In this essay I will elaborate China’s open door policy in late 1970s. Since then China has increasingly developed its industrial base and agriculture and at the same time attract large inflow of foreign direct investment (FDI). China’s open door policy has further strengthen through its accession to World Trade Organization (WTO) in 2001 and effective implementation of China’s ‘go global strategy’.
China’s ‘go global strategy’ is a significant point of departure in its journey toward more investment abroad by increasing its overseas direct investment (ODI). This essay seeks to explain how China’s ‘go global strategy’ has further stimulated increased overseas investment in natural resources to supply increasing industrialization in China. Characteristic of Chinese investment will also be described here to provide context or enabling environment for Chinese investment practices overseas.
China’s Open Door Policy in Late 1970s
Before 1949, China was torn apart by foreign invasions, peasant uprisings, civil wars and drained of its surpluses through imperialist impositions. China at the time lived through classic symptoms of underdevelopment such as economic stagnation, poor technological capacity, political corruption and disorder, social polarization and impoverishment. In 1976 when Mao passed away China had developed into a diversified and self-sufficient industrial structure with some developed capacity in technology. This economic transformation was built on the basic structure of socialist system with strong emphasis on the public ownership (Clegg, 2009). Facing with the US-led anti-communist world system, Mao developed a ‘closed door’ self-reliance and limited engagement with the outside world. This was very damaging to the development of the country. Given this context Mao crafted a combination of ‘top-down’ command system with ‘bottom up’ mobilization for production and social progress leading toward Great Leap Forward in 1958 – 60 and Cultural Revolution in 1966 – 76.
While Maoist self-reliance approach has been used in the context of strong international pressure, Deng Xiaoping was able to come up with a different approach following the normalization of Sino-US relations in 1978. This is a transformation from ‘war and revolution’ to ‘peace and development’. Under Deng’s guidance China was able to reap the benefit of multilateral initiatives, open the China’s door to the outside world and advance the development of the country through export markets and attracting foreign direct investment (FDI) toward priority sectors in line with the state’s industrial policies, directing foreign capital inflows into long-term investment projects and into greenfield sites to create new productive capacity. Building on Mao’s self-reliance model, Deng make use of opportunities available in the global market to advance the country’s development agenda. This is done by still maintaining control over the country’s economic development path and objective (Clegg, 2009). As Deng once said ‘socialism cannot be built on the basis of poverty’ and the ‘superiority of the socialist system is based on increasing the productive forces and improving people’s material and cultural life’ (R. Halloran, 1999).
China’s approach in the opening up process is different with that of Russia’s neo-liberal ‘shock therapy in early 1990s. Its open door policy is developed in stages with the aim at strengthening China’s industrial base. This is done by stimulating the spectacular rise of small and medium-sized township and village enterprises (TVEs) that later on provide favorable environment to restructuring of large scale state-owned enterprises (SOEs). From the demand side the government use pricing policy to stimulate domestic production. Therefore in contrast with that of Russia which follows market liberalization path, the opening up of China is more of a planned intervention by the government through expansion of domestic market, shaping demand patterns using pricing policy and create a dynamic between development of agriculture and industrial development. China’s open door policy aimed in the first place to promote China’s production for external markets by seeking to attract foreign investment into the export sector. The focus was not simply on the large-scale Multi-National Corporations (MNCs), but especially on the overseas Chinese investors from Hong Kong, Taiwan and Singapore as well as from elsewhere in East Asia (Clegg, 2009). Given the Deng’s open door policy above, since 1980 China’s economy has grown at the rate of 9 percent a year and its foreign trade has expanded at the pace of almost 15 percent a year. Its share in world trade rose from less than 1 percent to about 5 percent in 2002.This has also brought changes in the architecture of the world economy and international economic relations especially for countries in East Asia region (Gaulier et al, 2007).
In 2001, China decided to ascend to the World Trade Organization (WTO). This is part of its plan to embark on a new development trajectory by further deepening engagement with international economic system. WTO rules require China to remove its protectionist policies and provide more freedom to the inflows of foreign capital. Joining WTO has its own risks however for China this is beyond economic considerations but strategic one. First, by becoming a member of WTO it will reduce China’s vulnerability to the US economic blackmail. It helps stable economic relations with the US and therefore stimulate trade and investment in both countries. Second, through WTO membership China would be able to forge closer ties with Taiwan as the restrictions will be removed through WTO rules. Third, through WTO China will take part in the global technological revolution that can be used by China to accelerate its industrial transformation and upgrade its economic structure (Clegg, 2009).
With the accession of China to WTO the flow of FDI into China’s economy is increasing. China in fact has gone through stages in its FDI. The first stage is experimental phase from 1979 – 1991. The second stage is the boom phase from 1992 to 2001 and the third stage is the post-WTO phase from 2002 – 2007. In the experimental phase FDI was still low following the Deng’s open door policy. The relatively low flow of FDI in this period partly due to high investment costs, restrictive price controls, poor infrastructure and legal framework. In the boom phase FDI increased rapidly with improving infrastructure and legal frameworks. However due to East Asian financial crises in 1997 as well as informal relationships and corruptions had made decline in FDI flow. Restrictions on the type of FDI due to China’s policy to allocate them to its development priorities are also other reasons for the slow down. China’s accession to WTO with the consequence of lifting the FDI restrictions have revived the trend of FDI flows into China from US$46.88 billion in 2001 to US$74.8 billion in 2007 (Chen, 2009).
All the above have led China to become an international power second only to the United States in the first decade of the twentieth century. Its major economic power has become key source of international economic growth. In 2010 China’s foreign reserves reaching more than US$ 2.6 trillion as a result of its trade surpluses and remain as the largest destination of FDI with total investment worth US$ 100 billion. However China’s growth remains heavily resource intensive with strong economic impacts on the resource exporters worldwide including countries in Southeast Asia. In order to sustain its long-term growth China uses its financial surpluses to buy long-term supplies of oil, gas and other resources from resource rich countries in the world (Morrison, 2009).
With the sluggish global economy today and the rise of protectionist policies worldwide China is facing new challenges. China can no longer expect external demand only to contribute to its economic growth like in the past. On the other hand China is also facing domestic problem with declining working age population as a result of its one-child policy. China needs to find a new global competitive advantage such as improving quality of products as opposed to price competitiveness given the increasing domestic production costs. Other important dimension of China’s strategy is its overseas direct investment (ODI) program using its large foreign assets and promoting Chinese firms investment abroad (Lemoine, 2013). The following sections will specifically discuss about the China’s overseas direct investment (ODI) which has been less studied compared to its FDI.
China’s ‘Go Global Strategy’ and Investment in Natural Resources
Literature on China as the top recipient of foreign direct investment in the recent decades and how it has contributed to national economic development of the country is robust. In contrast systematic studies on China’s increasing role as the source of foreign investment is still limited. An attempt for this has been undertaken by Buckley, et all (2010) by laying out FDI general theories and how that would be relevant to China’s outward direct investment (ODI). Looking into China’s statistical data Buckley (2010) tried to establish destinations of China’s ODI since its ‘open door’ policy and what are the enabling institutions and strategic considerations that have contributed to China’s overseas investment.
In fact since 2002, following the effective implementation of China’s ‘Go Global Strategy’ there has been significant growth in Chinese ODI. United Nations Conference on Trade and Development (UNCTAD) also has predicted that China would become a ‘top three’ source country for FDI before the end of 2008 and the annual flows of Chinese ODI would reach US$ 60 billion by 2010. These projections to some extend have come true in recent years.
One of the purposes of China’s ODI is the pursuit of domestically-scarce natural resources. This will help the country to stabilize the supply of these resources thus will help generate a more sustained growth (Lu, 2002). The Increase in ODI after 2003 also include private investors although mostly undertaken by China’s SOEs. It is important to note, however, that even private companies investing abroad are still associated with the Chinese government, serving the national development agenda. In recent years administrative control has been relaxed and approval process and procedures have been streamlined which further allow Chinese investors to invest abroad. This is part of the China’s ‘go global agenda’ as advocated by Deng Xiaoping (Sauvant, 2005).
As Buckely et al (2010) pointed out in their studies that there are at least three key considerations for China’s ODI which are seeking new markets, seeking new knowledge and technology and seeking natural resources to supply domestic demand for industrialization. In the period of the ‘open door’ policy (1992 – 1998) most of the China’s ODI are invested in developed countries such as Canada, Australia and the US. However interestingly looking deeper in the scope of business Chinese investment in these countries is still dominated by securing energy and mineral resources. After the effective implementation of its ‘go global strategy’ and also its accession to WTO China increasingly expands its investment to other countries in Africa, Asia and Latin America. Resource seeking FDI from emerging economies is aimed at securing resource supply to increasing domestic demand for industrialization process. In particular, FDI in the energy and minerals sectors was encouraged to meet growing needs at home (Lawrence, 2002). In this sense, China has built some of its Multi-National Enterprises (MNEs), as did Singapore, South Korea and Malaysia to secure natural resources at home (Heenan and Keegan, 1979).
It is therefore obvious that Chinese government has used ODI to ensure the supply of domestically scarce factor inputs as the Chinese economy has grown (Ye,1992; Zhan, 1995). Key resources include minerals, petroleum, timber, fishery and agricultural products (Cai, 1999; Wu and Sia, 2002). Purchases of stakes in Australian mineral and food companies by CITIC and the acquisition of Canada-based PetroKaz by China National Petroleum Corporation (CNPC) are examples (Wu and Sia, 2002). This shows positive relation between natural resource endowment and China’s decision to invest. In short destination of Chinese investment strongly links to natural resource endowment of the target countries (Buckley and Casson, 1976).
Chinese companies mostly SOEs investing in natural resources abroad enjoy strong support from the Chinese government. This normally in the forms of direct financial assistance, negotiation of bilateral investment treaties, trade agreements with the host countries and close inter-governmental relationship that China is now trying to revive as part of its global south strategy reaching out to developing countries. Leading recipients of ODI in natural resources include Zambia (copper), Peru, (Iron, Ore), some west and central Asian countries and resource rich East Asian countries such as Indonesia, Vietnam, Laos, Cambodia and Myanmar. There is some evidence to suggest that China’s official development aid (ODA) has been used to access market or obtaining exploitation rights of petroleum or mineral resources (Pan, 2006; Evans and Downs, 2006). In short expansion of China’s ODI in natural resources has been subsidized by the Chinese government through various mechanisms including ODA.
Characteristic of China’s ODI
There is widely known that Chinese investment in natural resources has disregarded associated risks be it human, social, environmental and political as opposed to traditional Western investment. According to Buckley, et.al (2010) this is due to capital market imperfections in China which emerge from a number of particular and interrelated imperfections such as inefficient banking systems that provide soft loans to outward investors, subsidies provide by the government to rather inefficient conglomerate, family owned firms access to capital from family members and later invest overseas and SOEs capital in the form of soft-budget constraints. These have contributed to low standards of Chinese investment abroad. State sponsored soft budget constraints make it normal for a Chinese enterprise entering into a host economy with its own rules and the banks or financial institutions are unable to restructure or exit inefficient firms.
Given the unconstraint rules at home, Chinese investors abroad are largely pragmatic and opportunistic in a sense that the rules they use in one country may be different in other countries depending on how the rules are enforced. Chinese investors are unconstrained by the ethical and governance obligations that are normally expected from the Western MNEs today. Chinese firms behavior is very much contingent upon the evolution of institutions and rules of the game at home which at this stage still fall below the conventional standards. This clearly explains why Chinese investment in natural resources in resource rich countries has been marked by deeper institutional breakdown in the respective countries.