For years, China has been exerting ever greater influence on the world. As Beijing’s One Belt One Road initiative changes the face of Eurasia, the shape of Chinese investment is also changing.
For some time now, China’s growing economic influence has been a matter of concern for politicians, especially in economically dominant countries in Europe, Russia, Japan and the USA. With its investments, China is displacing previously established market leaders in South and Central Asia as well as in the Far East, the Arab region, the Balkans or Africa. In fact, the capital China exports to the world nearly tripled in the few years between the 2008 global financial crisis and the COVID-19 crisis. And despite setbacks during the pandemic, there appears to be no break in the trend in sight. Unlike the rest of the world, China has not yet been hit by galloping inflation, and China’s central bank is keeping interest rates stable at a comparatively low level. This makes it attractive for Chinese companies to invest their money abroad at higher interest rates. Which could put even more ports, companies and roads in Chinese hands. Although fears of a sell-off to China are rife in Western European capitals, the region actually plays a minor role in Chinese holdings. The same is true for most other industrial and high-wage regions such as Australia, New Zealand, and the U.S. along with Canada (North America).
Chinese FDI-Netflows into world region (in billion US-Dollars). (Source Chinese statistical yearbooks, several)
In fact, East Asia continues to dominate China’s portfolio, with Hong Kong holdings in particular playing a significant role. Singapore, on the other hand, is starting to take up more and more space as the largest and most important transport hub in trade between Europe and Asia. The inconspicuous but thickening layers of countries such as Indonesia, Vietnam and Thailand also tell a special story. Due to labor shortages and higher wages, China, long known as the world’s extended workbench, now finds itself outsourcing simple manual jobs to low-wage countries. Complex value chains have long since developed around China’s industrial centers throughout the Far East. The supplier countries produce simple parts that are ultimately assembled in China into laptops, cell phones and even electric cars of their own brands – and have long since conquered markets all over the world. Other potential competitors, such as Japan or South Korea, play only a minor role in these chains.
While the West likes to conjure up an autocratic bloc between Russia and China, the resource-rich giant country actually plays hardly any role in China with just 10 billion FDI stocks. On the contrary, Chinese entrepreneurs are reluctant to invest too much in Russia because of the prevailing nepotism and corruption, legal uncertainty due to arbitrary decisions by the authorities, and the Kremlin’s tendency to exploit mutual dependencies for geopolitical purposes.
Chinese FDI-Stocks in Asia (in percentage points). (Source Chinese statistical yearbooks, several)
Conversely, European politicians also like to regularly warn African governments against Chinese influence (without ever having made an adequate counteroffer). China is only exploiting Africa’s wealth of raw materials to burn them up in its voracious industrial conglomerates, while leaving Africans poor. However, these claims can hardly be backed up with figures. The share of Chinese investment in the extractive sector is even lower than that of major Western investors. The Chinese do, however, invest heavily in the construction sector, which means much-needed infrastructure for Africa, from roads to dams to buildings. Despite Africa’s comparatively small share of China’s portfolio, China has thus become a major player on the African continent, with shares nearly tripling between 2011 and 2016. In addition, Chinese companies are investing in production facilities that enable Africans to learn new industrial skills and technologies.
Chinese FDI stocks by recipient world region, in percentage points. (Source Chinese statistical yearbooks, several)
By contrast, Latin America, like Africa a developing region, is completely out of the picture as China’s second most important FDI location. Interestingly, it is not even the large, populous and resource-rich countries such as Brazil or Mexico that attract particularly large numbers of investments, but the small tax havens in the Cayman and Virgin Islands. However, these flows are particularly volatile. They are not so much used by some Chinese super-rich people to conceal their assets and escape taxes from Beijing’s tax authorities. Rather, the tax havens are used by Chinese companies to circumvent Chinese law, which prohibits foreign ownership of strategic companies, especially in the tech industry. The Chinese companies operate shell companies on the islands, which are traded on international stock exchanges and enter into bilateral agreements with strategic companies in China to give the shareholders of the shell companies control and claims over the companies. According to international accounting standards, this is equivalent to equity, but is permitted under Chinese law. This construct is used by tech giants such as Alibaba and Tencent as well as state-owned enterprises such as the China National Offshore Oil Corporation (CNOOC) and the State Grid Corporation of China. Over the past twenty years, Chinese securities spending in these tax oases has increased from near zero at the turn of the millennium to 60 percent in 2020.
Chinese FDI Flows to Latin America (in billions of U.S. dollars, nominal). (Source Chinese statistical yearbooks, several)
Of particular concern to many observers is China’s hunger for mineral, agricultural and energy raw materials, for its gigantic industry. But this too is very difficult to substantiate with statistics; on the contrary, it is even taking up less and less space in China’s FDI spectrum. The bulk of Chinese investment is focused on leasing and business services, such as leasing machinery, buildings or vehicles. This is often done with the aim of acquiring new technologies or expertise. In addition, Chinese companies play a larger role in consulting and maintenance of machinery abroad. Other important FDI stocks worldwide are unsurprisingly Chinese wholesalers and the manufacturing sector with its ever-expanding value chains, which already include industrial operations in African countries such as Ethiopia or Senegal.
Chinese FDI Flows to Latin America (in billions of U.S. dollars, nominal). (Source Chinese statistical yearbooks, several)
China is also taking on an increasingly important role as a financier of infrastructure projects and manufacturing operations around the world. This is closely intertwined with a particular strategic project of the Middle Kingdom: The One Belt One Road (OBOR) initiative. This initiative is seen as a counterpart to U.S. domination of the world’s oceans and aims to secure China’s supply of fossil fuels on the one hand and its export markets on the other by means of land links. Although it is a massive infrastructure project spanning the Eurasian countries all the way to Africa by means of ports, railroads, terminals and roads, China very often limits itself to financing projects and acting in an advisory capacity rather than taking action itself. FDI in the construction sector, on the other hand, plays an increasingly subordinate role.
Chinese FDI net-outflows by sector (in billion US-Dollar, nominal). (Source Chinese statistical yearbooks, several)
The OBOR initiative is modeled on the historic Silk Road. A historic trade network that once brought silk, tea and spices from the Far East to Europe via caravans, making the transit countries obscenely rich in the process. Today, computers, cell phones, clothing and virtually all Christmas gifts find their way to Europe via the new Silk Road. China pursues beside its own material supply is one of their avowed goals thereby the economic co-operation, cultural exchange and diplomatic relations thereby to develop. For example, by connecting Central Asian countries to ports such as Shanghai, China is enabling them to reduce their heavy dependence on Russia. It is one of the most complex undertakings to unite the different cultural identities on the road to Europe under one overarching goal – in addition to bilateral loans from its state-owned banks and guarantees, China also makes use of institutions such as the Asian Infrastructure Investment Bank (AIIB).
Sketchy representation of the main traffic routes of the new Silk Road. (Source: Nadia Oborska/Shutterstock)
China’s influence in the world, especially in the global South, is growing. Often, the technologies China brings with it are not only cheaper, but also easier to operate and maintain than Western equipment. With its One Belt One Road initiative, the Middle Kingdom is also opening up markets that were previously either forgotten by all the major economic powers or were previously in the sphere of interest of other blocs – such as Central Asia or South-eastern Europe. While there are concerns – particularly in the West – these are much more about China’s own failings vis-à-vis the global South than about Chinese grievances. China does not overexploit the resources of other countries, nor does it exploit them; on the contrary, some of the prosperity that the Chinese have earned in recent decades has long since spilled over to countries on the periphery. China is reshaping the entire Eurasian continent. Not altruistically, but there are enough win-win situations that make China an attractive partner.
