Since the late 1970s, the People’s Republic of China (PRC) has built its economic modernization strategy on a philosophy that regards foreign direct investment (FDI) as functioning in two distinct but interconnected stages. “Welcoming in” (Yin jinlai) facilitates domestic capital formation, market reform, and technological advancement. It is accompanied by a subsequent “going out” (Zou chuqu) of surplus capital intended to deepen access to foreign markets, natural resources and advanced technology, bringing about additional growth and stabilization. The concept bears an analogy, in one sense perhaps, to the ebb and flow of Yin and Yang at the heart of Taoism’s dualistic cosmology, in which complimentary forces interact with one another to create balance in the natural world.
The PRC began to “welcome in” significant FDI after Deng Xiaoping–who chaired the Chinese Communist Party (CCP) after Mao Zedong and initiated its economic “reform” and “opening up” program (Gaige Kaifang) – proposed to integrate China into global capitalism as a means of resurrecting its former imperial prosperity, which, after protracted internal upheaval, had been destructed by a series of foreign incursions and civil wars spanning the 19th and early 20th centuries. From its inception in 1949 to 1978, the PRC tried unsuccessfully and, at times, disastrously, to reconstruct under a communist system in which the state controlled production, exchange, and distribution.
It mattered little to Deng that his vision of China’s economic future represented a reversal of Mao’s policy of self-reliant industrialization. Purged and persecuted by the Party during the Cultural Revolution (1966-76), he was left with few illusions. If no longer a classical Marxist, he remained a fervent nationalist who summed up his pragmatic way of thinking in his now-famous, though often misquoted, saying: “It doesn’t matter whether it is a yellow cat or a black cat; a cat that catches mice is a good cat.” Since his youth, Deng’s aspiration had always been to draw on Western knowledge and resources to, as he put it, “save” China.
China began laying the groundwork for a global strategy in 1978 when it initiated widespread market reforms that saw the de-collectivization of agriculture, experimentation with free markets, and the introduction of foreign capital. At the time, inbound FDI came mainly from (or through) the British Dependent Territory of Hong Kong. Only state-owned enterprises (SOEs) or other approved provincial and municipal entities were allowed to invest overseas, which they did on a modest scale.
A second round of market reforms followed in the late 1980s and into the early 1990s. Non-SOEs were allowed to invest overseas, provided they put up sufficient capital and partnered with suitable foreign entities. Outward FDI quickly rose to over US$1 billion.
In 1992 the CCP announced at its 14th Congress that it would institute a “socialist market economy with Chinese characteristics”. It seemed paradoxical, but Deng reasoned that since economic planning takes place even in capitalist societies, it does not define socialism any more than do market forces, which are evident also within a centrally-planned socialist society. He believed that China could harness the economic benefits of capitalism to the moral imperatives of socialism under the guidance of a centralized and technically proficient bureaucracy.
Deng’s market reforms and China’s immense pool of cheap labor kick-started an export drive that would fuel economic growth for decades and win for the nation the laudatory, if not sardonic, accolade “factory to the world”.
In the early 1990s, China languished under sanctions imposed by Western countries in response to its government’s crackdown on pro-democracy demonstrators at Tiananmen Square in the spring of 1989. But these sanctions had an unintended consequence, for they motivated the CCP to speed up economic development as a way to legitimize its rule – with some success as it would turn out–and to justify authoritarian control as necessary to achieve difficult but fruitful reforms.
In 1992 Deng, now retired from active politics but near the height of his influence, toured southern China, signaling his support for more overseas investment in Special Economic Zones, where market liberalization was encouraged in order to accelerate modernization. In time, continued growth and capital market reform would make it possible for increased outflows of Chinese FDI through new multinational corporations.
By the mid-1990s, it had become apparent that SOEs had to be made more self-reliant. Beijing undertook to transform all but the largest (those it had built up to achieve economy of scale through consolidations and mergers in key industries) into “Modern Enterprises”. That is, it allowed them to reorganize as joint stock companies, capitalized by private shareholders, and to seek to maximize profit, paving the way for their eventual floatation on domestic and overseas stock exchanges. Effectively, the policy pushed many former SOEs in an outward direction because they could no longer compete domestically against large state-controlled oligopolies. SOE reform also facilitated significant capital flight, as new grey areas opened up in the legal framework governing their structure, offering a channel for corrupt officials and SOE managers to drain state assets using investment activities conducted through overseas branches.
In the early stages of China’s “Going Out” strategy, the bulk of overseas investment was directed to trade and supporting business like marketing and distribution. Problems emerged as China’s rapid growth continued to be driven by the export of low value-added products. The model drew mounting criticism from Western countries, such as the United States, whose manufacturing sectors were being deeply eroded by competition from inexpensive Chinese imports, as well as from conservative Party elders who regarded exports on such a large scale as a net outflow to the benefit of foreign countries. Nonetheless, light industrial, export-oriented firms, especially those requiring a low capital base, continued to flourish and expand, which in time would cause China’s manufacturing sector to experience overcapacity and spur progressively more aggressive real-estate and stock market speculation.
In the wake of the Asian financial crisis of 1997-98, the State Council, confident that Chinese manufacturers could achieve better global competitiveness and brand recognition, decided to alleviate overcapacity by assisting Chinese multinationals to establish production bases overseas, where they could integrate into new markets and acquire Western technology, management skills and foreign currency. It began offering export tax rebates and financial assistance to Chinese companies operating abroad that utilized materials, parts and machinery from China.
By 2001 China had acceded to the World Trade Organization (WTO), and its “Going Out” strategy had been consolidated and formalized as one of China’s “Four Modernizations”, or primary economic development goals, in the 10th Five-Year Plan (2001-05). Chinese companies were encouraged to strengthen their international competitiveness by availing themselves of their rights to enter WTO markets, to which membership entitled them, and for which Beijing had committed itself to several major domestic market-opening concessions. Chinese embassies and consulates overseas were directed to beef up their commercial services to assist Chinese companies in navigating unfamiliar foreign investment and legal environments, and to help them understand their own advantages and disadvantages abroad.
Outward FDI rose dramatically in subsequent years. China moved to the front ranks of large global investors, transforming itself from a major exporter of goods into a major exporter of capital. Continued reforms and a booming export trade increased its capacity for foreign investment. The government encouraged companies to “go further outwards” (Jinyibu zouchuqu) in its 11th Five-Year Plan (2006-2010), partly in an attempt to steer surplus capital away from speculative investment in real-estate and the stock market, as well as to ease growing pressure on the Renminbi (RMB), China’s currency, to appreciate. The National Development and Reform Commission (NDRC) drew up a list of natural resources and technologies that Chinese outward FDI ought to target. During this period, Chinese companies engaged in larger and more complex foreign investment deals. While they continued to forge joint ventures, and some to establish wholly-owned entities overseas, particularly in the manufacturing sector, they turned increasingly to mergers and acquisitions (M&A) because these offered quicker access to new markets and technologies.
China’s outward FDI soon swelled to unprecedented levels. By the end of 2010, according to China’s Ministry of Commerce, more than 13,000 Chinese investing entities had established 16,000 overseas enterprises in 178 countries and regions globally. The accumulated outward FDI net stock volume had reached US$317.21 billion (compared to US$4.84 trillion for the United States). Of this, US$261.96 billion was non-financial outward FDI. China’s outward FDI flows for 2010 alone amounted to US$68.81 billion (compared to US$328.9 billion for the United States), placing China 5th among all economies in terms of outward FDI flows and 17th in terms of stock. Foreign affiliates had total assets exceeding US$1.5 trillion and employed 1.1 million workers. Chinese state-owned commercial banks had established 59 branches and 17 affiliated entities in 34 regions or countries, employing 41 thousand foreign staff. In the first half of 2011, China’s non-financial outward FDI rose 34 percent from a year earlier, and observers expect it to reach US$1 trillion by 2020.