What accounts for such a rapid expansion of China’s outward FDI in recent years? To a large degree it has been the result of a conscious policy on the part of the Chinese ruling class, known as the “Go Global” strategy. First some background information.
Ken Davies, a consultant for the OECD Investment Division, notes in his important 2013 study, “China Investment Policy: An Update”, that “China has been rapidly becoming an important source of outward foreign direct investment (OFDI), a trend that was reinforced by the global financial and economic crisis.”[1] This point about the role of the global crisis in reinforcing this outward FDI from China is worth thinking about for a moment.
It is sometimes argued that Chinese capitalism is so dependent upon exporting commodities to foreign countries that the rapid growth of the Chinese economy in recent decades is bound to soon come to a screeching halt as the world economy sinks deeper into crisis and stops expanding its huge purchases of so many goods from China. There are serious problems with this thesis.
First, even if the world economy is in crisis and slows down in a major way (as it has already done), or even seriously contracts in a prolonged and ever-deepening way (as it is likely to do in coming years), there is still the possibility of some countries doing much better than others. And those that are likely to do best under these more adverse general conditions are those like China with still lots of relatively poorly paid but productive workers, an ever improving infrastructure, and a more stable financial situation.
A world economic crisis intensifies international competition, and a country like China that has been winning this competition will suffer far less from the crisis than other countries. (At least in its early periods, and if political stability can be maintained there by the ruling class.)[2]
Second, this thesis ignores the major and intensifying campaign by the Chinese ruling class to refocus its economy away from being export-oriented, and more towards promoting its internal growth, though in a manner further integrated within the globalized production system.[3]
Third, the thesis that China, as an export-oriented country, will especially suffer as the world economic crisis intensifies seems to forget that modern capitalist-imperialist countries have an important supplement or alternative to the export of commodities, namely the export of capital! The primary reason that the export of capital became so important in the imperialist era is that the home markets in the leading capitalist countries became satiated and there was a growing scarcity of profitable investment opportunities there. This is mostly what leads imperialist countries to export so much capital in the first place!
Actually, it is not at all clear that the home market in China is completely satiated, though there is certainly at least temporary overproduction in many sectors. Of course, if we understand how capitalism is based on the generation of surplus value we also understand that no capitalist market can expand, and continue to expand, unless there is also the continuous expansion of consumer and/or government debt to enable it. But it appears that the level of both consumer and government debt in China is still much lower than in the U.S., Europe or Japan. There is a lot of local government debt in China, but the more important national government debt is much less of a worry so far.[4] As the Economist magazine recently stated, “China’s government as a whole is able to sustain its debts without undue strain on the economy.”[5] Plus the tighter government control of the banks and financial sphere in China also gives them much more scope for the further expansion of debt (without an early financial collapse)—and thus the possibility of prolonging the boom economy there is much greater than elsewhere.[6] However, this doesn’t mean that there can’t be economic slowdowns in China too and maybe even some outright recessions at times.[7]
In any case, even before the U.S. and world financial crisis of 2008-9 broke out, China began reorienting its whole economy away from the simple export of cheap commodities, and more in the direction of globalization and the export of capital. And since the “Great Recession” began, this reorientation has intensified. As we mentioned earlier in this essay, exports of goods fell from 38% of Chinese GDP in 2007 to just 26% in 2012.[8] Some Western specialists in the Chinese economy say that the internal consumption of goods within China is even substantially higher than official statistics show because of the large size of the “underground economy”.[9]
Thus, somewhat ironically, the need to refocus the Chinese economy partially away from the export of cheap commodities and much more toward the export of capital is the essence of the major nationwide economic campaign in China to “Go Outward” or “Go Global!”
Before the year 2000 the Chinese government carefully limited outward direct investment by both private and state-owned enterprises (SOEs). But this policy was diametrically changed with the “Go Global” policy (zou-chu-qu, literally “go out”) announced by Premier Zhu Rongji in 2000 in his report to the National People’s Congress. Though now a capitalist country, China still has “Five Year Plans” to give general guidance to the development of its economy. The Tenth Five-Year Plan (2001-05) made overseas investment by Chinese enterprises one of the four key thrusts designed to adjust the Chinese economy to the reality of economic globalization within the world capitalist system. In March 2004 Premier Wen Jiabao urged that the implementation of this “Go Global” policy should be sped up and that the government should coordinate and guide Chinese investment abroad more effectively. Enterprises under all forms of ownership were strongly encouraged to invest in overseas operations and expand their international market shares. And this “Go Global” strategy was stressed again in the Eleventh Five-Year Plan (2006-10).[10]
But with the intensification of the global economic crisis in 2008 this “Go Global” strategy was further elaborated, promoted and greatly sped up even more. Chinese outward FDI flows more than doubled from 2007 to 2008 “when Chinese investors found themselves in a privileged financial position and could take advantage of the crisis then hitting their competitors in more developed countries.”[11] And Wen Jiabao, in presenting the outline of the current (Twelfth) Five-Year Plan in October 2010 again stated that “We must accelerate the implementation of the ‘go global’ strategy”.[12] On March 15, 2011 Premier Wen elaborated further:
“We will accelerate the implementation of the ‘go global’ strategy, improve relevant support policies, simplify examination and approval procedures, and provide assistance for qualified enterprises and individuals to invest overseas. We will encourage enterprises to operate internationally in an active yet orderly manner. We will strengthen macro guidance over overseas investments, improve the mechanisms for stimulating and protecting them, and guard against investment risks.”[13]
Note especially the comment here about the Chinese government “protecting” and “guarding” overseas investments! This is a primary role of any imperialist military machine.
And this “Go Global” strategy is not just abstract talk or hopeful dreams. Serious pressure is being put on Chinese companies (SOEs or otherwise), and all the regions of China, to actively participate in this strategy. Chinese businessmen operating overseas often mention this intensifying pressure at home to “Go Global”.
Partly by coincidence, and partly by design, as the growth rates in the exports of Chinese made goods slow down, the growth rates for the export of Chinese FDI and other forms of capital are being greatly increased.
We noted in section 14 above that although China’s inward FDI from other countries presently far exceeds its outward FDI to foreign countries, nevertheless China’s total export of capital still exceeds the total imports of capital by at least $2 trillion. Still, the specific imbalance between inward and outward FDI bothers the Chinese rulers and one of the major goals of the Twelfth Five-Year Plan is to more closely balance these investment flows. The Chinese Minister of Commerce, Chen Deming, stated on March 7, 2011, that in 2010 the ratio of outward FDI to inward FDI was 6 to 10, but that the plan is to bring this ratio into balance (1 to 1) within 5 to 10 years.[14]
A couple months later, Zheng Chao, a senior Ministry of Commerce official in the Department of Outward Investment and Economic Cooperation, said that outward FDI would grow annually by “20 to 30 percent” over the next five years, and that outward FDI would overtake inward FDI “within three years” (rather than the previously estimated five or more years).[15] That new timetable may not yet be a certainty, but what is certain is that China is taking major steps to soon bring inward and outward FDI flows into a balance.
The Chinese bourgeoisie is also worried about mass unrest, and the large number of “mass incidents” in recent years.[16] This is part of the reason why they are allowing workers wages to rise. But rising wages (and perhaps benefits) will also serve to make China a somewhat less favorable location for foreign direct investment. However, as we mentioned in an endnote earlier, China surpassed the U.S. for the first time in 2012 as the favorite country in the world for inward foreign direct investment. And even with rising wages, it is likely to remain a favorite target for foreign investment for years to come—especially considering the persistent economic problems in the U.S., Europe and Japan.
This means that if the difference between inward and outward FDI is to find a better balance, it must of necessity mostly come about—for the time being at least—through greatly expanded outward FDI from China. This is yet another reason to expect that China’s outward FDI, in accordance with its “Go Global” strategy, will continue to rapidly expand for a long time.[17]
There are many motives behind China’s “Go Global” strategy, and some of the motives may not be initially obvious. For example, a top priority in this campaign is the creation and promotion of a large number of “global champions”, i.e., large Chinese based multinational corporations with globally recognized brands able to better compete in the international market.[18] One of the problems for Chinese capitalist-imperialism has been the difficulty of establishing recognized and respected brand names for Chinese commodities, and this is one of the specific problems that the “Go Global” strategy is designed to overcome.[19]
Of course another major motive behind the “Go Global” strategy is just to more easily acquire foreign technology and know-how. Some studies have shown (as one might expect) that it is much easier to acquire foreign technology through outward FDI investment than it is from inward investment by foreign corporations.[20] And setting up companies or branches of companies overseas also allows an end-run around the still considerable international barriers to trade (including import quotas, tariffs, and other obstacles).[21]
But beyond such important goals as these, the primary reason for the “Go Global” strategy is the basic necessity to export capital which all capitalist-imperialist countries share: the need to find and exploit the most profitable places around the world for the investment of excess capital.
[1] Davies, K. (2013), “China Investment Policy: An Update”, p. 4, OECD Working Papers on International Investment, 2013/01, OECD Publishing. http://dx.doi.org/10.1787/5k469l1hmvbt-en
[2] Of course in saying that “China is likely to suffer far less” in the early periods of this world crisis we are still talking about the situation from the point of view of the ruling class. That is, we are talking about the measurement of pain in the terms the capitalists use—as harm to GDP, worsening trade balances, etc., and not primarily how the masses are affected. Of course all capitalist economic crises always fall hardest on the backs of the working classes, and that goes for every country including China.
How stable is China politically? This is not completely clear. On the one hand the rapid growth of the economy has led to the creation of a quite large “middle class” (mostly consisting of the highest paid urban workers, rather than merely a petty bourgeoisie properly speaking). On the other hand there are hundreds of millions of downtrodden peasants, many migrating to the cities, and other workers at the lower levels of society who—if they can find work at all—are very low paid and horribly treated. And there are at least tens of thousands of serious mass protests, of one kind or another, in China every year. Despite such widespread rebellion among those sectors of the population which could not be fully integrated into this new capitalist economy, China has had a relatively stable economic advance over recent decades. But there are too many contradictory factors to be sure if this relative stability will continue for a long time yet into the future.
[3] Davies, K. (2013), cited earlier, p. 37 and elsewhere. As Davies notes, a major objective of the current (Twelfth) Five-Year Plan is “a move away from dependence on a massive trade surplus and capital inflows”, which in turn is part of moving away (to some degree) from having a merely “export-oriented” economy.
[4] For a recent discussion of local government debt in China see: “Local-government debt: Counting ghosts”, Economist, Jan. 4, 2014, p. 32.
[5] Ibid.
[6] Because the Chinese government already owns, controls and directs the largest banks, when there is a financial crisis the government does not need to go through the complicated and politically contentious step of first nationalizing the failing financial institutions. It can instead proceed directly to the step of either propping up the banks by creating and giving them money, or else apportioning the necessary debt write-offs as it deems appropriate.
[7] Even within overall boom periods, such as the quarter century in the U.S. after World War II, there can still be recessions. There were several fairly short mild or moderate recessions in the U.S. during this overall boom period.
[8] “China: The economy: A bubble in pessimism”, the Economist, Aug. 17, 2013, p. 39.
[9] See for example “China 2013: A Year in Review with Shaun Rein”, China Briefing, Jan. 7, 2014, online at: http://www.china-briefing.com/news/2014/01/07/china-2013-a-year-in-review-with-shaun-rein.html#sthash.Cr838QCY.dpuf
[10] Davies, K. (2008), “China’s Outward Direct Investment”, in “OECD Investment Policy Reviews: China 2008”, Nov. 7, 2008, p. 83, online at: http://www.oecd-ilibrary.org/finance-and-investment/oecd-investment-policy-reviews-china-2008/china-s-outward-direct-investment_9789264053717-5-en (Use the “read” option for free access.)
[11] Davies, K. (2013), “China Investment Policy: An Update”, cited earlier, p. 34.
[12] Ibid., p. 35.
[13] Ibid.; original source: Wen Jiabao, “Report on the Work of the Government”, XinhuaNet website, March 15, 2011.
[14] Ibid., pp. 37-38. Chen Deming was referring specifically to non-financial OFDI. If financial OFDI is included, the task of bringing OFDI into balance with IFDI is more difficult, because it is further out of balance at the present time.
[15] This probably refers to annual inward and outward FDI flows rather than to accumulated stocks of inward and outward FDI. (The article was unclear on this point.) The complete balancing of total inward and outward FDI accumulated stocks may take a little longer. Ding Qingfen, “ODI set to overtake FDI ‘within three years’”, China Daily, May 6, 2011, online at: http://www.chinadaily.com.cn/business/2011-05/06/content_12457305.htm
[16] There have been over 100,000 such “mass incidents” annually in recent years (by official Chinese government reports!), such as wildcat strikes, farmers protesting the theft of their land for industrial projects and real estate development, protests against corruption and protests against various environmental outrages.
[17] The China Daily article cited above mentions a report by the U.S. Asia Society that also predicts that China’s outward FDI is about to surge, and that the stock of outward FDI will likely reach between $1 and $2 trillion worldwide by 2020.
[18] Nargiza Salidjanova, “Going Out: An Overview of China’s Outward Foreign Direct Investment”, U.S.-China Economic & Security Review Commission [of the U.S. government], USCC Staff Research Report, March 30, 2011, p. 11, online at: http://www.bioin.or.kr/upload/policy/1314079084656.pdf (accessed on June 26, 2013).
[19] It is simply not true, as some people have maintained, that it is impossible to outflank the U.S. and other established imperialist countries because of their well-known and supposedly impregnable brand names. For more general information about the techniques that not only China, but also other countries relatively new to the world market are using to build or acquire prominent and recognizable brand names, see: “The emerging-brand battle: Western brands are coming under siege from developing-country ones”, Economist, June 22, 2013, p. 70. One example from that article: “Pearl River of China has become the world’s biggest piano-maker and now rivals Yamaha (itself once an emerging-market challenger) on quality.”
[20] This of course is due to the fact that most outward FDI involves buying up existing companies, and thus automatically acquiring any technological knowledge and capabilities that they posses. One such study that shows this expected effect to actually exist is: Bruno van Pottelsberghe de la Potterie and Frank Lichtenberg, “Does Foreign Direct Investment Transfer Technology Across Borders?”, June 2000, online at: http://www.ulb.ac.be/soco/solvay/cours/vanpottelsberghe/resources/FDI_REStat6874.pdf
[21] Ibid., p. 10.