China has two main forms of foreign involvement:

1. belt and road initiatives: construction projects in foreign countries
2. Investments in foreign countries (buying and building)

Expansions

Two key factors—

1. good forex reserves to finance this expansion
2. coordinated and financed by Chinese government with national priorities

Pros and Cons

Pros

• large foreign exchange ourselves

Cons

• largely based on debt financing internally since companies are not allowing to invest in foreign areas

Market Limitations

To invest overseas, a company needs permission from the government to move money out of the country: this means that China’s currency is non-convertible; thus it limits outwards expands, and domestic companies thus cannot move overseas.

Foreign Exchange Reserves

Huge trade surplus, thus used it to finance corporate activities abroad starting in 2005

Investment Objectives

1. pre-2008, China invested a lot of money in US corps (Blackstone, etc.)
2. 2008 happened, and China shifted its objective from Blackstone etc. to making strategic investments
   • …this means not necessarily to turn a profit, but for access to certain markets or technologies

Some private companies were buying “trophy properties” (like Rockerfeller center) but then China put a stop to it because it doesn’t align with objectives

How to make foreign investment

1. NDRC (state planning)
2. Ministry of Commerce (due dillegence)
3. State Administration of Foreign Exchange (money controls)
4. SASAC (for goverment company aprpvoal)

Construction Projects

The usual structure of contracts:

1. Stipulates price etc.
2. Stipulates Chinese builder
3. Stipulates Chinese builder can get other chinese firms

Often the Chinese government finance these operations, thus getting foreign exchange for returning the loans.

Two Main Outputs: Construction and Investment

Structure of Construction

1. Energy
2. Transport
3. Real Estate

etc.

Who’s Making These

State owned enterprises! 96%

Structure of Investment

Less state-owned-enterprise; 64%: non-state firms had 36%; private sector doesn’t have to be aligned with natinoal strategy

Where are the things

• building more in low-income countries—stuff to do
• investing more in high-income countries—technology transport, money

Where?

What

Chinese private companies mostly invest

Limits of Investment

This design is largely self-imposed.

• CCP insists on state control of largest firms
• Walls off the economy with no-convertable currencies
• Domestic banks finance the whole operations
• No foreign loans.

Now, the China’s forex reserves are large, but about the same as a private equity firms.

Why not foreign loans?

Because otherwise foreign companies will then exert control

Not a lot of foreign aquisitions

… they are largely small

Secondary Limits

1. non state firms do not face the same restrictions
2. 2l3 acquisitions and investments are by SOEs: so people think they are foreign investments

Key Takeaways

expansion

• outward expanding laregly state finaced / state directed
• 3/4 of all ferign activity by state-owned firms
• almost all ocnsturction was by 64 large central state SOEs
• expansion radid through 2014, but then decreases

limits

• state sector downsize stopped, and in fact SOEs are bolstered
• China uses a walled-off approach to their currency
• key to maintain control over large corporations + financial resources

Paradox: China plays a very small role outside of its boarders.