Saturday, April 30, 2011

The Growing Importance of China - A Closer Look at their Foreign Direct Investments

It is obvious that the influence of China in the global economic and geopolitical arena is growing dramatically. To a large part this is the result of the spectacular economic growth of the country. For many years now, GDP growth figures are close to or in the double digit zone.

And the Yuan Renminbi is one of the strongest currencies in the world, carried by China's position as the world's number one when it comes to Foreign Currency and Gold Reserves. This, combined with a huge current account surplus helps the Yuan. However, it is also clear that so far the Chinese have done all they can to ensure that the currency remains relatively affordable so that the export machinery won't be hurt.

Using data from the Heritage Foundation, LMG Emerge itself and the CIA World Factbook we take a closer look at the Foreign Direct Investment (FDI) activities of Chinese firms. This activity is linked to Chinese government activity to the extent that the government uses state-related firms for this expansion (e.g. oil company Sinopec).

Foreign Direct Investments by China, 2010

The table above lists the top-20 countries in FDI, with China as the investor. When looking at the absolute investment amount the USA and Australia were last year's winners with a total amount of USD 28.1 billion. Nigeria, Iran and Brazil are the other top-5 countries with a combined investment amount of USD 45.4 billion. Three countries from the Emerging Markets group who are all known as commodity providers with a strong export machinery when it comes to energy. Logical, when taking into account the energy hunger of China. Nevertheless, the top-5 positions of Nigeria and especially Iran (still suffering under Western embargo's) might be shocking to many Westerners.

As always, Western observers do immediately when numbers get bigger suggest that the Chinese investments have 'only one main goal, namely to buy political influence'. Interestingly enough, they always seem to forget about this idea when it is about Western FDI's in other countries. So as to analyze the potential political impact in more detail, we also created a column with relatively numbers by dividing the FDI by last year's GDP.

The top 5 changes dramatically, with now the Democratic Republic of Congo, Kazakhstan, Nigeria, Vietnam and Algeria the most important investment destinations of China. In all 5 cases the Chinese investments represent more than 5 percent of GDP, with the impact in Congo being 46.8 percent. Conclusion: true, China is important and might be a political factor. But, buying votes? Except for DR Congo this is just as likely as what one could say about investment activities originating in countries like the USA, Germany, France and the UK. We believe that the bulk of Chinese FDI is directly linked to the Chinese 5- and longer-term plans: ensuring a structural, smooth inflow of necessary resources (commodities, energy, knowledge).

Chinese PM meets DR Congo President Kabila
Beijing 2005

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