Old fears die hard. About a quarter of a century years ago the US launched a “structural impediment initiative” against Japan when both trade and investment balances between the two countries surged in favor of Japan. The EU acted more softly but in 1992 Sir Leon Brittain, the then EU Commissioner for Competition , also raised strong concerns regarding impediments in access to the Japanese investment market and the surge of Japanese investors in Europe acquiring European technology.
Today nobody speaks of a Japanese threat any longer. Imbalances have declined, the Japanese market is open but aging and far from dynamic, and Japanese investment in Europe would be welcome if it could be attracted. Yet, all this does not hinder observers to blow into the same trumpet when it comes to an alleged sale out of European technology to Chinese investors.
More pronouncedly, the fear is that a “China Inc.” will under government directive head for “China 2025” when the country sees itself as the top host of advanced knowledge industries and services.
That China is not Japan is a meaningless statement concerning the future. Nobody can reliably predict that the Chinese net foreign direct investment (FDI) position (the balance between inward and outward FDI) will take the same or different course over the next decades as Japan’s one in the past.
So far we can only rely on facts, past experiences and arguments concerning future directions of capital movements and the behavior of Chinese companies in markets. First, what about the facts? For illustration, we concentrate on most recent figures of German FDI in China (both stock and flow data) and on Chinese FDI in Germany. So far, stock data are only available until 2014. They state a clear “imbalance” in favor of Germany. The share of China in total German FDI in manufacturing jumped from about 9% in 2011 to 15% in 2014. Obviously, restrictions like being confined to joint ventures have not detracted German companies from investing in China. On the other hand, China’s investment in Germany comprised but a tiny share of all foreign investment in Germany (far less than a percentage point).Now, it is often argued that the surge of the Chinese shopping tour started not earlier than last year. Yet, balance of payments flow data of German Monthly Balance of Payments Statistics in October 2016 (p. 43) show that in 2015 German FDI in China rose by 4.3 Bill. € against only 1.9 Bill. € of Chinese investment in Germany. The first two quarters in 2016 showed an increase of 2.6 Bill € and 0.4 Bill.€ in German investment in China while Chinese FDI in Germany declined by 0.5 Bill € in the first quarter of 2016 and rose again by 0.5 bill € in the second quarter.
A surge spells differently. True, pure numbers may underrate the importance of “strategic “foreign investment in key technology-leading German small and medium-sized enterprises (SMEs). Yet, they at least allow for the argument that also German investment have and had options to acquire valuable human resources in China for their companies as it is feared from Chinese investment in Germany.
Second, coming to past experiences, the small numbers as well as the behavior of Chinese companies so far do not support strategic or non-economic target setting. Companies producing under Chinese majority ownership report normal profit-oriented objectives with stable employment and free entrepreneurial decision-making. What is more important is that Chinese large companies like Huawei, Haier, or Alibaba argue that they are global companies and thus act globally. This discloses an important flaw in arguments of those who fear about the future. In a globalized world, companies act globally but with still national headquarters which are engraved in the mindset of policymakers as national companies with national ownership on valuable technological assets. One can label such view as the “GDP view” in which the D stands for domestic control inside territorial boundaries. This is, however, no longer the relevant view in global companies’ boardrooms. Global Chinese companies are not immune against the outflow of firm-specific assets like technology. Nor can the Chinese government lock in these assets inside China. Technology is embedded in persons and resources like Big Data. It can rapidly move from one place to the other. The speed of technology diffusion between countries has strongly risen over the last decades. With hindsight, this was one of the reasons why the fear against Japan Inc.”did not materialize.
Of course, future interference from political circles can never be excluded as documented by the growing list of complaints of German companies about detailed micro-interventions from the Chinese bureaucracy. Yet, this seems to reflect more an often inconsistent array of different industrial policies of different public decision-making bodies in China than the top-down strategy of “China Inc.”. In short, past evidence does not support fears on the future. Nor it can it rule out such fears.
Finally, coming to economic arguments on future directions of Chinese investment capital, first, the world from a macro-economic viewpoint should welcome the Chinese “recycling of manu-dollars” into foreign private equity rather than into foreign fixed interest-bearing public papers. What was the major weakness in the recycling of petro-dollars in the seventies can now be avoided: sovereign debt crises and defaults. With larger equity instead of debt flows, risks will be burdened on many shoulders including Chinese ones. Second, the internationalization of the Yuan and the gradual opening of the Chinese capital account will raise the volatility of buying and selling Chinese assets. Markets will begin to speculate against the Yuan and Chinese companies will be tempted to split their borrowing and investment between different currencies, thus eventually becoming victims of the well-known currency mismatch syndrome underlying the Asian crisis of 1997. The hefty rise of corporate debt of Chinese companies in foreign currencies in the recent past is an early warning signal for such problems if the Yuan continues to be under depreciation pressure. Such volatility would also act against “China Inc.”. Companies could be forced to sell assets in order to serve their debts and in doing so would move the balance between Chinese and non-Chinese companies back towards level playing field.
This is not to belittle the rise and success of Chinese companies in the digital economy. But to extrapolate such rise and to sketch a linear trend in the direction of China Inc. becoming a technology-sucking copycat first and a monopolist later, is neither supported by past experience nor by good arguments.