Chinese foreign investment

Trolling through some articles from a few months ago I found this one "Tracking Where China Invests" by Derek Scissors from the Heritage Foundation (HF). In it he discusses the HF's China Investment Tracker.

This interactive display is pretty neat as it shows Chinese investment growing over time.

Now the HF is a conservative think tank and its purpose behind providing such data may be different than mine, but it does provides a valuable resource that is worth looking at if you want to know more about Chinese outward investment.

One of the interesting points that Scissors makes is about the announcement of deals may not actually result in subsequent investment. He uses Venezuela as an example but it could possibly apply to Australia. Governments in Australia love making announcements of 50 billion of this and 20 billion of that but these figures are much more arbitrary and conditional than governments suggest.

The other interesting fact is that Australia has been the largest recipient of Chinese (non-bond) investment in recent times. The US wins hands down in total Chinese investment of course because of China's huge appetite for US dollar assets.

Now whether you think Chinese investment is a good thing or not, it's important to start with the facts

China's hefty investments in sub-Saharan Africa have received deserved attention, but its investment in Latin America has been overblown by some. One reason is a common event in bilateral commercial transactions--grand announcements that never come to fruition. In mid-April Venezuela proclaimed a $20 billion oil-for-loans deal with China, but Caracas' track record in this area encourages skepticism. China has little investment in the Arab world, which is perhaps surprising in light of its focus on energy, but it has sizable engineering and construction contracts there. Australia, at $30 billion, is the single biggest draw for Chinese investment. The U.S. is second at $21 billion, Iran third at $11 billion.

The places where the Chinese have invested most often are also the places where their investments have been most often thwarted: Australia, the U.S. and Iran, in that order. Failures stem from a variety of causes, such as nationalist reactions in host countries, objections by Chinese regulators and mistakes by the Chinese firms themselves. According to the Heritage tracker, the value of failed investments from 2005 to 2009 is a staggering $130 billion. Chinese investment could have been a full 40% larger than it was had the failed deals closed.

He also points out that the biggest recipients of investment have also been the biggest blockers of Chinese investment:

The places where the Chinese have invested most often are also the places where their investments have been most often thwarted: Australia, the U.S. and Iran, in that order. Failures stem from a variety of causes, such as nationalist reactions in host countries, objections by Chinese regulators and mistakes by the Chinese firms themselves. According to the Heritage tracker, the value of failed investments from 2005 to 2009 is a staggering $130 billion. Chinese investment could have been a full 40% larger than it was had the failed deals closed.

The last point is slightly spurious because if investment had succeeded in one place it might not have gone ahead elsewhere.

The potential for Chinese investment growth is huge, but let's keep it all in perspective. In terms of the total stock of foreign investment in Australia Chinese investment is currently minute. The latest edition of the ABS's
5352.0 - International Investment Position, Australia: Supplementary Statistics, 2008 reveals that:

Level of foreign investment in Australia
The level of foreign investment in Australia increased by $66.9 billion to reach $1,724.4 billion at 31 December 2008. Portfolio investment accounted for $921.2 billion (53%), direct investment for $392.9 billion (23%), other investment liabilities for $302.6 billion (18%) and financial derivatives for $107.8 billion (6%). Of the portfolio investment liabilities, debt securities accounted for $689.1 billion (40%) and equity securities for $232.1 billion (13%).
The leading investor countries at 31 December 2008 were:
United Kingdom ($427.1 billion or 25%)
United States of America ($418.4 billion or 24%)
Japan ($89.5 billion or 5%)
Hong Kong (SAR of China) ($56.3 billion or 3%)
Singapore ($43.1 billion or 2%)
Switzerland ($38.1 billion or 2%)

In addition, the level of borrowing raised on international capital markets (e.g. Eurobonds) was $145.3 billion or 8%.

China doesn't make it into the top 5, although much Chinese mainland investment comes through Hog Kong (4th at 3 per cent) and through various other sources such as tax havens like the Cayman Islands and the British Virgin Islands.

So the current position is that Chinese investment in Australia is growing rapidly but from a very low base.
Despite the huge focus on Chinese investment, what has gone largely unnoticed is the considerable increase in Japanese investment, which is much wider in scope than Chinese investment. On this see "Japanese investment in Australia slips under the radar" by Rick Wallace in The Australian. 

A Wave of Japanese investment in Australia is being driven by Japan's economic stagnation and the need for its corporations to seek fresh growth strategies and a secure supply of food and energy.

The key focus of foreign investment has been China in the past two years, but direct investment from Japan to Australia hit $36 billion in 2008, up more than 50 per on 2006 levels, and is predicted to keep growing.

The figure eclipses the long-term average of $3.3bn of yearly direct investment from Japan, as well as the 2008 total of Chinese direct investment in Australia of $3bn.

The breadth of the investment -- in Australia's food, beverage, technology, financial services, energy, manufacturing, mining and resources sectors -- differentiates the current wave of Japanese investment from the property speculation of the late 1980s.

High-profile Chinese resources deals have captured the headlines, but Japanese companies and investment funds have quietly closed out at least $17bn of mergers and acquisitions since 2007.