In November 1979, the Jinghe Share Holding Co. opened its doors in Tokyo, marking China's first overseas investment and the start of the country's transformative economic opening. Today, China has become the world's second-largest investor and biggest supplier of capital. While other markets are in recession, China's economy continues to grow, however slowly. Without question, the gravity of China's economy, coupled with its ever-expanding reach into global affairs, will secure its place of influence in the international system for decades to come.
But the sort of presence Beijing seeks abroad is evolving. For China, as for most countries, investment and acquisition are key components of its strategy for development and, to some extent, national security. Yet as China embarks on the long path leading away from an export-based model of economic growth and toward one dependent on domestic consumption, its investment priorities are shifting. Beijing is gradually replacing its focus on snatching up the developing world's energy and natural resources with an emphasis on acquiring the developed world's value-added industry assets. At the same time, the government's traditional dominance in outward investment is weakening, making room for private enterprises to invest alongside their state-owned peers. Furthermore, China is becoming more careful about its investment decisions, trading a frenzy of hasty purchases for a careful search for quality buys.
By all appearances, China's actions have consistently conformed with these trends for the past two years, even as the scale and size of its investments overseas have steadily risen. But perhaps more important, the new phase of its investment strategy reflects a deeper transformation underway — a change in China's vision of its place in the world.
China 'Goes Out' Into the World
For many years, China's renown as a "global factory" attracted investors from far and wide. Foreign funds were its bread and butter and, in Beijing's eyes, the key to gaining the technology, capital and assistance it needed to build up its fledgling economy. Though China longed to make its mark abroad, Beijing did not begin to systematically invest in or acquire its own projects in other countries until the late 1990s, when it launched its "go out" initiative to expand its economic footprint overseas.
Despite its delayed start, Chinese foreign investment has surged over the past decade. Beijing's insignificant portfolio — worth about $2.9 billion in 2003 and accounting for only 0.45 percent of global investment — climbed to a record-high of $120 billion by 2015 and included many different nations.
For the most part, China's diplomatic relationships and economic needs have determined where and how those funds have been spent. As a country whose development was long driven by low-end manufacturing and exports, China was, for decades, motivated to build up its stock of international commodities and increase its control over their supply chains. At the same time, Beijing sought to cultivate its image as a benign emerging power, which meant not exacting many political concessions from the recipients of its funding. But now that China is transitioning to an economic model that rests on domestic consumption, its investment goals — and targets — are changing.
Different Economies With Different Needs
Gone are the days when Beijing aggressively sought the world's mining, oil and natural gas assets. From 2008 to 2013, China spent some $111 billion on the latter two; since then, that figure has dropped to just $7.8 billion. In fact, the country's three biggest energy firms have not made any significant acquisitions abroad since early 2014. China's mining acquisitions have similarly declined after peaking in 2008.
Instead, software, hardware and biotechnology have risen in their place as China begins to follow its developed peers up the value chain. These industries now receive the bulk of China's attention and funding. Over the past two years, Beijing has completed nearly $15 billion worth of mergers and acquisitions in the semiconductor sector alone, and in 2015 its computer chip imports — nearly 14 percent of its total imports — valued some $231 billion. China hopes that the hardware companies it is purchasing now, like the energy assets before, will eventually enable it to produce such items itself.
China's new interests, unsurprisingly, have set its sights on new destinations as well. Though Beijing continues to invest in infrastructure projects in the developing world, their share of total Chinese foreign investment is diminishing. Meanwhile, the flow of Chinese funds into the developed states of Western Europe, Asia and North America continues to expand. Announced mergers and acquisitions are $150 billion in 2016 thus far, with more likely to flow in by the end of the year. (By comparison, China's deals in the developing world total about $25 billion.) In all likelihood, this trend will hold as China continues to bid aggressively on Western companies in technology-related sectors.
Perhaps the most noteworthy aspect of this shift, though, is the type of company moving overseas. Historically, most of the investment flowing from China has come from its state-owned enterprises. Now, private Chinese companies such as Alibaba, Tencent and Baidu are among the firms most assertively buying up foreign assets. In many ways this is a testament to the broader changes underway in China, where an expanding economy has given rise to a flourishing private sector. The active participation of private Chinese companies in the country's investment abroad has imposed some limits on the politicization of Chinese business decisions. Even so, Beijing's investment strategy remains tightly entwined with its broader geopolitical ambitions, particularly in the developing world.
Creating a Global Vision
Contrary to popular belief, a coherent global strategy emerged from China only a few years ago, and it will take many years more to fully solidify. For decades, Beijing's outward-facing policies — those in foreign affairs, trade and investment — were largely guided by domestic priorities, not by a grand strategy. As a result, they were often described as reactive, inconsistent and, at times, contradictory. Nevertheless, this freewheeling approach also granted China the flexibility to navigate its options without the constraints imposed by specific plans or obligations — an especially useful ability as China tried to figure out how to move from the sidelines to the spotlight.
As China stepped onto the world stage, its leaders realized that they needed a cohesive vision to align their country's growth, interests and outreach. The recognition gave rise to a host of grand initiatives, starting in late 2013, that culminated in the One Belt, One Road program and the policies it entailed. The project aims to integrate the Eurasian continent by deepening diplomatic, commercial and financial cooperation and building up infrastructural connectivity within the region.
Of course, Chinese foreign investment will not be bound to these goals alone. The One Belt, One Road initiative is more an evolving concept than a formal strategy. Nevertheless, it is representative of how China perceives its strategic position and priorities abroad within the context of its dramatic transformation at home — and how that perception will shape its decisions moving forward. For one, Beijing clearly has already placed some emphasis on linking China to its neighbors through infrastructure and transport projects. According the PricewaterhouseCoopers, some $250 billion in such projects are already under construction or have been agreed on, including the ambitious China-Pakistan Economic Corridor and the Bangladesh-China-India-Myanmar Corridor. China will likely continue to channel its massive and readily available pool of capital into regional connectivity projects in the short term.
Moreover, Beijing has worked hard to promote advanced manufacturing as a way of boosting China's position in the global value chain and expanding its international presence. High-speed rail and nuclear projects, in particular, have caught Beijing's attention, and it has pursued several related state-led contracts with countries in Central and Southeast Asia as well as Europe. Developing high-value industries is no easy task, however, and it continues to pose a daunting challenge to Chinese leaders.
Solving the Perception Problem
As China remolds its foreign investment to better fit with its developing global strategy, many of its projects could fall victim to the reputation that precedes it. China often pursues, as it has in the past, investments and acquisitions with an eye toward gaining access to the host country. This attitude, however, frequently endangers commercial interests there as well, which could engender local suspicion or resentment of Chinese investment.
Likewise, China has a habit of linking its projects to its relationships with partnering countries. Though this can be beneficial to all parties when projects run smoothly, it can also undermine or even disrupt China's bilateral ties when obstacles arise. For instance, President Xi Jinping hailed the Hinkley Point nuclear plant — of which China owns a one-third stake — as the start of a "golden age" of Sino-British relations during his visit to the United Kingdom in 2015. But when British Prime Minister Theresa May delayed approval of the plant last month, citing national security concerns, Beijing announced that it would not tolerate "unwanted accusations" about its investments. Such pronouncements are often received negatively by other states, hampering China's efforts to expand its international reach.
In more tangible terms, China's perceptual problem has also caused a number of potentially lucrative deals to go awry. China's acquisition of Germany's Kuka Robotics, for example, created an instant political dispute between Beijing and Berlin, centered on questions of China's intentions for the company. The deal eventually went through, but as China's economy continues to develop, it will be forced to compete more directly with the West in areas such as manufacturing. And as foreign concerns over corporate espionage and the theft of technology continue to hang over China and the companies it buys, Beijing will find its negative image increasingly difficult to shake.