The New York Times

November 17, 2009
Op-Ed Contributor

China Curbs Its Appetite


The bigger the doubts about the West’s prospects, the greater become the assumptions about China’s economic power. China, it is said, will have a massive foreign exchange surplus for the foreseeable future, gobbling up natural resources producers in Australia, Africa and Latin America, buying U.S. technology companies to transfer know-how back to China, and using an open checkbook to pick up big stakes in famous European brands.

But many Chinese and Western businessmen and bankers at the annual Global China Business Meeting here suggest that the country’s expansion of direct investment overseas will not be as rapid as is often assumed.

It will grow as trade relations deepen and Chinese technology and brand names have global impact. But this will be gradual. After a first flush of cash-driven enthusiasm, Chinese firms are proceeding with greater caution, less likely to throw money at countries and industries with which they have scant experience. They are also meeting increasing obstacles in some countries.

China’s recent spending surge needs to be kept in perspective. Despite direct investment abroad doubling to around $50 billion in 2008 — and maintaining a similar level this year — the country’s overall foreign investment is still tiny compared with investment by other countries in China. So far, the vast majority of China’s direct foreign investment is by state-owned companies in natural resources in foreign countries, with the aim of developing new sources and keeping import prices down.

Nor is it likely that the pace of Chinese buying will accelerate further. The peak opportunity to acquire assets at favorable prices may have passed. The cash squeeze that threatened many companies in the West and drove them to be open to bids from the cash-rich Chinese, is now less severe. China is also expecting a contraction in its trade surplus as domestic demand outstrips export growth, and may see large short-term capital inflow if the yuan is revalued upwards — in which case there will be less pressure to export capital.

Hunger for resources by state companies with few restraints on funding is still there. But the revival in commodity prices has reduced the urgency for foreign firms to seek Chinese investors and has pushed up acquisition prices. Political barriers also have become more apparent, even in Africa. Fear of adverse political reaction is making Chinese firms more cautious and pushing Beijing to tighten control of state enterprises seeking resources deals. A more cautious attitude is also shown by the China Investment Corporation, China’s sovereign wealth fund, which has been taking stakes in the 7-to-15-percent range, big enough to be significant but small enough not to raise nationalist hackles.

The government has been urging firms to be more aware of local sensitivities and more careful in assessing investment risks. However much Beijing wants to diversify assets, it is also aware of the “more -money-than-sense” mentality of some newly rich mainland businessmen. Advice from investment banks and investigation agencies is increasingly sought to temper the zeal of cash-rich companies to make acquisitions. Chinese interest in acquisitions is still strong, but buyers and sellers alike have become more measured.

Some urge Chinese firms to focus on expansion via new projects, as Japan did during its first phase of foreign investment, building plants and creating jobs rather than buying existing businesses, which can create animosity, particularly when targets have iconic names or deep local roots.

Not that caution has taken hold everywhere. Private Chinese money is bidding high prices for real estate, mostly in Asian markets. Cash flowing to private bankers in Switzerland and Singapore attests to the expansion of China’s wealthy class and its contribution to the buoyancy of some stock markets. But this is more a reflection of global liquidity than of any sustained move by Chinese investors. It is also small relative to the firepower of state entities.

The bottom line is that China will remain a significant player in cross border investment. But as financial and commodity markets stabilize and money ceases to be almost free, China will be seen less as juggernaut and more as a normal investor trying to make profits in a competitive world.