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Going Global 2.0: China's Growing Investment in the West and Its Impact.

China's post-Mao "reform and opening up" started in December 1978 with the conclusion of the third plenary session of the eleventh Chinese Communist Party (CCP) national congress. The reforms spearheaded by China's then paramount leader Deng Xiaoping contained two integral parts: yin jin lai (bringing in) and zou chu qu (going out).

At the beginning of the reform era, China's policy focus was understandably on yin jin lai--bringing in foreign direct investment (FDI) and foreign management skills--due to China's lack of funds and backwardness in industry and technology. To attract FDI, China established four special economic zones (SEZs) on the southeast coast. This first phase of reforms lasted roughly from 1978 to 1990. Since 1990, China has continued to be a major destination of global FDI, but concurrently it began to implement zou chu qu--going out, in terms of investing overseas. Now China is not just a major FDI recipient, it has become a net investor in the global economy.

Between 1990 and 2005, China's outward direct investment (ODI) covered mostly developing countries, particularly in Africa, Latin America, Southeast Asia, the Middle East, and Central Asia. That was Going Global 1.0. Ample research has been done about phase one of China's ODI in the developing world and its impact on international political economy (Dollar 2016; Shambaugh 2014; Wolf, Wang, and Warner 2013; Zhu 2013).

The year 2005 was a turning point, when a Chinese company attempted but failed to purchase a money-losing California oil company, Unocal. The US$18.5 billion deal was blocked by the US Congress on national security grounds, but China's global ambition was not blunted; instead China's reach into Western markets has actually accelerated since then, with mergers and acquisitions (M&A) in all major Western economies.

The year 2015 was a milestone year for China's global economic ambitions: China's ODI surpassed inbound FDI for the first time, and the International Monetary Fund (IMF) approved the Chinese yuan's inclusion into its basket of reserve currency. China's role as a major economic power and global investor has taken a solid foothold.

Going Global 1.0 (1990-2005)

During the first phase of "going out," China concentrated its investment in the developing world with tremendous amounts of trade, energy deals, and infrastructure projects. China's appetite for natural resources seemed insatiable, which propelled it to reach out to resource-rich countries. Many countries in Africa, Latin America, and the Middle East became major sources of raw materials and energy to sustain China's rapid economic growth. As a manufacturing power, China was also looking for export markets for its products.

In 1991, the trade volume between China and the Association of Southeast Asian Nations (ASEAN) was only $8 billion. It rose to $40 billion in 2000, and China has been the region's largest trading partner since 2009. In 2014, China's total goods trade of $480 billion was more than twice the US goods trade with ASEAN of $220 billion. The United States has a free trade agreement with only one ASEAN nation, Singapore, while China has a free trade agreement with ASEAN as a group. China and ASEAN have agreed to boost trade to $1 trillion by 2020. Two-way investment will reach $150 billion by 2020 (Xinhua 2014). Already the provider of more loans to developing countries than the World Bank, China finances numerous agricultural, hydropower, housing, railway, road, and mining projects in Southeast Asia. With the establishment of the Asian Infrastructure Investment Bank (AIIB) and the implementation of the Belt and Road Initiative (BRI), China's investment in Southeast Asia is expected to further increase in the years ahead.

In Africa, China pursued a political agenda in the 1960s and 1970s, supporting rebel movements and Maoist forces in competition with the Soviet Union and winning over countries that recognized the ROC in Taiwan. In the 1970s, China began to invest in several African countries, including in the 1,160-mile Tanzam Railway linking Tanzania and Zambia. But it was after 1990 when China's trade with and investment in Africa grew significantly. In 1995, China-Africa trade volume stood at $4 billion. Ten years later it reached $40 billion. By 2015 it had topped $300 billion (China Daily 2015). China seeks to raise the volume to $400 billion by 2020. In comparison, current US-Africa trade is less than $100 billion. Though Chinese investment is welcomed by various African governments, Chinese indifference to the recipient countries' environment and rule of law has elicited some criticism from the West, as well as within some African nations (Brautigam 2011).

Trade between Latin America and China jumped from less than $3 billion in 1988 to over $240 billion in 2011. Trade between China and Latin America saw a twenty-two-fold increase between 2000 and 2016, a stark contrast to Latin American trade with the United States and Europe, which merely doubled in the same time period (Melguizo 2017). To facilitate bilateral trade and investment, China has signed free trade agreements with Chile, Peru, and Costa Rica. China-Latin America business relations also incorporate finance--FDI and loans. In 2015, while visiting Latin America, President Xi Jinping pledged to invest $250 billion in the region over the next decade. In 2016 alone, Latin American countries received $21 billion in loans from Chinese banks. China has several ambitious, but challenging, investment projects in Latin America such as a railroad stretching 3,300 miles from Brazil's Atlantic coast to Peru's Pacific coast and a canal stretching across Nicaragua that will rival the Panama Canal if completed. Despite China's expanding investment in Latin America, its influence in the region remains limited. Studies have found that Sino-Latin American economic ties may not be dramatically reshaping the host country's foreign policy toward China, that positive political relations are not sufficient to ensure smooth economic relations, and that the activities of Chinese firms in Latin America may be shaped by the host country's institutional environment and their own operational interests rather than by any dictates from Beijing (Blanchard 2016).

The rapid economic growth during Going Global 1.0 turned China into a major trading power, especially after its admission into the WTO in 2001. After years of working with developing countries, China accumulated business experience and appeared prepared to enter the more sophisticated markets in the West. It continues to invest in developing countries, but its eyes are on the developed Western markets now.

Going Global 2.0 (2005-Present): Rationale

In the Going Global 1.0 phase, Chinese trade and investment in the developing world served several noneconomic purposes, such as projecting China's global image; competing for influence with other powers, namely, the United States and Japan; and limiting the international space for Taiwan, all of whose diplomatic allies except the Vatican are located in the developing world (Zhu 2013). In Going Global 2.0, the rationale for Chinese investment seems different from the previous phase and focuses more on conventional economic and political considerations. Due to China's global power status, Chinese ODI in the West will have significant impact on international political economy.

Structural reforms in the Chinese economy mean that China's growth will move away from manufacturing toward consumption and innovation, and China's appetite for raw materials has diminished, which makes the developing market less attractive. It is only natural that China is turning to developed markets as its economy undergoes qualitative changes. China's total global ODI has increased more than tenfold since 2005 (Figure 1).

Despite being the second largest economy in the world, China's FDI stock is not yet commensurate with its newfound global economic status. However, Chinese ODI is growing quickly now. In 2005, the total volume of China's outbound acquisitions was just a little over $10 billion. In 2014, China's outbound investment flows totaled $116 billion, inching ahead of Japan to take the world's number two position, behind the United States. Chinese ODI steadily increased, and by 2015 it had topped $120 billion.

In 2016, China struck a staggering $225 billion in deals to acquire companies abroad, almost doubling its 2015 total. Such a sudden jump in overseas investment not only surprised many outside China but also alarmed Chinese regulators. Chinese Commerce Minister Zhong Shan said in March 2017 that Chinese officials planned to intensify supervision of Chinese companies to curb "blind and irrational investment" (Bradsher 2017, B1).

The Government Push

As China's economy matures, developing markets can no longer satisfy its needs for upgrading its economy. As a result, the Chinese government has encouraged businesses to look for new opportunities in the West. However, it was not until the 2010s that the focus of Chinese investments began to diversify from emerging and frontier markets to advanced markets.

The third plenary session of the eighteenth Central Committee of the CCP in November 2013 strongly endorsed globalization of the Chinese economy, calling upon enterprises and individuals to directly invest abroad. The resolution added, "Enterprises and individuals are permitted to develop overseas investment based on their own advantages. They are allowed to take risks in all the countries and regions to develop engineering or labor cooperation projects. And they can use innovative methods to undertake overseas expansion involving greenfield investment, mergers and acquisitions, securities investment, joint venture investments, and the like." (1)

For the Chinese government, going out to the West has helped jump-start long-stalled reforms of state-owned enterprises (SOEs). SOEs generally lack efficiency and competitiveness, and some have become heavily indebted, with many still receiving government subsidies to offset such disadvantages in the global market. When SOEs compete overseas, they lose the monopoly and privileges they enjoy at home and are forced to improve their performances and establish their competitiveness in the international market.

While the BRI focuses on the developing world, it involves accelerating outward investment, shifting excess industrial capacity and infrastructure projects into other regions such as South Asia and Europe, creating new markets, upgrading its own industries, and stimulating domestic growth. The land-based "Silk Road Economic Belt" goes through Central Asia and Russia, all the way to Europe, thus facilitating and servicing further Chinese investment in Europe. Different from investing in the developing world, where rule of law tends to be weak and policies are often nontransparent, investing in the West represents a giant leap forward for Chinese businesses toward becoming a major force in international political economy. Chinese business activities will be under tight scrutiny by Western governments, and Chinese companies will have to follow international norms and practices such as assuming more corporate social responsibilities. The Chinese government's push for global investment demonstrates its growing confidence. All of this is also in line with President Xi Jinping's "Chinese Dream," which seeks to turn China into a powerful and wealthy nation.

Chinese investment in the West is at its incipient stage and has not received much attention from mainstream economists in China (Wang 2014, xi). Despite the government's calls for Westbound investment, the Chinese government has few specific guidelines or rules. Most of the investment and other commercial activities have been initiated by companies and individuals themselves. More official and scholarly efforts are needed to analyze both successful and failed cases, collect data, and produce high quality research to provide guidance for Chinese businesses.

Growing Demand in the West

The global recession that began in the United States in 2008 provided China with an opportunity to move into Western markets since China's economy remained robust. Against the backdrop of a slowly recovering global economy, new modes of economic cooperation and industry transfer are brewing, and countries around the world have high expectations for capital inflows from China. With over $3 trillion in foreign exchange reserves, China is taking the opportunity to develop FDI, as a way of both conforming to the needs of economic development at home and meeting global demands. One way to protect the value of China's foreign exchange reserves is to use them to buy real assets, like property or shares in companies in the United States and other developed markets. Such acquisitions could make China's dollar holdings less vulnerable to the volatile gyrations of financial markets (Schuman 2011).

European countries have actively sought Chinese investment. Without Chinese investment, the Greek economy may still be stuck in a deep hole. From London to Paris, from Rome to Madrid, European governments are not only welcoming Chinese investment, but also enticing Chinese tourists whose spending power often awes local residents.

Former British prime minister David Cameron and Chancellor of the Exchequer George Osborne hoped to bring forth a golden era in Sino-British relations and warmly welcomed President Xi in October 2015. Britain was the first Western country to sign up to join the China-led AIIB in 2015. Prime Minister Theresa May's delayed approval in September 2016 of the $24 billion Hinkley Point nuclear power station is telling of Britain's policy, however. The Hinkley Point nuclear power station is a Franco-Chinese joint investment that raised some security concerns in the United Kingdom. When May held up the project temporarily, China hinted that its cancellation would inevitably affect its future economic relations with Britain (Guardian 2016). May wrote a letter to Xi before attending the September 2016 G-20 summit in Hangzhou, China, affirming her then-new government's intention to maintain strong ties with China. Shortly after her return from China, she approved the project. Clearly, May, who had criticized the Cameron-Osborne approach toward China, did not wish to jeopardize economic ties with or lose investment from China (Guardian 2016).

Germany did not attract much investment from China in the past, but now it has become a major destination of Chinese ODI. In May 2017, BaFin, Germany's financial watchdog, welcomed Chinese investment into the German banking sector, a week after it was revealed that Chinese conglomerate HNA had become the biggest single investor in Deutsche Bank (Shotter 2017). Another high-profile deal was a $5 billion bid in 2016 by the Midea Group, a Chinese appliance maker, for robotics specialist Kuka AG. Other proposed or completed Chinese deals include China National Chemical Corporation's $1 billion takeover of Krauss-Maffei Group--a cutting-edge equipment maker that processes plastics and rubber--and Beijing Enterprise Holdings Ltd.'s $1.59 billion takeover of EEW Energy from Waste, which operates high-tech waste-incineration plants that produce electricity, heat, and steam for industrial use (Wall Street Journal 2016b).

A US Congressional Research Service report in 2008 highlighted the importance of China in dealing with the financial crisis. "China is a major economic power and holds huge amounts of foreign exchange reserves, and thus it could play a major role in responding to the current crisis" (Morrison 2008).

Domestic Imperative to Upgrade the Economy

China's growth has slowed down considerably since 2010, from double-digit growth annually before 2010 to 6.7 percent in 2016. Certain sectors such as steel and coal are experiencing overcapacity. Diminishing returns and limited attractive opportunities as a result of decades of overinvestment in real estate and infrastructure at home compel Chinese businesses to look for new markets. The industrialization phase of Chinese growth is yielding to a new era focused on efficiency, innovation, and consumption. The new mindset among Chinese investors reflects the recognition that while China is no longer a capital scarce country, it is still "a relatively technology-scarce economy" (Paulson 2016, 6).

China now sees ODI as an integral part of transforming and upgrading its economy. This strategy helps China to expand its room for development in a globalized world, improve the level of its international competitiveness, and promote sustainable growth. Acquiring assets in the West helps Chinese businesses to diversify into more mature markets with stable regulations and to build global brands. Chinese companies can learn how multinational corporations mobilize global resources in order to become more globally competitive.

After successes at home, Chinese businesses like Alibaba are seeking new opportunities abroad. Since its shares went public in New York in 2014, Alibaba has acquired major deals in Singapore, Macao, Japan, Hong Kong, and the United States, including the acquisitions of TangoMe ($280 million) and Magic Leap ($794 million) in the United States in 2014 and 2016, respectively (Wall Street Journal 2016a). In January 2017, Alibaba's Jack Ma met with President-Elect Donald Trump and promised to create 1 million jobs for the United States.

Many consumers in the West still hold negative views of Chinese products. To overcome this global branding deficit, Chinese businesses have purchased valuable Western brands, such as Lenovo's acquisition of IBM's PC division, Geely's buyout of Sweden's Volvo, and Haier's takeover of GE's appliances division. Establishing global brands and strengthening innovation capacity have been major objectives of China's outbound investment.

Top Destinations of Chinese West-Bound ODI

The United States, Australia, and Canada were the top three recipients of Chinese ODI between 2005 and 2016. In Europe, Britain, Russia, Italy, France, Switzerland, and Germany have been the largest destinations of Chinese investments since 2005 (Figure 2). Competition has been intensifying among EU countries in attracting Chinese investment. For example, Chinese investors sought to acquire German companies at a rate of roughly one a week in 2016, according to data provider Dealogic (Wall Street Journal 2016b). Germany attracted more investment from China than any other European country in the first half of 2016.

According to the "China Global Investment Tracker," maintained by the US-based think tank the American Enterprise Institute, Chinese investments and contracts in the United States have topped $134 billion since 2005. If the United States continues to be a major recipient of China's investment, it could receive another $100-$200 billion from China by 2020, according to a study by the Rhodium Group and the National Committee on US-China Relations. This would increase the number of full-time US jobs to between 200,000 and 400,000, according to some estimates (Rhodium Group 2016).

Chinese investors, whether state-owned enterprises, private businesses, or individuals, are pouring billions of dollars a year into the United States to buy real estate just like the Japanese did in the 1980s and early 1990s. Notable big purchases include Anbang's purchase of the Waldorf Astoria in New York for $1.95 billion in 2014, Lexmark's purchase by a consortium of Chinese companies for $3.6 billion in 2016, and Wanda's acquisition of Legendary Entertainment for $3.5 billion in 2016. In February 2016, Chongqing Casin Enterprise Group signed a definitive agreement to acquire the 134-year-old Chicago Stock Exchange (CHX). The deal, which was cleared by the interagency Committee on Foreign Investment in the United States (CFIUS) in December 2016, was blocked by the US Securities and Exchange Commission (SEC) in February 2018 in the midst of growing trade tensions between China and the United States. If successful, this would have been the first sale of a stock exchange in the United States (Washington Post 2017).

Chinese investors, much like their counterparts from Japan, Europe, and elsewhere, view the United States as one of the most stable and dynamic markets in the world. As former US treasury secretary Henry Paulson remarked, Chinese direct investment "reflects a vote of confidence in the American market and its workers and a belief in the long-term resilience of the US economy" (Paulson 2016, 11).

China has also invested in Western media firms and startups. Examples include Snapchat and Lyft, and China has purchased mobile gaming firms like Supercell of Finland and Playtika of Israel. Chinese Internet giant Tencent Holdings and its partners agreed to buy Clash of Clans creator Supercell Oy for $8.4 billion in July 2016. A Chinese consortium of eleven investors led by Shanghai Giant Network Technology Co. agreed in August 2016 to purchase an Israeli games business for $4.4 billion in cash. The consortium will purchase a 100 percent stake in Caesars Interactive Entertainment's subsidiaries (Wall Street Journal 2016c). Chinese companies acquired twenty-five firms based in the United States and Canada in 2015, compared to just four in 2014 and nine in 2013.

Australia maintained its position as the second largest recipient of aggregated Chinese ODI between 2005 and 2015 (KPMG and the University of Sydney 2016). Chinese investment in Australia reached $11.1 billion in 2015, the second highest in the past ten years following 2008, when Chinese investment peaked at $16.2 billion due to the mining boom. Investment in real estate continued to dominate, accounting for $6.85 billion, or 45 percent, of total Chinese investment in Australia. Chinese investment in Australia has also expanded into other areas such as health care, energy, mining, infrastructure, and agribusiness. The free trade agreement signed between the two countries in June 2015 made it easier for Chinese businesses to enter the Australian market.

Features of Chinese Investment in the West

Most Chinese Investment in the West Is Through M&A Rather Than Greenfield Investment

In the past, the vast majority of Chinese capital flows into the US market were paper transactions involving the purchase of securities, particularly US Treasuries, not direct investments that involved the hiring of US workers and the operating of businesses in the United States. This is quickly changing. Chinese companies consider M&A in the West a shortcut to upgrade technology. For example, after its failed 2005 acquisition of Unocal, the state-owned China National Offshore Oil Corporation successfully acquired Canada's Nexen oil-sands facility for $15 billion in 2013.

In 2016, China's FDI in the United States soared to $45.6 billion--triple the total from the year before, up from $15 billion in 2015 and $11.9 billion in 2014. In 2013, China's Shuanghui Group acquired Smithfield Foods, the world's largest hog processor, at $4.7 billion. Smithfield has continued to operate its business as usual and maintained its US-based farm supply chains. The Shuanghui-Smithfield deal underscores a key rationale behind Chinese investment: acquiring managerial and technical expertise from Western businesses.

Chinese Investment Is Concentrated in Certain Sectors, Such as Energy, Entertainment, Real Estate, Sports, Agriculture, and Technologies

Chinese money has flooded into European soccer clubs since Xi Jinping came to power in 2012. Xi is a soccer fan and has expressed interest in China's hosting a World Cup. While visiting the UK in October 2015, Xi made a high-profile stop at the Manchester City football club. To realize Xi's soccer dream, Chinese tycoons are purchasing soccer clubs overseas. In December 2015, a consortium of Chinese investors obtained a 13 percent stake in City Football Group, Manchester City's parent company. Two teams in central England--Aston Villa and Wolver Hampton--were also purchased by Chinese investors. A consortium of Chinese companies has sought to buy the Liverpool Football Club at roughly $1 billion from its US owner Fenway Sports Group. The family holding company of former Italian prime minister Silvio Berlusconi agreed in August 2016 to sell the Italian soccer club AC Milan to Chinese investors. Chinese investors and firms have also been acquiring stakes in soccer clubs in Spain, France, the Netherlands, and the Czech Republic (BBC 2016).

Chinese insurance companies have been active in purchasing abroad. Some of the most high-profile purchases include Anbang's purchase of the Waldorf Astoria Hotel and Taikang's 13.5 percent stake purchase in Sotheby's. With an investment of $233 million announced in July 2016, Taikang is now the largest shareholder of Sotheby's (Yan 2016b). In August 2016, Ping An joined a small group of Western bidders to acquire CIT Group, Inc., a US lender for aircraft leasing, to satisfy the growing demands of Chinese travelers.

Dalian Wanda, primarily a commercial property developer, has in recent years become an aggressive buyer of entertainment assets in the West. It now owns control of AMC Entertainment Holdings, Inc., the second largest cinema chain in the United States, and it acquired the Ironman triathlon series of races in 2015. In July 2016, it was in final talks to buy a 49 percent stake in Viacom, Inc.'s Paramount Pictures, a major Hollywood movie studio, for a value of between $8 billion and $10 billion (Wall Street Journal 2016d). In September 2016, it reached an investment partnership with another major Hollywood studio, Sony Pictures. Wanda already bought Legendary Entertainment in early 2016. Famous Chinese film director Zhang Yimou directed his first English-language film, The Great Walls, with Legendary. The $150 million production is hailed as the costliest ever US-China coproduction (Chow 2017).

Chinese Private Businesses and Individuals Have Become a Powerful Force in Overseas Consumption and Purchases

China does not publish detailed figures about its capital outflows, but according to an estimation by Goldman Sachs in July 2016, Chinese residents spent $372 billion on foreign assets in the second half of 2015, and another $108 billion left the country in the first quarter of 2016 (South China Morning Post 2016).

China imposes strict capital control on residents, allowing each individual to buy no more than $50,000 in overseas assets annually. Nonetheless, there are policy loopholes that people use to disguise their capital flight. A widely used method is to fake invoices, such as overstating the value of imports. Although the Chinese banking regulatory system has tightened the scrutiny of residents' overseas transactions, it has been hard to eliminate those activities, and Hong Kong is being used to disguise such capital outflows as well (South China Morning Post 2016).

According to an American Enterprise Institute study, overseas investment by Chinese private enterprises is now larger than that by SOEs (Scissors 2016). Private Chinese investments are increasing because firms want to get the money out of China due to the weakness of the yuan and, some speculate, political and economic uncertainty in China. It is also suspected that some SOEs or companies with close ties to the Chinese government use front companies and individuals to launder money abroad in order to evade taxes or for other illicit purposes.

The Impact of China's Investment in the West

On February 17, 2017, during a national security seminar in Beijing, President Xi Jinping suggested that China should "guide the international community in constructing a new world order that is more just and fairer and in jointly safeguarding international security" [phrase omitted] (Xi 2017). It's a clear indication that Xi intends to shape the future of the international system. Soon afterward, Prime Minister Li Keqiang gave his annual work report at the National People's Congress in March. The report included an unusually long passage about foreign policy and mentioned quanqiu (global) or quanqiuhua (globalization) thirteen times. That compares with only five such mentions the previous year (Economist 2017). As China keeps growing, its voice in international affairs will become louder and its influence bigger, whether the West likes it or not.

Chinese investors face many hurdles in the West. Just like Japan's investment and purchases in the United States in the 1980s, it is now China that is causing anxiety among Americans as Chinese investment increasingly moves to the United States. The Japanese presence in the United States triggered widespread fears and the perception that "Japan is buying up America" began seeping into American culture. Japan's successes and the United States' worries were reflected in Ezra Vogel's 1980 book, Japan as Number One.

China faces more challenges than Japan did since it is the first nondemocratic, non-Western power challenging the dominance of the West in international political economy spheres. Different from international reactions to China's investment in the developing world, which focus on issues such as the environment, labor standards, and local governance, Western countries pay greater attention to jobs and national security when they examine Chinese investment in the West. Such concerns are often highlighted during an election year, as was the case in the 2016 US presidential election.

In addition, the US government fears that some Chinese companies may engage in industrial espionage and steal high technology for military purposes. Huawei has been singled out for having ties to the Chinese military, since its president, Ren Zhengfei, was a former PLA officer. Huawei has strongly denied any links to the Chinese government. Large private businesses such as Huawei and ZTE are often perceived by Western governments as state owned or state controlled, creating obstacles in their normal business activities. For example, AT&T had a deal with Huawei to sell Huawei's Mate 10 smartphones to customers in the United States, but in January 2018, AT&T walked away from the deal due to pressure from some members of Congress (Bartz 2018).

It is not just security concerns that are driving the increased backlash against Chinese investment abroad; it's also the suspicion that China is gaming the system by snapping up foreign firms in key areas while blocking others from doing the same in China. On the other hand, the Chinese government has already begun to regulate overseas investments.

Some foreign businesses complain that it's more difficult to invest in China. David Dollar of the Brookings Institution asserts that China "remains the most closed to foreign investment of the G-20 countries.... This creates an unfairness in which Chinese firms prosper behind protectionist walls and expand into more open markets such as the U.S." (Bloomberg 2016). For example, since the launch of the "going out" strategy, many international energy companies have played important roles in their Chinese partners' growing overseas investments, including jointly tapping into oil and gas explorations in many parts of the world. But they have made little headway over the years, with oil majors, such as Shell and BP, still complaining about unfriendly energy policies and limited business opportunities in China (Bloomberg 2016). As Henry Paulson recommended, China and the United States should avoid putting entire sectors off-limits from foreign investment and apply national security reviews in a fair and transparent manner (Paulson 2016). The United States and the European Union are still interested in negotiating a bilateral investment agreement (BIT) with China as of January 2018. A successfully concluded BIT may help rectify some of the problems and concerns mentioned above.

China is a favorite punching bag of US politicians, especially during elections, but facts speak louder than words. According to the McKinsey Global Institute, only around 700,000 of the 6 million manufacturing jobs lost in the United States between 2000 and 2010 went to China (Time 2016). In recent years there has been some resurgence of manufacturing jobs in the United States: 1 million jobs have returned to the United States since 2010. According to a joint study by the National Committee on US-China Relations and the Rhodium Group, in 2010, fewer than 15,000 Americans were on Chinese company payrolls, and in 2016, Chinese companies employed 140,000 Americans with Chinese companies' operating in 98 percent of congressional districts nationwide (National Committee on US-China Relations and Rhodium Group 2017). As Americans debate the risks of growing Chinese investment in the United States, it is important that the US public and policy community not lose sight of the benefits these investments can generate for local economies.

The CFIUS is perhaps the most famous governmental organization tasked with reviewing foreign investment that could result in foreign control of US businesses. In August 2016, the state-owned China National Chemical Corporation (ChemChina) received clearance from CFIUS for its $43 billion acquisition of Syngenta, a giant in farm chemicals and seeds, removing one of the biggest challenges to the deal. Chinese investment is not necessarily more scrutinized by Western governments than that of other nations, but certainly some large projects or companies like Huawei often get a lot of media attention, helping politicize negotiations and review processes, contributing to a public perception in the West that China's investment is likely to hurt the economy and national security of the recipient country.

While contributing to recipient countries' economies, Chinese investment faces three kinds of hurdles in the West. First, some policymakers, regulators, media, and scholars question the motives of Chinese investment. They think it is not pure commercial activity but a policy tool of the Chinese government. Second, they believe Chinese businesses, especially SOEs, are supported and subsidized by the Chinese government and engage in unfair competition with foreign companies. Third, they criticize Chinese firms for lacking corporate social responsibility (Wang 2014).

Indeed, Chinese investors face restrictions in the West. For example, in Vancouver, a favorite destination for individual Chinese investments, the British Columbia government announced that starting August 2, 2016, it would begin to charge an additional transfer tax of 15 percent of a property's value to foreign buyers, as a way to limit foreign money coming into real estate markets to rein in home prices (Wall Street Journal 2016e).

In Australia, the government blocked China's state-owned State Grid Corporation and Hong Kong's Cheung Kong Infrastructure Holdings Ltd. from taking a controlling stake in the country's largest state-owned electricity network, Ausgrid, citing national security considerations. Though the Australian government said that the national security concerns are not country specific, the failed Australian deal is a major upset for State Grid, the world's largest electricity provider by revenue. In May 2016, Australia blocked a Chinese consortium led by Shanghai Pengxin Group from buying an 80 percent stake in Kidman & Co.--the world's biggest cattle farm--on concerns that it would not be in the national interest.

Using a national security rationale to block outbound investment from China is far more confrontational than a trade dispute. It suggests that China is untrustworthy and has potentially nefarious intentions, commented James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney (Bloomberg 2016). Bilateral relations are likely to suffer in the long term due to such distrust.

National security remains the top US concern regarding Chinese investment, especially from Chinese state-owned or state-controlled enterprises. In a September 15, 2016, letter to the comptroller general of the US Government Accountability Office (GAO), a group of sixteen members of Congress raised concerns about security challenges posed by foreign ownership in sectors such as telecommunications, media, and agriculture, especially from Chinese companies designated as "state champions" that often benefit from "illegal subsidies" designed to gain strategic access to markets like the United States. They mentioned ChemChina's $43 billion acquisition of Syngenta (for food security and safety implications) and Dalian Wanda's acquisition of major US movie studios (for concerns about China's efforts to shape US media and culture). The letter requested a review report from the GAO on the CFIUS to determine whether its statutory and administration authorities have effectively kept pace with the growing scope of foreign acquisitions in strategically important sectors in the United States. Among a list of recommendations, the members of Congress urged the GAO to consider whether the CFIUS membership should include the director of the FBI, the chairman of the Federal Communications Commission, and the secretary of agriculture and whether foreign acquisitions from designated countries should be subject to mandatory, rather than voluntary, notification to CFIUS.

In its 2017 annual report, the US-China Economic and Security Review Commission, an advisory body to the US Congress, recommended prohibiting the acquisition of US assets "by Chinese state-owned or state-controlled entities" and ensuring a strict review process for all significant Chinese investments in the United States, including licensing agreements and any deals that enable Chinese entities to "determine the disposition of any asset" (US-China Economic and Security Review Commission 2017, 25).

One need not exaggerate the obstacles facing China's overseas investment. As Rhodium Group's Thilo Hanenmann suggested, for every sensitive deal that draws opposition, there may be ten that go through (Economist 2016). Strict reviews by CFIUS have not deterred Chinese firms that are eager to enter the US market. How Chinese investment can benefit both China and the recipient without creating concerns about national security or jobs continues to be a question worth exploring.


China has undoubtedly become an economic powerhouse and has deepened its participation in global governance. From the World Bank to the United Nations, from APEC to the Davos Forum, China's voice has become clearer and louder, which means that the existing international institutions will not be able to address global issues properly without taking China's views into account. More importantly, China is contributing to global governance through innovative measures to strengthen international cooperation such as the establishment of the AIIB and the launching of the BRI.

China's rise and its global economic activities challenge traditional patterns of international political economy. Chinese trade and overseas investment sometimes eschew existing norms and practices such as by ignoring the environment, local culture, or corporate social responsibility (CSR), and restrictions on foreign businesses, including international media, have not been lifted. Meanwhile, China under President Xi has become more confident, with Xi's proclaiming in his nineteenth Party Congress report in October 2017 that the China Model offers an alternative approach to international development. Whether China is a revisionist power or a status quo power or whether China intends to replace the current international system is in the eye of the beholder, but the fact is, China's rise has already created unprecedented challenges to the global economic and political orders established and maintained by Western powers. China has repeatedly called for a more just and fair international order. Since such challenges are new to the West and China alike, the international system may need to undergo some transformation or modification in the years ahead that reflects the changing realities attendant on China's growing international influence. However, it is premature to conclude that China's challenge to the existing international order will necessarily precipitate a conflict between China and the West.

Indeed, since China's investment in the West is a relatively new phenomenon, mutual learning and adjustment are required for both China and the West to fully understand its causes and consequences. For example, in compliance with international norms and practices, Chinese firms need to assume CSR while aiming at their direct business interests. Western governments and publics, on the other hand, must avoid knee-jerk reactions simply because an investment comes from communist China. They need to get to know and work with globally ambitious Chinese companies and seek new opportunities to expand their businesses in their home country, in China, and elsewhere. Western countries must also reconcile the tensions that sometimes emerge between a central government that focuses more on national security issues and a local government that cares more about economic development.

Investment is a two-way street. To address outside concerns about restrictions for investment in China, the Chinese government has repeatedly reassured foreign governments and foreign investors that China's door remains open. It is encouraging that in November 2017, China's State Council announced a new financial market liberalization policy, easing limits on foreign ownership of financial services groups. According to the new policy, foreign firms will be allowed to hold a majority stake in joint ventures with Chinese securities companies and life insurers. In addition, caps on foreign banks' stakes in Chinese banks and asset managers are to be removed (Financial Times 2017). The new policy was immediately welcomed by Western businesses such as JPMorgan Chase, Morgan Stanley, Goldman Sachs, UBS, and Citigroup.

For China, investing in the West is not just a simple commercial act; it is a milestone in its pursuit of great power status. With its contributions to the development of the Western world, China is moving closer to becoming an indisputable global power. China's investment in the West will fundamentally change the traditional global economic and political orders dominated by the West, and its impact will be significant and transformative. Much of the angst about China's investment in the West boils down to the fundamental question: Is China's rise an opportunity or a threat? How company executives, politicians, economists, and other stakeholders can encourage, secure, and ultimately leverage Chinese investments will become a topic of discussion and debate in the years ahead.

It seems clear that Chinese investments abroad will continue to rise, albeit under tighter scrutiny by both Western countries and China. The rest of the world will need to get used to it and adopt legal and regulatory adjustments to make the most of it. China has entered uncharted territory in international business and global outreach. Chinese companies investing in advanced economies will likely reshape the global business landscape irrevocably. While major international concerns about Chinese investment in the developing world are related to human rights and environmental protection, concerns about Chinese investment in the West focus first and foremost on security and global order. Western countries will increasingly have to balance their national security concerns with their economic ones.

For China, following internationally accepted norms in global business and launching public relations campaigns may help erase some of the concerns about Chinese investment. Greater transparency from Chinese companies about their finances and ownership would help to dispel fears about their motives. China can also diversify investment destinations and enhance investment in areas or sectors that are less likely to generate national security or employment concerns. In the final analysis, both China and the West need to become accustomed to the growing power and influence of China through mutual socialization.


Zhiqun Zhu is professor of political science and international relations at Bucknell University in Lewisburg, Pennsylvania. His research interests include Chinese politics and foreign policy, East Asian political economy, and US-China relations. He is the author and editor of more than ten books, including China s New Diplomacy: Rationale, Strategies and Significance (2013) and US-China Relations in the 21st Century: Power Transition and Peace (2005). He can be reached at

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Caption: Figure 1 Chinese Outward Investment Since 2005 (in billions of dollars)

Caption: Figure 2 Top Western Destinations of Chinese Investment (2005-2016, in US$ billions)
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Author:Zhu, Zhiqun
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Date:Apr 1, 2018
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