China’s global investment and construction have shown a clear change over the past nine months: The country’s state-controlled giants are engaging in fewer transactions, especially large transactions. They are still slowly moving auto and steel capacity outside China, but the eye-catching sums spent by the likes of Ping An in acquiring a stake in HSBC have disappeared. They are still building new expressways and cement plants in developing economies, but less frequently and on a smaller scale.
One explanation is greater foreign hostility toward Chinese investment, starting with but not limited to the US. However, this does not account for the recent absence of large construction projects in the much-hyped Belt and Road Initiative, which is utterly dominated by state-owned enterprises (SOEs). Instead, the principal explanation is that fear of balance of payments and exchange rate weakness has caused rationing of the hard currency used to make investments and finance construction. Until this situation changes—and there is no sign it will—China’s global business footprint cannot again approach its 2016 peak.
The China Global Investment Tracker (CGIT) from the American Enterprise Institute is the only fully public record of outbound investment and construction worldwide. All 3,500 transactions are profiled in a public data set. In the first half of 2019, investment fell just over 50 percent compared to the first half of 2018. The 2019 results to date are similar to 2011, when Chinese investment was far from a global issue and considerably more welcome.
The plunge in verifiable investment overwhelms other developments. For the US, the pace of Chinese spending goes back even further, to 2008’s almost invisible $5 billion range. Globally, the proportion of greenfield investment reached a new high, primarily due to the absence of large acquisitions by SOEs that have characterized the previous five years. For the same reason, the share of spending due to private Chinese companies also rose. Historically, investment in Belt and Road (BRI) countries is minor compared to investment in rich countries but held up better, easing only modestly versus the first half of 2018.
Investment is often conflated with the construction of coal plants, rail lines, and so forth. Investment involves ownership and an indefinite presence in a host country. Construction may be long term, but it is temporary, as is supporting loan finance. China’s average construction deal is smaller than its average investment, but it has recorded more $100 million–plus construction contracts than investments since 2005. Construction, not investment, leads the BRI. Since its inauguration in 2013, and using the largest possible set of members, BRI construction exceeds $400 billion.
Construction contracts are reported with a lag, so results from the first half of the year are incomplete. Even so, the pace has unmistakably eased from the previous three years, and the first estimate of transaction value is far lower than last year at this time. With the prospective shortage of hard currency, BRI construction in particular may have gotten too big for its own good; new BRI projects dropped sharply in the first half of 2019.
Declining Chinese investment globally reinforces a continuous drop in the US since 2016 and the need for American policymakers to shift attention. The People’s Republic of China’s (PRC) globalization efforts are being exaggerated in terms of the amount of money involved and Beijing’s ability to allocate more resources. What has not declined are the threat to the rule of law, especially regarding intellectual property (IP); the extent of Chinese subsidies; and the Communist Party’s human rights violations. Changing policies to address these problems will better safeguard America’s security, prosperity, and leadership role.Chinas-Global-Business-Footprint-Shrinks
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