovernmentwillhavetoletmarketforcesplayamoreimportant
roleinthefuture,sothatSOEscanfollowcommercialprinciplesindependentlywhen
makinginvestmentdecisions.Anditisparticularlyimportanttocreatefairercompetition
mechanisms,whichwouldallowprivateenterprisesthataredrivenbyeconomicself-
interesttoparticipate,alongwithinstitutions,andinthelongrunpromotehealthyand
sustainabledevelopmentofChina’seconomy.
‘ g o I N g o u t ’ e N t e R P R I S e S l A C k m A N A g e m e N t C A P A C I t y F o R I N t e R N A t I o N A l b u S I N e S S
FormanyChineseenterprises, theirunderstandingofM&Aintegrationseems tobe
stuckinamodethatemphasisespurchasinghardassets–equipmentandplants–and
acquiringtechnology.Thecurrentfinancialcrisishasexacerbatedthisapproach,with
ChineseSOEssearchingfor‘bargains’.ManyChineseentrepreneursthinkthatmoneycan
buyeverything,whereasthecross-borderM&Amiscarriagesofthelasttwoyearsshow
thatcapitalisnotthemostimportantconsiderationpriortoanacquisition.Furthermore,
aftertheacquisition,Chineseenterprisesfinditdifficulttoaddvalueotherthanfinancial.
These two issues show that China’s overseas FDI capacity is seriously flawed. For
enterprises,theultimatepurposeofcross-borderM&Ashouldbetooptimiseresources
andindustrial,technologicalandmarketstructures,notjusttoachieveeconomiesofscale.
Chineseenterprisescurrentlyimplementingthe‘goingout’strategysufferfromasevere
shortageofinternationalmanagementcapacity,whichisreflectedintheproblemsrelated
tointegratingorganisationalcultureandhumancapital.Asubstantialgapexistsbetween
Chineseenterprisesandinternationalcompetitors,whoarebetterabletohandlethe
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
17
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
problemsofintegrationinM&A.ThisunderscoresthefactthatChineseenterprisesneed
toexertmoreeffortandtakerisksinordertoachievetheaimsofthe‘goingout’strategy.
C h I N e S e e N t e R P R I S e S l A C k A N o v e R S e A S F d I S t R A t e g y
From2005to2008,therenminbi–dollarexchangerateincreasedbymorethan20%,
whichcouldbeseenasasignificantadvantageforChineseenterprises‘goingout’.In2008,
theinternationalfinancialcrisisledtodecliningeconomicgrowthinmanycountries
andalackofdemand,depressinginternationalpricesofstapleproductsandresultingin
aseriousshortageofcapitalmobility.Incontrast,thecrisisencouragedmanyChinese
enterprises,especiallylargeSOEswithrelativelyadequatecashin-hand,to‘bargain-hunt’.
However,overall,Chineseenterprisesinvestingoverseasseemtolackaclearandlong-
termstrategy,especiallyinacquisitionandintegration.
An investmentopportunityandpotentialbenefitswillnotautomaticallyproduce
genuineprofits.Comprehensiveandclearstrategicplanningisakeyfactortorealising
thisfundamentalaim.Chineseenterpriseshavestrategicplanningflawsintheiruseof
overseasFDI: first, theyusuallyonlyconsiderpriceandaccessibility,not investment
objectivesthatareconsistentwiththeiroveralldevelopmentgoals;second,theydonot
havealong-termbusinessplanoraclearpictureoftheacquisition’sfuturedirection;
third,theirduediligenceisinadequatefortheinvestmentobjectives,resultinginafailure
todiscovertherisks;fourth,theydonothaveafullyconsideredintegrationplanbefore
thetransaction.47
Oneofthereasonsforthislackofstrategicplanningisthattheenterprisesdonothavea
clearknowledgeoftheirownbusiness.ThepurposeofoverseasFDIistooptimiseresource
allocation,introduceadvancedtechnology,achieveeconomiesofscaleandpromotethe
rapidexpansionofproductionandcapital.Corporateinvestorsmustcorrectlyassesstheir
competitiveandstrategicpositionandintegratehumanresources,whichissomethingthat
manyChineseenterprisesseemill-preparedfor.AsVice-PremierWangQishanpointedout,
inrelationtotheChineseentrepreneurs’impulseforoverseasacquisitionafterthe2008
financialcrisis,overseasM&Aisnotjustaboutthemoney.Hewarnedoftheneedtoanswer
thesequestionsfirst:‘Canyoubuyout?Canyoumanageit?Doyouhaveconfidenceabout
yourownmanagementability?Haveyouanalysedtheculturaldifferencesbetweenthetwo
sidesyet?Haveyoueverstudiedthelocallabourunionrelations?’48
The lack of strategic planning is closely related to the external institutional
environment in which enterprises operate. Currently, enterprises that invest or are
planningtoinvestoverseasaresubjecttoChineseoverseasinvestmentpolicy.TheChinese
government’slegalprotectionofoutwardFDIischaracterisedbythelackofaunified,
stableandauthoritativelegislationandoverlappingorconflictingpoliciesfromdifferent
managementsectors,whichsubstantiallyreducestheefficiencyofChineseoverseasFDI.
Inparticular,theChinesegovernmenthasfewpoliciesinplacethatencourageandsupport
entrepreneursoverseas.TheChinesegovernmentcannottakefulladvantageofmobilising
therequisiteresourcesunderitsauspicestoaddressthemarketfailuresofinformation,
andisnotinvolvedinthedevelopmentofinternationalrulesforcross-borderinvestment
either.49 More fundamentally, the government’s industrial policies in the relevant
enterprisescannotprovidethecorrectincentives.TheultimatepurposeofoverseasFDIis
18
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
toco-ordinatedomesticandinternationalmarketsandresources,whichmeansinessence
importingresourcesforuseinChinaratherthansimplyexportinggoods,services,or
softpower.50OverseasFDIcanplayanimportantroleinpromotingenterprisereform,
improvinggovernanceandbuildingmultinationalcorporations.However,inrecentyears,
the‘goingout’strategyemphasisedsecuringresources,focusingoninvestmentinenergy
andmineralresources,anapproachthatdoesnottakeintoaccountissuessuchasbrandor
saleschanneldevelopmentandinnovation.Asaresult,enterprisesinevitablyseeoverseas
FDIasinvolvingquicksuccessesandshortsightedbehaviour,notstrategicthinkingand
investmentplanning.
F d I I N C o u N t R y R I S k A S S e S S m e N t
Althoughinrecentyearsmorestudieshaveappearedontheenvironmentsandrisksof
China’soverseasFDI,fewcomprehensivestudiesfocusspecificallyonthecountryrisks
ofChina’soverseasFDIaroundtheworld.In2009,theOutward FDI and Co-operation
Country (region) Guide(hereinafterreferredtoasthereport)wasjointlypublishedbythe
ChineseAcademyofInternationalTradeandEconomicCo-operation,theInvestment
PromotionAgencyofMinistryofCommerce(People’sRepublicofChina)andChinese
embassies business sectors. The report gives a complete and objective description
oftheinvestmentenvironmentsinhostcountriesand/orregions,notingwhichtypes
ofinvestmentrisksexist.Thereportappearstoreflectthelocaldata,usesconsistent
standardswhencomparingcountriesandregions,andcanberegardedastheauthorityon
countryrisksofoverseasFDI.
Thereportincludesatotalof160countriesandregionsintheworld,distributedover
sixcontinents(Asia:36;Africa:47;Europe:46;NorthAmerica:2(USandCanada);Latin
America:21;Oceania:8).
Atext-basedinterpretationofquantitativeanalysiswasusedtoanalysethereport.The
mainexternalrisksfacedbyChineseoverseasFDIweredividedintosevencategories:
1 politicalrisk,includingpoliticalstabilityandadministrativeefficiency;
2 sovereignrisk,includingnationaltreatmentandmarketopenness;
3 securityrisk,thethreatofterrorism,epidemicsandotherphysicalthreats;
4 legalrisks,theintegrityofthelegalsystems,Chineseenterprises’familiaritywithlegal
systemsandlitigationcostsinhostcountries(regions);
5 culturalrisk,mainlyculturalintegrationandtheextentoffriendlinesstowardsChina’s
overseasFDI;
6 risksoflabourunionsandstakeholders,theinfluenceofmainlabourunionforcesand
otherexternalstakeholders,employmentconvenienceandlabourcosts;and
7 environmentalrisk,theresponsibilityofenvironmentalprotectionrequiredbythehost
country.
Theoverall risk indexofan individualcountryorregionwasachievedbyaveraging
theseventypesofrisk.Thequalitativeandquantitativeanalysesofriskswerebasedon
thecontentanalysismethod.First,thenatureofriskwasidentified,accordingtothe
textlanguage.Then,thestrengthofthesevarioustypesofriskswasmanuallyevaluated
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
19
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
usinga5-pointLikert-scale,whosegradesdependedonwordsfrequencyextractionand
languagecharacterisation.
The geographical distribution of the overall risk index
AfterestimatingtheriskindexofChina’soverseasFDIinallcontinents(seeTable5),a
crossanalysiswasconductedbycombiningthedataofnon-financialoverseasFDIstocks
andflowsin2008.ABCGmatrix51wasgeneratedbycombiningtheriskindexwiththe
geographicaldistributionofChina’soverseasFDI.BeingsimilartoaSWOTanalysis,the
matrixwasanalysedusingsimilarmethods.52
Table 5: The risk index of China’s overseas FDI in six continents
Asia Africa Europe US & Canada Latin America Oceania
Risk index 3.49 3.61 3.78 3.65 3.37 3.67
BasedonthegeographicaldistributionofthetotaloverseasFDIstockstotheendof
2008,China’snon-financialoverseasFDIisathighriskinfourofthesixcontinents.
TheshareofFDIstocksinAsiaisthehighestofthesixcontinents(seeFigure2).The
extentofinvestmentislowerinEurope,LatinAmericaandOceaniarespectively,butthe
risksarerankedcomparativelyhigher,makingthemmoredifficultareasforinvestment.
Moreover,specialattentionshouldbegiventoAustralia,asthecountryhasabsorbed
mostofChina’soverseasFDIforyears.TheUSandCanadasharealowerdistribution
ratioandtheleastrisk,whichmakesthempotentialdestinations(long-term)forChina’s
overseasFDI.Atpresent,China’sinvestmentinAfricarepresentsahigherproportionof
China’soverseasFDIandseemstocarryfewerrisks,makingthecontinentauniqueand
high-qualityinvestmentarea.
Figure 1: Distribution of China’s overseas industrial M&A transactions, 2008–2009
business service$0.86 billion (1.50%)
utilities$1.58 billion (2.77%)
mining industry$26.23 billion (45.92%)
manufacturing$0.70 billion (1.23%)
energy industry$27.75 billion (48.58%)
Source:Calculatedbytheauthorfromexistingstatistics
20
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
Figure 2: China’s overseas FDI per continent
100%
80%
60%
40%
20%
48.4
8.8
5.23.5
22.8
11.4
29.5
10.8
10.3
14.6
6.0
27.2
38.4
13.1
3.3
8.2
20.8
16.3
32.5
10.9
4.3
5.5
24.8
21.9
24.3
17.2
4.0
11.7
16.6
23.9
32.8
2.80.4
15.0
6.8
42.2
38.9
10.2
4.0
10.7
14.3
21.8
0%2003 flow
2004 flow
2005 flow
2006 flow
2007 flow
2008 flow
2008 stock
oceania
latin America
North America
europe
Africa
Asia
Source:AnnualStatistical Bulletins of China’s Outward Foreign Direct Investment.In2003–2007:
Non-financialoutwardFDIdata.In2008,theflowsandstockarealloutwardFDI
AsFigure2shows,Africaoccupied the largest shareof investment flows in2008,a
signofitsprominentpositionasaninvestmentlocation.Oceania(actuallyAustralia)is
obviouslyalsoavaluableinvestmentdestination,whileattentionshouldbepaidtothe
fullpotentialoftheUSandCanada,whoseregionaladvantagesareweakening.Although
higherinvestmentriskhasalwaysbeenafactorinEuropeandLatinAmerica,theirshare
decreasedin2008.
The overall coverage of seven types of risks
Theseventypesofriskhavedifferentexposureinthe162countriesandregions,and
soacrossanalysiswascarriedoutthatcombinedthecoverageandthedegreeofrisk.
Accordingtothereport,thehighestcoveragerelatedtolabourunionsandstakeholders
risk(85.6%)andpoliticalrisk(85%)in137and136countriesandregionsrespectively,
followedby legal risk (76.9%)andenvironmental risk (76.3%).Cultural riskhada
coveragerateof71.3%,whilesecurityriskandsovereignriskcarriedthelowestrisk,at
46.9%.
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
21
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
Table 6: The coverage rate and risk index of seven types of risks
Political risk
Sovereign risk
Security risk
Legal risk
Cultural risk
Labour union risk
Environmental risk
Coverage rate of risk (%)
85.00 46.90 46.90 76.90 71.30 85.60 76.30
Risk index 3.45 3.71 3.37 3.70 3.11 3.87 3.94
Basedon thematrix thatcombined the indexofsevenrisk typeswithriskcoverage
rates,themostcommonandsevererisksforChina’soverseasFDIare:labourunionsand
stakeholders,legalriskandenvironmentalrisk.Althoughpoliticalriskandculturalrisk
arecommon,theproblemisnotserious.Securityriskalwayshasalargeinfluence,butthe
probabilityandseverityoftheproblemsarenotobvious.Finally,theeffectofsovereign
riskwillbemoreseriousbut thisriskonlyappears incertaincountriesandisnota
universalphenomenon.
The distribution of various types of risk in different countries/regions
An investment risk analysis was created for different levels of economic and social
developmentofcountriesandregions,using theWorldBank’s incomeclassification.
AccordingtotheWorldBank,the160countriesandregionsinthereportaredividedinto
fivecategories:highincome(OECD53),highincome(non-OECD),upper-middleincome,
lower-middleincomeandlowincome.Theoverallindexvaluesofseventypesofrisks
werecalculatedinthefivecategoriesofcountriesandregions(economies),whichwere
sortedinascendingorderforeverytypeofrisk.
1 Political riskIngeneral,high-incomeeconomieswouldbeexpectedtohavethelowestpoliticalrisk,as
theireconomicandpoliticalsystemsaremoremature,theirsocietiesmorestable,andthe
administrativeefficiencyoftheirgovernmentsmoresatisfactory.Assuch,thelowerthe
economy’sincomeis,thehigheritsexpectedrisks.However,accordingtothestatistical
results,thehighestpoliticalriskwasnotcarriedbylower-incomeeconomies,butby
lower-middleincomeeconomiesandupper-middleincomeeconomies,whicharemainly
fromSouth-EastAsia,SouthAsia,WestAsia,LatinAmerica,WestAfrica,SouthernAfrica
andtransitioneconomies,wherepoliticalstabilityandcorruptionaremajorissues.
2 Sovereign riskTheleast-developed,low-incomeeconomieshavealowerlevelofsovereignrisk,which
isinsomerespectscounter-intuitive.Apossibleexplanationforthisresultisthatsuch
economiesaremainlyfromsub-SaharanAfricaandSouthAsia,whereleadersareless
likelytobereplacedandfavourableconditionsareofferedtoattractforeigninvestment.
So,low-incomeeconomieshavealowerprobabilityofriskssuchasnationalisation.
22
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
3 Security riskTheseverityofrisks(suchaspublicorder,terrorism,epidemicdiseasesandothercauses
ofpersonalsecurityrisks)isininverseproportiontothepercapitalincomelevel.This
reflectstherelationshipbetweenthelevelofeconomicandsocialdevelopmentandthe
investmentenvironment.Thestrengthofsuchariskisthesameforinvestmentfromany
country,includingChina.
4 Legal riskInterestingly,althoughbothgroupsbelong tohigh-incomeeconomies, the legal risk
facedbyChina’soverseasFDIwasnotthesameinOECDandnon-OECDcountries.As
mostofthenon-OECDhigh-incomeeconomieshavesmallereconomicaggregates,they
cannotattractorretainrealdirectinvestment.Insteadtheymaysimplydevelopoffshore
financialbusiness,becominginternationaltaxhavens.TheOECDeconomiesareadvanced
countrieswithbasicallysound legal systems.Manyof theseOECDcountrieshavea
commonlawsystemthatdiffersfromChina’slegalsystem,whichmeansthatChinese
companiesoftenhavetopayhigherlegaladaptationandlitigationcosts.
5 Cultural riskMost of the low-income economies, mainly in sub-Saharan Africa and South Asia,
maintainfriendlydiplomaticrelationsandtraditionalfriendshipwithChinaandhavea
higherdegreeofacceptanceofChineseoverseasFDI.
6 Labour unions and other stakeholder risksGenerallythelabourunionmovementandlabourcostsarehighlycorrelatedtotheextent
oflocaleconomicdevelopmentandincomelevels.Asmentionedearlier,non-OECDhigh-
incomeeconomieshavelowereconomicaggregatesandsmallrealinvestmentprojects,
butprovideregistrationservices,whichmakeslabourunioninterventionandlabourcosts
meaningless.
7 Environmental riskIn general, there is a trade-off between environmental protection and economic
developmentinmanycountriesorregions.Localenvironmentalprotectionrequirements
are therefore in line with development and income levels. Lower-middle income
economiesaremainlyfromlessadvancedindustrialisedcountriesinAsiaandAfrica,
where the industrialmodel is labourandresource-intensive.Therefore, therequired
environmentalresponsibilitiesarerelativelylenient.
ThemainrisksofChineseoverseasFDIwereanalysedingreaterdepthbysubmittingthe
seventypesofrisktoafactoranalysis.Thenumberoffactorswasdecidedaccordingto
whethertheirrespectiveeigenvaluewasgreaterthanone.Threefactorswereextracted
whose cumulative variance contribution ratewas76.798%.Themaximumvariance
orthogonalrotationdeterminedthatfactor1consistedofpolitical,legalandculturalrisks;
factor2comprisedunion,securityandsovereignrisks;whilefactor3wasenvironmental
protectionrisk.Thethreefactorswerenamed:systemrisk,interestgroupsandmajeure
risk,andenvironmentalliabilityrisk.Therefore,generallyspeaking,themainbarriersto
ChineseoverseasFDIarecausedbyincompatiblelegal,politicalandsocialsystems.This
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
23
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
meansthatalotofpainstakingworkremainsifChinaistoimproveitsunderstanding
andintegrationintotheinternationalformalandinformalsystems.Moreover,China’s
‘goingout’strategymustbeaprocessofintegratingintotheinternationalsystem,and
adequateattentionmustbepaidtotheinterestgroups,socialandpoliticalmovements
andthesupplychaininhostcountries.ChineseoverseasFDIshouldalsobecommitted
tofollowingtheinternationaltrendofresponsibleenvironmentalprotection,inorderto
avoidsocialandpoliticalriskarisingfromecologicalproblems.
Table 7: Index of seven types of risks in five categories of economies
Political risk
Sovereign risk
Security risk
Legal risk
Cultural risk
Labour union risk
Environmental risk
High income: OECD
2.46 3.58 2.12 3.91 3.59 4.04 4.64
High income: non-OECD
3.20 3.50 3.00 3.29 3.46 3.41 3.93
Upper– middle income
3.71 4.06 3.45 3.61 2.89 4.06 4.15
Lower– middle income
3.84 3.70 3.50 3.92 3.18 4.03 3.48
Low income
3.56 3.56 3.70 3.69 2.62 3.56 3.61
Figure 3: Geographic distribution and risk index of China’s overseas FDI stocks in 2008
Prop
ortio
n of
dis
trib
utio
n
Risk index
Asia
europe
oceania
Africa
latin America
uS & Canada
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%3.3 3.4 3.5 3.6 3.7 3.8 3.9
I
Iv
II
III
24
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
Figure 4: Geographic distribution and risk index of China’s overseas FDI flows in 2008
Prop
ortio
n of
dis
trib
utio
n
Risk index
Asia
europe
oceania
Africa
latin AmericauS & Canada
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%3.3 3.4 3.5 3.6 3.7 3.8 3.9
I
Iv
II
III
Figure 5: The coverage rate-risk index matrix
Cov
erag
e ra
tio
Risk index
Cultural risk
Political risk
legal riskenvironmental risk
labour union risk
Sovereign riskSecurity risk
90%
80%
70%
60%
50%
40%3 3.2 3.4 3.6 3.8 4
I
Iv
II
III
C o N C l u S I o N
AfteranalysingthecurrentsituationandmainfeaturesofChina’soutwardFDIin2008–
2009, the lossessufferedandthemajorrisks faced, thepreliminaryconclusionsare:
(1)China’soverseasFDIhasexperiencedarapiddevelopmentbutisstilllowinabsolute
terms, while the concentration trend of geographical and industrial distribution is
obvious.Thisindicatesthatthe‘going-out’strategyhasbeenfaithfullyimplemented,but
alsocontainshighrisks.(2)TherisksofChina’soverseasFDIemanatefromfourmain
aspects:breachofcontractandunexpectedtransactionalcosts;exchangeloss;premium
transactions;andfailureofintegration.(3)OverseasFDIfacessystemicrisks.Theinternal
causes from theChinese side includeahighconcentrationof investment; excessive
governmentintervention;lowinternationalbusinessmanagementability;andalackof
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
25
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
overseasinvestmentstrategies.(4)BasedonacountryriskanalysisofChina’soverseas
FDI, themost important issuesare the legal,political, socialandother institutional
differencesandconflicts.ThisindicatesthatChina,hostcountriesandtheinternational
community need to continue to strengthen co-operation and mutual institutional
transformation.And,asimportantly,asanemergingworldpower,Chinashouldtakeon
moreinternationalresponsibility.
e N d N o t e S
1 JiangZeming’saddressatthemeetingofthePoliticalBureauoftheCentralCommitteeon20
January2000.‘JiangZemingAnalects’,2,Beijing:PeoplePublishingHouse,2006,pp.569.
2 Accordingto China Statistical Yearbook 2008,outwardFDIisdefinedasaneconomicactivity
wherebyChina’sdomesticinvestorsestablishorpurchaseenterprisesabroadoroutsideof
customsterritorybycash,intangibleortangibleassetsetc.withaviewtogettingtherightof
controltooperateormanagetheenterprise.
3 ChenWeishuarguedthatChina’soverseasinterestsexistoutsidetheeffectivejurisdiction
ofChinesesovereignty.Thenarrowconceptisthesecurityoflife,propertyandactivitiesfor
overseasChineseorganisationsandcitizens.Thebroadconceptincludesallkindsofeffective
agreementsandcontractsrelatedtotheinterestsofChinesegovernment,corporationsand
citizens,andthedignity,reputationandimagefairlyaccessedbyofficialandcivilsociety.
SeeWeishuC,‘GeneralvisionofChina’soverseasinterests’,International Review,2,2009.
SuChanghearguedthatChina’soverseasinterestsaredefinedasatypeofnationalinterests
whichentitledininternationalinstitutionsanddistributedinextra-territorialareaswithin
theestablishedgloballinkagesofdomesticmulti-actors.SeeChangheS,‘OnChina’soverseas
interests’,World Economics and Politics,8,2009.
4 NominalGDPofCaymanIslandsisKYD2.03billion(about$2.5billion).CaymanIslands
Governmentwebsite,http://www.gov.ky/portal/page?_pageid=1142,1481068&_dad=portal&_
schema=PORTAL).The2006StatisticalBulletinofChina’sOutwardForeignDirectInvestment
demonstratesthatChina’sdirectinvestmentflowtoCaymanIslandsis$7.83billion.TheGDP
ofBritishVirginIslandswasabout$1.1billionin2007.DatacalculatedaccordingtotheBritish
MinistryofForeignAffairs,http://www.fco.gov.uk/en/travel-and-living-abroad/travel-advice-
by-country/country-profile/north-central-america/british-virgin-islands?profile=economy.
The2007StatisticalBulletinofChina’sOutwardForeignDirectInvestmentdemonstratesthat
China’sdirectinvestmentflowtoBritishVirginIslandsis$1.88billion.Bycontrastingthese
figures,itisobviouslyverydifficulttobelievethattheseinvestmentsaretrulysettledlocally.
5 NotethatexcludingtheCaymanIslandsandBritishVirginIslandsinvestment.
6 NotethatexcludingHongKong,MacaoandTaiwaninvestment.
7 Thispaperconsolidated thecompletionofnon-financial sectorM&Acases thatChinese
enterprises announced between 1 January 2008 and 31 December 2009. The top 20
transactionsare listedat theendof thepaper.Unless thesource is indicated, theauthor
calculatedthecross-borderM&AtransactionsfrompubliclyavailablereportsinChinaand
overseas,corporateannualreportsandothernoticesororders.Duetothewidevariety,the
sourcescannotallbelisted.
8 Someindependentresearchinstituteshaveindicatedthatformanyyears,cross-borderM&A
of Chinese enterprises focused on energy, mining and utilities. Deloitte’s study showed
26
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
that from2003tothethirdquarterof2009,acquisitionsbyChineseenterprises inthese
sectorsaccountedfor29%oftheircross-borderM&Aactivities,and66%ofthetotalvalue
oftransactions.Inthefirstthreequartersof2009,dealsacquisitionscompletedbyChinese
enterprisesintheseindustriesaccountedforabout41%oftheircross-borderM&Adeals,
andupto93%ofthedealsvalue.SeeDeloitteChina,China’s rise: New areas of cross-border
mergers and acquisitions, November 2009, http://www.deloitte.com/assets/Dcom-China/
Local%20Assets/Documents/Services/Global%20Chinese%20Services%20Group/cn(zh-cn)_
gcsg_EmCnNewFront_011209.pdf.ThomsonReuters’studyconfirmedthatin2009China’s
cross-borderM&Afocusedontheenergyandrawmaterialssectors, ‘Fourthquarter2009
financial advisors: Mergers & acquisitions review’, http://online.thomsonreuters.com/
DealsIntelligence/Content/Files/4Q09%20MA%20Financial%20Advisory%20Review.pdf.
9 HongmeiH,‘M&A:Systemicstrategyismoreimportant’,fromthewebsiteoftheChinese
AcademyofInternationalTradeandEconomicCo-operation.
10 DevelopmentResearchCenteroftheStateCouncil,‘AnanalysistothestrategyonM&Aof
Chineselargeoilenterprises’,DRCnetMonthlyAnalysisofPetroleumandChemicalIndustry
Report,14August2009.
11 YouZ,‘Thereasonsof“goingout”failure,threestrategiesexpertsgiven’,21st Century Business
Herald,9August2007.
12 RMB:renminbi(Chinesecurrency).
13 ChuanJ,‘Hurriedwithdrawoverseasacquisitions:China’s200billionRMBtuitiontestwaves’,
China Securities Journal,18December2008.
14 CAD:Canadiandollar.
15 ‘CNPCacquiredVerenexdealfellthrough’,Caijing,September9,2009.http://www.caijing.
com.cn/2009-09-09/110244077.html.
16 ‘Verenex shareholders approve sale to Libyan government arm’, Wall Street Journal,
14December2009,http://online.wsj.com/article/SB100014240527487042014045745900808
69123634.html.
17 NoticeofChinaRailwayGroupLimited’sforeigninvestment,ChinaRailwayGroup,23April
2008,http://www.crec.cn/c_admin/images/200842474626.pdf.
18 ‘Congo(DRC)announceddetailsofthe$9.25billiontransactionwithChina’,FT Chinese,
12May2008,http://www.ftchinese.com/story/001019267.
19 Until2007,theDRC’sbalanceofforeigndebthadreached$13.4billion,belongingtothe
HeavilyIndebtedPoorCountries.InternationalMonetaryFund(IMF),‘DemocraticRepublic
oftheCongo:StatisticalAppendix’,IMF Country Report,10/11January2010.Seehttp://www.
imf.org/external/pubs/ft/scr/2010/cr1011.pdf.Inrecentyears,theDRCgovernmenthasbeen
negotiatingwiththecreditorsandtheIMFabout$11billionofdebtreliefissues.
20 ‘China’s largest investment in Africa delay’, FT Chinese, 10 February 2009, http://www.
ftchinese.com/story/001024589.
21 IMF,statementbyIMFstaffmissiontotheDemocraticRepublicoftheCongo.PressRelease,
08/346,23December2008.Seehttp://www.imf.org/external/np/sec/pr/2008/pr08346.htm.
22 WallisW,‘ChinesedealthreatensIMFaidforCongolese’,Financial Times,15May2009.See
http://www.ftchinese.com/story/001026447/en.
23 IMF, ‘DemocraticRepublicof theCongo:Request for the rapid-access componentof the
exogenousshocksfacilityandreportonthe2008staffmonitoredprogram’, IMF Country Report,
09/317,17November2009.Seehttp://www.imf.org/external/pubs/ft/scr/2009/cr09317.pdf.
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
27
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
24 ‘IMFputpressureonChinaandtheDRCshrinksagreement’,STNN,20August2009.See
http://www.stnn.cc/chinafin/200908/t20090820_1088718.html.
25 InJanuary2008,theexchangerateofRMBagainstthedollarincreasedby7.5%overthesame
periodofpreviousyear.InJanuary2009,theexchangeratehadincreasedby6.0%year-on-
year.(DatacalculatedaccordingtothePeople’sBankofChina’swebsitestatistics.)
26 ‘ChinaCOSCO:Exchangerateriskscontinuetoexpand’,EEO,25December2008.Seehttp://
www.eeo.com.cn/hwtz/2008/12/25/125040.shtml.
27 DongL,‘Openthe“doorofAustraliandollar”looksatcorporateexchangerisk’,Securities
Daily,21November2008.
28 ChinaRailwayGroupLimited,Report of the third quarter of 2008,http://www.crec.cn/c_admin/
images/2008103192833.pdf.
29 HKD:HongKongdollar.
30 ‘CITICPacificLimitedResultsAnnouncement(2008)’,CITICPacific,http://www.citicpacific.
com/upload/gb/20090325-1c.pdf.
31 Untiltheendof2002,Chinasetup6 960enterprisesoutside(includingHongKongand
Macao regions). See Ministry of Commerce website, ‘2002 concise statistics of foreign
economicco-operation’.Untiltheendof2009,Chinahasestablishedabout14 283enterprises
acrosstheborders.ThecalculationisbasedonStatisticalBulletinofChina’sOutwardForeign
DirectInvestment2008andthedataonoutwardFDIpublishedonthewebsiteoftheMinistry
ofCommercein2009.
32 Beingunabletofindthenumberofcompaniesthatsettingupinoverseascountries(excluding
HongKongandMacaoregions),theoutwardFDIdatawasusedtoreplacetheoverseasFDIto
analyse,astheirdevelopmenttrendsaresimilar.
33 From2002to2007,thenumberofdomestic-scaleindustrialenterprisesincreased0.85times,
totalassetsincreased1.41times,andaverageannualgrowthrateswere13.2%and19.3%.
BasedonChina Statistical Yearbook 2003 andChina Statistical Yearbook 2008, publishedbythe
NationalBureauofStatistics.
34 AnnualReportofPetroChinaCompanyLimitedin2008,PetroChinawebsite.
35 Chen Y, Hui H & T Chunrong, ‘2009 International oil price review and 2010 forecast’,
Petroleum & Petrochemical Today,1,2010.
36 ‘ReportofChinaOilfieldServicesLimitedinthethirdquarterof2009’,COSLwebsite,http://
www.cosl.com.cn/Chinese/uploadSoft/200910281751252097.pdf.
37 AnnualResultsAnnouncementofAluminumCorporationofChinaLimitedin2008,Chinalco
website,http://www.chalco.com.cn/zl/html/61/2009/20090330093156145492057/2009033009
3302457679349.pdf.
38 Mid-term Results Announcement of Aluminum Corporation of China Limited in 2008,
Chinalcowebsite.
39 XinhongL,‘TheaftermathofChinalco’sM&A’,Weekly On Stocks,2December2008.
40 Deloitte, ‘Deloittesurveyshowsthat60%ofmergersandacquisitionsdonotachievethe
desiredbusinessvalue’,Deloitte’snetworkinChina,http://www.deloitte.com/view/zh_CN/
cn/7039/press-release/68f30b7412a94210VgnVCM100000ba42f00aRCRD.htm.
41 KRW:Koreanwon.
42 SAICMotorCorporationLimited,2008 Annual Report,SAICwebsite,http://www.saicmotor.
com/chinese/images/tzzgx/ggb/dqbg/2008ngg/2009/4/29/2390.pdf.
43 SAICMotorCorporationLimited,2008 Mid-term Annual Report,SAICwebsite,http://www.
saicmotor.com/chinese/images/tzzgx/ggb/dqbg/2009ngg/2009/8/28/2605.pdf.
28
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
44 ThenewsonthewebsiteofNationalDevelopmentandReformCommission,5January2010,
ZhangXiaoqiang,deputydirectoroftheNationalDevelopmentandReformCommission,
addressedthemeetingonutilisingforeigncapitalandoverseasinvestmentthat‘goingout’
strategyshouldcontinuetoinvestinthemainenergyresources,increaseabilitiestoexplore
overseasresources,marketsandadvancedtechnologysoastoprovideprotectionfordomestic
economicdevelopment.Seehttp://zhangxiaoqiang.ndrc.gov.cn/zyjh/t20100105_323369.htm.
45 ‘China has already signed 127 bilateral investment protection agreement with over 100
countriesandregionsintheworld’,People’s Daily,overseasedition,20May2009.
46 UNCTAD,RecentDevelopmentsinInternationalInvestmentAgreements,2008–June2009,IIA
Monitor, 3,2009.Seehttp://www.unctad.org/en/docs/webdiaeia20098_en.pdf.
47 ‘PWC experts: There is misunderstanding overseas investment of Chinese enterprises’,
International Finance,9,2009.
48 ‘Chineseenterprisesinoverseasmergersandacquisitionsshouldbecareful’,Securities Journal,
21March2009.
49 Zhang Guangrong, ‘The evolution of the basic policy of China’s “foreign investment”’,
International Economic Cooperation,9,2009.
50 Deloitte,‘LookatChina’soverseasinvestmentactivities’,MeasuredValue,thefifthJanuary-
February2010.
51 Boston Consulting Group matrix is a chart created by Bruce Henderson for the Boston
ConsultingGroupin1968.Ithelpscorporationstoanalysetheirbusinessunitsorproduct
lines,andallocateresources.
52 Quadrantsofthematrixwerebasedonmid-valueofverticalandhorizontalranges.Theexact
degreeofriskindexispoor,assubjectivitywasusedtosortthereferences,andsothefigures
arenotmathematicallycorrect.
53 OrganisationforEconomicCo-operationandDevelopment.
C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9
29
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
A P P e N d I x
20 largest cross-border M&A by Chinese enterprises (non-financial sectors), 2008–2009
Rank
Dat
e of
pu
blic
atio
nTa
rget
co
mpa
nyTr
ansa
ctio
n co
nten
tTa
rget
indu
stry
Targ
et
loca
tion
Buy
erco
mpa
nyLo
cati
on o
f th
e se
ller
com
pany
Valu
e of
the
tr
ansa
ctio
n ($
bill
ion)
1Fe
bru
ary
20
08Ri
o Ti
nto
Plc
12%
equ
itym
inin
g in
dust
ryBr
itain
Alc
oa In
c an
d C
hina
lco
Brita
in14
.000
2A
ugus
t 20
09A
ddax
Pe
trole
um
Cor
pora
tion
100%
equ
ityen
ergy
Nig
eria
, G
abon
and
Ira
q’s
kurd
ish
regi
on
Sino
pec
Inte
rnat
iona
l Ex
plor
atio
n an
d Pr
oduc
tion
Cor
pora
tion
(Sin
opec
Gro
up)
Switz
erla
nd7.5
60
3Ju
ly 2
008
Aw
ilco
Offs
hore
A
SAFu
ll
acqu
isitio
nen
ergy
Nor
way
Chi
na O
ilfie
ld S
ervi
ces
Limite
d (C
NO
OC
su
bsid
iary
)
Nor
way
3.77
7
4A
pril
2009
JSC
M
angi
stau
m
unai
gas
100%
ord
inar
y sh
ares
ener
gyka
zakh
stan
CN
OD
C
(CN
PC s
ubsid
iary
), ka
zMun
aiG
as
kaza
khst
an3.
300
5O
ctob
er
2009
Felix
Res
ourc
es
Limite
dC
ondi
tiona
lly
appr
oved
the
acqu
isitio
n of
10
0% e
quity
min
ing
indu
stry
Aus
tralia
Yanz
hou
Coa
l Min
ing
Com
pany
Lim
ited
Aus
tralia
3.20
0
6M
arch
20
08Tu
as P
ower
Lim
ited
100%
equ
ityen
ergy
Sing
apor
eSi
noSi
ng P
ower
Pte
Ltd
(C
hina
Hua
neng
Gro
up)
Sing
apor
e3.
103
7Se
ptem
ber
20
08A
wilc
o O
ffsho
re
ASA
Ove
rall
M&
Aen
ergy
Nor
way
Chi
na O
ilfie
ld S
ervi
ces
Limite
d (C
NO
OC
su
bsid
iary
)
Nor
way
2.50
0
8D
ecem
ber
20
08Ta
ngan
yika
Oil
Com
pany
Ltd
All
shar
esen
ergy
Syria
Sino
pec
Can
ada/
Sw
eden
2.00
0
9N
ovem
ber
20
09PT
. Bum
i Re
sour
ces
Tbk
Adv
ance
d m
ortg
age
deb
tm
inin
g in
dust
ryIn
done
siaC
hina
Inve
stm
ent
Cor
pora
tion
Indo
nesia
1.90
0
30
S A I I A O C C A S I O N A L P A P E R N U M B E R 73
C H I N A I N A F R I C A P R O J E C T
Rank
Dat
e of
pu
blic
atio
nTa
rget
com
pany
Tran
sact
ion
cont
ent
Targ
etin
dust
ryTa
rget
lo
cati
onB
uyer
com
pany
Loca
tion
of
the
selle
r co
mpa
ny
Valu
e of
the
tr
ansa
ctio
n ($
bill
ion)
10A
ugus
t 20
09A
SOC
Mac
kay
Rive
r and
D
over
oil
sand
s pr
ojec
ts60
% e
quity
ener
gyC
anad
aPe
troC
hina
Com
pany
Limite
d (C
NPC
sub
sidia
ry)
Can
ada
1.74
0
11N
ovem
ber
20
09A
ES C
orpo
ratio
n15
% e
quity
Pub
lic
utili
ties
US
Chi
na In
vest
men
t Cor
pora
tion
US
1.58
0
12Ju
ly 2
009
Teck
Res
ourc
es L
imite
d17
.2%
equ
itym
inin
g in
dust
ryC
anad
aC
hina
Inve
stm
ent C
orpo
ratio
nC
anad
a1.
500
13Ju
ne 2
009
OZ
Min
eral
sC
ondi
tiona
l offe
r to
acqu
ire th
e m
ain
as
sets
min
ing
indu
stry
Aus
tralia
Chi
na M
inm
etal
s N
on-fe
rrous
M
etal
Com
pany
Lim
ited
(Chi
na
Min
met
als
Cor
pora
tion)
Aus
tralia
1.38
6
14M
ay 2
009
Sing
apor
e Pe
trole
um C
o.45
.51%
equ
ityen
ergy
Sing
apor
ePe
troC
hina
Sing
apor
e1.
020
15A
ugus
t 20
09Fo
rtesc
ue M
etal
s G
roup
17
.34%
equ
itym
inin
g in
dust
ryA
ustra
liaH
unan
val
in Ir
on &
Ste
el
Gro
upA
ustra
lia0.
985
16Se
ptem
ber
20
09JS
C k
azM
unai
Gas
Ex
plor
atio
n Pr
oduc
tion
11%
of g
lob
al
depo
sitar
y re
ceip
ts,
equi
ty is
not
cle
ar
ener
gyka
zakh
stan
Fullb
loom
Inve
stm
ent
Cor
pora
tion
(Chi
na In
vest
men
t C
orpo
ratio
n)
kaza
khst
an0.
939
17Se
ptem
ber
20
08M
idw
est C
orpo
ratio
n Lt
d.98
.52%
equ
itym
inin
g in
dust
ryA
ustra
liaC
hina
Ste
el C
orpo
ratio
nA
ustra
lia0.
902
18N
ovem
ber
20
09N
oble
Gro
up L
imite
d14
.91%
equ
ityco
mm
erci
al
serv
ice
Sing
apor
eC
hina
Inve
stm
ent C
orpo
ratio
nH
ong
kong
0.85
8
19M
arch
20
08A
ED O
il in
Puf
fin a
nd
Talb
ot60
% a
sset
sen
ergy
Aus
tralia
Sino
pec
Aus
tralia
0.55
9
20N
ovem
ber
20
09In
doph
il Re
sour
ces
NL
100%
equ
itym
inin
g in
dust
ry
Sout
h-Ea
st
Asia
ZIJIN
Min
ing
Gro
up C
o., L
tdA
ustra
lia0.
504
Sou
rce:
Bas
edo
nd
omes
tic
and
inte
rnat
ion
alp
ubl
icr
epor
tin
g,c
orpo
rate
sel
f-di
sclo
sure
of
info
rmat
ion
South African Institute of International Affairs
Jan Smuts House, East Campus, University of the Witwatersrand
PO Box 31596, Braamfontein 2017, Johannesburg, South Africa
Tel +27 (0)11 339-2021 • Fax +27 (0)11 339-2154
www.saiia.org.za • [email protected]
S A I I A ’ S F u N d I N g P R o F I l e
SAIIA raises funds from governments, charitable foundations, companies and individual
donors. Our work is currently being co-funded by AusAid, the Bradlow Foundation, the
United Kingdom Department for International Development, the European Commission,
the British High Commission of South Africa, the Finnish Ministry for Foreign Affairs, the
International Institute for Sustainable Development, INWENT, the Konrad Adenauer
Foundation, the Royal Norwegian Ministry of Foreign Affairs, the Royal Danish Ministry of
Foreign Affairs, the Royal Netherlands Ministry of Foreign Affairs, the Swedish International
Development Cooperation Agency, the Canadian International Development Agency,
the Organisation for Economic Co-operation and Development, the United Nations
Conference on Trade and Development, the United Nations Economic Commission for
Africa, the African Development Bank, the Open Society Foundation for South Africa, and
the Africa Governance, Monitoring and Advocacy Project.
SAIIA’s corporate membership is drawn from the South African private sector and
international businesses with an interest in Africa. In addition, SAIIA has a substantial number
of international diplomatic and mainly South African institutional members.
African perspectives. Global insights.South Africa
n Institute of In
te
rnat
iona
l Affa
irs