Foreign Direct Investment has been an incredibly important catalyst for China’s economic development, bringing in the capital, technology and know-how that made China the world’s factory. But China is no longer so fresh and attractive to foreign investors as return on assets is falling. FDI to China increased 3.9% on the year to RMB 731.8 billion in the first 11 months of 2016—the 2015 expansion was 5.6%. Besides, increasing labor costs have become a heavy burden to foreign enterprises, especially manufacturers, who can cut costs by moving to Southeast Asia.
Chinese companies have been on a buying spree around the globe over the past two years. 2016 witnessed a record level of Chinese outbound mergers and acquisitions (M&A) activity, with 932 deals worth over $220 billion taking place, an increase of 246% compared to 2015, according to PwC China. However, the surge in outbound investments has brought concerns from both Chinese authorities and recipient countries; the latter are becoming more cautious regarding the presence of Chinese capital in large-scale deals in key industries. Affected by such concerns and tighter government scrutiny, the number of M&A deals might not be as numerous in 2017 as in 2016, but the trend will not stop.
China’s One Belt, One Road initiative is the fusion of two development schemes—the land-based Silk Road Economic Belt, and the 21st Century Maritime Silk Road. Together they comprise infrastructure between 65 countries containing 63% of the world population, more than 35% of global merchandise trade, and 30% of global GDP. To date about $ 150 billion in investment has been committed.
China’s economic growth over the past few decades has impressed the world. But the world’s second largest economy now faces a difficult transformation: from relying on exports and investments to developing domestic demand. That’s not easy. Government-led stimulus is only a temporary solution and only looked reasonable in the first few years after the recent global financial crisis. In fact, the main problem facing the Chinese economy has been the weak demand in domestic market which manifested clearly in 2006, and became more obvious when growth slowed down.
In China, while state-owned enterprises dominate the monopoly industries like petroleum and telecom, the country’s private economy is still the major source for growth in production, employment and exports. Private companies are very sensitive to market changes: When profit margins shrink, they will jump out quickly. Expectations are low while the Chinese economy is under the ‘New Normal’, but the government is still concerned about private investment stagnation. The top economic agency has created a work team to look into the problem and made 60 proposals to solve the slow-down issue. But will top-down methods work?
Bitcoin, a virtual currency traded online, was not invented in China, yet China is where 80% of the virtual “coins” are minted and 90% of the transactions are made. Currently, the global bitcoin market amounts to some $14.5 billion, roughly the same amount of money as Apple’s European back taxes. If the virtual currency’s popularity continues to grow, decisions made by Chinese investors and regulators may determine whether bitcoin fades to a historical footnote, like Napster or the eight-track tape, or becomes the silicon cornerstone of a new global financial order. A combination of factors thrust China into this decisive role.
One day in October, 2015, a group of disgruntled investors gathered in Beijing to lodge a complaint: they had bought so-called wealth management products from a state-owned guarantor backed company that managed nearly $8 billion in assets, and which had collapsed later. Such defaults have been uncommon in China’s wealth management product space, but the now-gargantuan industry may pose a large risk to China’s financial system. Many risky aspects of the wealth management products industry make people worry about the possibility of a chain reaction similar to the 2008 financial crisis, when the US mortgage market buckled under similar strains.
After several decades when most Western governments inclined toward freer and more global trade, the mood seems to be changing. In the US, the presidential candidates have agreed on little but the need to keep a closer eye on trade agreements. In the United Kingdom, the new Prime minister, Theresa May, seems determined to fulfill the British public’s wish to leave the European Union, despite the fact that the pound sterling sank recently to a 168-year low. Skepticism over trade deals seems likely to remain a stubborn presence in most of the mature economies, so what should Chinese companies do to react?
For the past three decades, the general political consensus in the mature Western economies has been that trade liberalization is a good thing: most economists credit rising levels of global trade and cross-border investment with lifting nearly a billion people out of poverty in the developing world and reducing prices for consumers almost everywhere. Yet despite those successes, a growing segment of the public in the mature economies sees the impact of liberal trade policies quite differently— the revisionist view sees free trade as a major cause of the declining prosperity in the mature economies. Why has an anti-globalization consensus developed?
Central banking is not enough. While monetary policy did much to recover from the global financial crisis, its instruments have been largely exhausted and rendered ineffective. Low interest rates and quantitative easing may have kept the engine spinning, but are not pillars of sustainable economic policy. In China, there might still be scope for more monetary easing, but Mohamed El-Erian, chief economic advisor at financial services group Allianz and formerly at the helm of investment firm PIMCO, warns that, ‘‘China needs to avoid the trap that the advanced countries have fallen into, namely that of excessive prolonged reliance on central banks.’’