Chinese FDI and Policy Objectives
Of the five divisions the China team chose to analyze in our research and forecasting process regarding the role FDI will play in the growth of the Chinese economy - specifically concerning financial institutions - was the Chinese Communist Party’s (CCP) FDI policy objectives. Meaning, we sought to understand what the CCP hoped to accomplish using FDI as a policy tool and concerning FDI itself. Another facet to this division of research is the political stability in China and the benefits it poses for FDI inflows - making China an attractive candidate for foreign investors. I broke down the research of this division into domestic and foreign policy objectives of the CCP.
In terms of the domestic policy objectives regarding FDI, the CCP aims to bolster investment in public-private partnerships (PPP), infrastructure, engineering, and financial services. Beginning in 2010, the central government has made a concerted effort to funnel foreign investment into ventures under the PPP umbrella. A PPP is a joint venture between a government agency and a private firm. In China, state-owned enterprises (SOEs) also constitute a private firm. The government has a vested interest in prioritizing PPPs as recipients of investment due to a heightened ability to keep tighter control over how invested funds are utilized. Additionally, the government has a track record of efficiently funneling FDI funds into infrastructure and engineering projects - this means that the PPP framework is directly tied to the FDI funding of major infrastructure projects in China. Since 2016, nearly $8 trillion has been invested in Chinese infrastructure and engineering projects via the PPP framework. Clearly, the PPP framework has been a catalyst for Chinese FDI inflows and has enabled the CCP to fund state-prioritized projects.
The next element of domestic policy objectives regarding FDI concerns financial services. This division tracks closely with the regulation division of our research but is distinct when drawing on what the CCP hopes to achieve with laws governing FDI inflows. The division on regulation will provide insight on FDI outflows. Currently, the Chinese financial markets are dominated by retail investors, but the CCP hopes to curate the emergence of professional asset managers to popularize holdings of stocks and bonds as opposed to investments in money-market funds (which remain the most popular investment vehicles in China). We see this economic ambition being pursued via the deregulation of FDI specific to domestic financial firms. The most significant de-regulation has been the removal of a cap on ownership by foreign financial firms of Chinese minority partners. As soon as this law was enacted in April of 2020, JP Morgan bought out its minority Chinese partner to gain full control of its China operations. This strategic maneuver is to be expected by a slate of other Western asset managers. Additionally, considering the aging population of China, the CCP hopes that the influx of these Western asset managers will improve the performance of pension funds. This opening up of China’s financial markets means that the vast data collection operations that Chinese internet giants run are going to be highly valued by incoming asset managers that need local partners to access consumer data.
The other side of the coin is foreign policy objectives regarding FDI. The Chinese government still regulated outgoing FDI to a significant extent and FDI outflows going into the United States face elevated scrutiny, also a theme that will be covered by research on the regulation division. The most significant foreign policy dimension to FDI is the Belt and Road Initiative (BRI) - an international infrastructure project funded by China aiming to facilitate trade across Europe and Asia. The BRI aims to improve the connection between the Chinese domestic market and the global market via trade and financial integration. A comprehensive study published in the Emerging Markets journal on the effects of the BRI on outward Chinese FDI indicates that overall the BRI has led to increases in FDI outflows. These increases can be tracked to the BRI host countries and BRI-prioritized sectors. In other words, the countries that host BRI projects have received more Chinese FDI, and the sectors that the BRI prioritizes in these host countries (infrastructure, engineering, and technology) also have received more Chinese FDI. One of the various reasons for this correlation is due to the influence of SOEs on FDI outflows as they tend to align investment practices with CCP objectives.
Another telling measure of the impact these BRI projects have on host countries is the percentage of GDP comprised of project revenue. In countries such as Laos, Cambodia, and Mongolia the figure can be as high as 6%. In concert, these findings indicate that the BRI is a catalyst for Chinese FDI outflows, especially regarding host countries.
As far as policy objectives are concerned, clearly, the CCP is placing great emphasis on the role FDI will play in the growth of the Chinese economy. This prioritization is playing out via PPPs, funneling of FDI inflows to specific growth sectors, deregulation of FDI rules for financial markets, and the major impact of the BRI. Given the optimistic outlook the China team has on the long-term success of these areas, using the policy objectives division, it can be projected that over the next few years FDI’s role in the growth of the Chinese economy will continue to grow. The empirical analysis we referenced in our research on PPPs indicates that the framework is expected to attract more FDI and the CCP continues to set targets for more domestic infrastructure projects, meaning PPPs will continue to play a pivotal role in attracting FDI and efficiently allocating FDI funds. The deregulation of financial markets has already invited strategic acquisitions of Chinese financial firms, JP Morgan being the prime example. Given that the influx of foreign asset managers set to capitalize on market conditions has just begun, this deregulation is expected to contribute to a large increase in FDI inflows specific to the financial services industry. Finally, the BRI is a state-driven project that has been empirically proven to attract FDI from Chinese firms (largely SOEs) to the economies of host countries. This qualitative analysis unambiguously indicates that FDI will not only continue to play a significant role in the growth of the Chinese economy, but its role will grow in scope.