The Victims of Communism Foundation's Blog

China’s Investments Raise Red Flags

China’s Investments Raise Red Flags

Faced with rising protectionism around the world, the Chinese Communist Party, with Xi Jinping at the helm, has recently been attempting to recast itself as the global leader of free trade and open investment. In March, Long Guoqiang, Vice President of the State Council Development Research Center, remarked, “After the global financial crisis, we found that […] China, as the biggest trading country, saw most of the protectionism against China. So we don’t like protectionism.” But a closer look at global foreign direct investment (FDI) trends belies Long’s words: ironically, Chinese companies trying to invest abroad have been treated much more fairly than foreign investors in China. Especially in the last few years, China has engaged in aggressive investment campaigns that the Chinese Communist Party (CCP) would never allow in the opposite direction.

Since China liberalized its outbound foreign investment policies in 2014, very few of its investment attempts around the world have been blocked. Chinese investment has been warmly welcomed, particularly in Europe. The UK approved a $23 billion Chinese investment in a nuclear reactor in 2016. A recent report by Ernst & Young reports 164 Chinese takeovers of European companies in just the first half of 2016, compared to 183 in all of 2015. Among European countries, Germany was the largest target for China’s aggressive investment, with 37 acquisitions in the first half of 2016. Although the German government has complained about restrictions on investment into China, they have done little to curb investment coming from the People’s Republic.

Chinese firms have also become important investors in American tech start-ups. The fact that many of these companies’ technologies have military applications has raised deep concerns among US policymakers. “If the technology is transferred, China would be able to domestically produce advanced military laser technology to Western standards sooner than would otherwise be the case,” a 2015 report by the Department of National Defense and CSIS said. Between 2012 and 2014, nearly one in five cases brought to the US Committee on Foreign Investment reviews transactions that could result in foreign control of a US business, dealt with Chinese investment. But the vast majority of the deals were approved.

At the same time, countries are starting to become apprehensive about Chinese FDI. The close relationship between the Chinese government and Chinese firms is one reason. Many apparently private firms have convoluted ownership structures that lead eventually back to the CCP. Some argue that the Chinese Communist Party strategically directs FDI to acquire cutting-edge technology for the benefit of the state. Naturally, many countries fear that this absorption will lead to the erosion of their own leadership.

Domestically, the CCP has been strengthening its hand within the business sector. In state-owned firms, the head of the company generally also heads the Communist Party committee within the company. More recently, private tech firms have also been appointing public relations and HR specialists to head their internal Communist Party committees in order to ensure that they stay on message, and on the good side of the Party.

The Chinese market, meanwhile, remains as difficult as ever for foreign investors. According to a survey on business sentiments carried out last year by the American Chamber of Commerce, three respondents out of four said that they felt less welcome in China than they had during past years. This reflects the increasing barriers that the CCP is erecting by legally prohibiting some industries from receiving outside investment at all. In other cases, foreign companies that want to invest in China are required to form joint ventures with Chinese firms.

This imbalance has led to backlash around the world. The US, UK, and Germany have all declared that they should treat Chinese companies no better than their own companies are treated in China. However, though the complaints are loud, they have led to only a few actions of any significance. In 2016, the Australian government cited national security concerns to block bids by a Chinese state power company for control of a major electricity supplier. In the US, according to a report by the global law firm Linklaters, between $40 and $75 billion of Chinese investment deals were cancelled in 2016.

As long as the CCP is determined to keep China closed while simultaneously pursuing aggressive trade and investment policies around the world, the rest of the world is obliged to become more cautious about trading with China. China’s approach to international trade is closely related to its largely state-directed and protectionist development model. Clearly, China hopes to reap the benefits of open trade and investment while maintaining barriers to protect its domestic and state-owned industries. China’s highly selective and self-interested approach to globalization may be catching up with it however, as its aggressive and one-sided tactics raise red flags in more and more world capitals.