5. China’s (Economic) Rise
5.4 China’s OFDI Policy
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According to findings from Gu (2009), most Chinese FDI is conducted by State-Owned Enterprises. Thus, for the case of China institutional frameworks impinge on an investment decision and are more than just background conditions. China actively promotes and supports its companies on their move abroad, while they are in turn required to further national development objectives through their investment projects.
In the past ten years, the Chinese government has put in place an investment promotion policy called “Go Global” and actively promotes Chinese companies in their move abroad. This policy however is only the preliminary end point to a wider development of an OFDI regime developed over time.
5.4 China’s OFDI Policy
In the case of China, the state plays a key role in shaping and encouraging Foreign Direct Investment by companies abroad. According to Li (2009), the development of a Foreign Direct Investment regime in the form of the Go Global Policy is linked to the overall economic development of China. As China entered the World Trade
Organization in 2001, Chinese companies faced much stiffer competition from foreign companies now able to enter the domestic market. This created the need to go abroad to enhance standing vis-à-vis international competition, with the support of the
Chinese government. However the Chinese OFDI regime has taken shape even before the formulation of the Go Global Policy in the tenth five-year plan of 2001. The Go Global Policy is thus only one step among many, embedded into a wider framework of outward investment reform in China. Chinese overseas investment policy
essentially has undergone four stages, each showing different configurations either limiting or enabling Chinese OFDI (Li 2009, 38-41):
Stage one ranges from 1979 to 1983. This phase is essentially described as a trial period in which little outward direct investment was made and maximum control by the government was exercised. The State Council formulated the very first regulation on OFDI in 1979 in the form of 15 economic reform measures that would permit to set up companies abroad. However all OFDI related projects necessitated approval by the State Council. Only in 1983 were approval procedures transferred to MOFTEC- Ministry of Foreign Trade and Economic Cooperation. For investments exceeding the
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limit of US$1 million, the investors still had to attain approval from municipal-, provincial- and (autonomous) regional governments and by the Chinese embassies, in order to actually implement. Smaller investments could directly seek approval at the embassy. Given the complicated procedures and lack of established standard
procedures, OFDI during this period was limited to US$ 9.2 million per year. (Li 2009, 38)
Stage two lies between 1984 and 1992. MOFTEC introduced standard procedures for examination and approval of investment projects in 1985, which was preceded by the
“Notice on the Authorization and Principle of the Approval of the Establishment of Non-commercial Overseas Enterprises” and the “Trial Regulation on the Approval Procedure and Administration of Establishing Non-Commercial Overseas
Enterprises”. Due to subsequent irregularities and failures in OFDI projects, the motion was later revised through the “Notice on Strengthening the Control of Foreign Investment” in 1991. From then on, the State Planning Commission (now called NDRC- National Development and Reform Commission) examined feasibility reports for each proposed OFDI project. For investments of over US$ 30 million several stakeholders were involved: ranging from NDRC, to MOFTEC and ultimately the State Council. This strengthened the governmental control considerably and set new bureaucratic standards for the approval of OFDI related projects. (Li 2009, 39)
Stage three lies between 1993 and 1998. In 1993 MOFTEC drafted the “Regulation on the Administration of Chinese Overseas Enterprises”. It set forth that MOFTEC was to be in charge of the approval and examination process. The NDRC was to evaluate the project proposal and feasibility report. The provincial level Foreign Trade
Departments were to be the governing bodies of the overseas enterprises, with the Chinese embassies’ economic and commercial departments coordinating the overseas enterprises. Due to the efficient administrative division, OFDI grew to US$ 0.7 billion per year. (Li 2009, 39)
Stage four lies between 1999 and 2001. The State Council allowed enterprises to set up assembly operations and processing of raw materials abroad in 1999. Subsequently the approval process changed: Now, first the State Economic and Trade Commission
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(SETC) examined both proposal and feasibility report. Then MOFTEC granted approval based on its own examination and the approval of commercial departments in Chinese embassies in cooperation with the State Economics and Commerce Commission. (Wang 2002, 194). The change in procedure resulted in a doubling of OFDI per company to US$ 2.18 million. (Li 2009, 40)
If not administrative reform, but numbers are concerned, there are similarly four stages to be discerned. It goes without saying that all are interlinked with the
administrative developments. What becomes clear when analyzing the graph below, is that Chinese OFDI only took on considerable speed after 2001, when the Go Global Policy was officially adopted.8 The Go Global Policy was expression to the
understanding that Chinese companies were now ready to play an active role in a globalized economy- resulting in rapid increase of OFDI and foreign acquisitions by Chinese firms.
Figure 7: China’s Outward Direct Investment and Cross-Border Acquisitions,
Source: Nicolas/Thomsen 2008, 3.
8 The official starting year of the Go Global Policy is still contested. Proposed starting dates range between 1998 (Cai 2006) and 2003 (Kaartemo 2007). This paper assumes the position of the tenth five
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Accordingly the key initiative put forward in the tenth five-year plan was to encourage the State-Owned Enterprises to invest abroad, and they received considerable support from the government for this end. (Voss/ Buckley/ Cross 2008, 15) As China was forced to open its protected domestic markets to comply with its accession protocols to WTO, especially private enterprises found themselves forced to expand abroad in order to secure their position in the domestic realm and to explore new opportunities abroad. (Taylor 2002, 223)
As Voss et al (2008, 16) note, the accession to WTO has sparked a host of initiatives to aid companies move abroad, essentially leading to the body of the Go Global Policy. First, the investment approval process has been moved to sub-national authorities and now only investment in selected countries required approval from national level. Furthermore, the requirement of conducting a financial feasibility study was abolished or simplified to speed up the overall investment approval process. (Yin/
Stender/ Song 2003, 75) Also, sourcing of funds on international financial markets was gradually permitted and control of capital movement relaxed:
“Previously, companies planning to take any foreign exchange out of China to finance investment, would have to place a minimum sum of five per cent of the value of the proposed investment with a bank designated by SAFE as a security deposit. (…) After October 2002, firms were no longer required to pay the security deposit to SAFE, and they could now go directly to the foreign exchange market to acquire the needed foreign currencies to invest overseas.” (Wong/ Chan 2003, 283)
Foreign exchange risk assessment, foreign exchange deposits, and exchange rate risk analysis requirements were all abolished during and after 2003. (Yin et al 2003, 76) The financial management approval process was further liberalized through the SAFE Circular “Issues Relevant to Further Intensifying the Reform of Foreign Exchange Administration on External Investments Circular”, which established de-facto equal treatment for private and state owned enterprises. The State Administration on Foreign Exchange (SAFE) allowed for the increasing use of foreign exchange in the
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set-up process and abolished the limit of foreign exchange for outbound investment in place before 2006:
“The 2006 Circular (SAFE) removed the previous limit on the overall annual amount of foreign exchange that may be approved on a nation-wide basis for use in outward foreign direct investment transactions. This limit was raised to US$5 billion under the 2005 Circular from the previous level of US$3.3 billion.” (Stender/ Yin/ Sheets/ Cui 2006, 26)
The decentralization of foreign exchange purchase for OFDI from national SAFE headquarters to regional SAFE bureaus in 2005, further eased the implementation process of OFDI projects. (Zhao 2006, 20)
The host of initiatives sparked through Go Global has also changed the role of
MOFCOM in the approval process. MOFCOM’s regional subsidiaries now review all applications and the national level MOFCOM only reviews those applications by companies under state supervision or with investment projects in selected seven countries (such as the US or Iraq). Furthermore, the size of investment now defines the merits of administrative management:
“Resource-seeking FDI exceeding an investment value of USD 30 million and non-resource seeking FDI exceeding USD 10 million have to receive approval from the NDRC (…) Resource-seeking investments above USD 200 million and non-resource seeking investment above USD 50 million have to be approved by the State Council (…)” (Buckley et al 2008, 17)
As the overall administrative process was eased for average OFDI projects, stricter regulations remain in place to control OFDI flows to countries that do not hold diplomatic relations with the PRC and for Taiwan- these are monitored by the State Council and National Development and Reform Commission (NDRC).
The Chinese OFDI is now coming from various industries, accordingly the
involvement of more specialized agencies, such as the Chinese Insurance Regulatory Commission or the Ministry of Foreign Affairs has evolved over time. The overall
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allows RMB to be used in OFDI projects. As Sun Lujun, director of capital management department at SAFE, told China Daily (2011), China aims to further liberalize capital control until 2015. (LanLan 2011) This official endorsement goes beyond mere tolerance- it entails access to acquisition funds and loans.
(Antkiewicz/Whalley 2006, 4) Access however is granted based on government strategic preferences, thus channeling investment into certain target countries and industries:
“In July 2004, Mofcom and the Ministry of Foreign Affairs jointly issued the Investment in Foreign Countries Industry Sector Catalogue (Outbound Catalogue). This sets out a list of preferred industry sectors in 67
countries and is backed by a broad range of incentives offering priority access to finance, tax concessions and preferential customs treatment to companies that comply.” (Deschandol/ Luckock 2005, 31)
Accordingly, the Go Global Policy is heavily enmeshed not only with trade relations and strategic decision-making within the companies, but also backed by a whole set of foreign relations initiatives. State visits and the conclusion of treaties and agreements with investment markets further facilitate a smooth flow of OFDI. This is particularly visible in the case of Chinese investment to Africa, where extensive diplomatic overtures are applied from the Chinese side. (Rotberg 2008, 3)