Remarks by Angel Gurría, OECD Secretary-General, delivered at a dinner with the foreign business community
Beijing, People’s Republic of China, 24 March 2014
(As prepared for delivery)
Ladies and gentlemen,
I am pleased to be with the foreign business community in China to talk about the tremendous opportunities and challenges opened up by investments made abroad in recent years by Chinese firms.
Going abroad opens new markets for firms, and helps them to become more productive, innovative and ultimately more successful in their business. International investment is also the fuel that helps run the global economy’s engine, making capital available for productive activity and job creation. But these positive outcomes will only materialise if appropriate framework conditions are in place that allow all companies to compete in a fair and transparent manner.
China’s integration into the global economy
China has experienced spectacular growth and an unprecedented transformation towards a modern market-based economy since it joined the World Trade Organization (WTO) in 2001. This growth has been underpinned and accelerated by expansion in trade and investment. China’s signing up to multilateral trade rules has not only ushered a period of high growth in China, it also benefitted the global economy.
In 2012, China became the world’s largest exporter and second-largest importer of merchandise goods. It remains a top destination for global investment (the largest outside of the OECD), and in 2013, became the third-largest foreign investor in the world. Through trade and investment linkages, China’s economy bridges numerous global value chains (GVCs), which have become a dominant feature in today’s world economy.
In November 2013, the Chinese government took the decision to deepen major comprehensive economic reforms domestically. It has put forward several recommendations to further open trade and investment; increase the role of the market in resource allocation; and widen investment access, among others. But China isn’t just solely focused on attracting FDI to its domestic market; it is increasingly investing abroad as part of a comprehensive growth strategy.
Chinese companies – mostly large, but increasingly also medium-sized ones – are redirecting their investments overseas to diversify their assets and location portfolios. The shift is turning heads: China doesn’t just own USD 1.3 trillion in Treasury bonds anymore, it now owns a coal mine in Australia, a 14% share in a car manufacturer in France, or a 20% stake in Standard Bank in South Africa!
China’s Go Global strategy is also about increased aid flows (concessional development finance) estimated at USD 3.5 billion in 2013, it is 55% more than in 2009. The government of China remains committed to increase the volume and plays a key role as a global development partner. These additional resources, knowledge and expertise are essential in tackling global development challenges, eliminating poverty, and supplying large-scale infrastructure in developing countries.
The nature of Chinese investments abroad
Let me provide a brief overview on Chinese investments abroad in recent years. In the first three quarters of 2013, Chinese overseas direct investment flows amounted to $70 billion, an increase of almost a quarter on 2012. Despite the take-off in outward investment, overseas assets are only 6% of Chinese GDP while the foreign direct investment of all other countries in the world amount to 33% of the world GDP. This is low – for now!
While the growth of Chinese investment abroad may be faster than that of American, European and Japanese companies during the early stages of their development, the nature of the investment appears very different. In the 1970s and 1980s, Western companies focused on building new factories abroad (as many of you did in China). Nowadays, Chinese companies seem more likely to engage in Mergers & Acquisitions (M&A).
Chinese companies are also primarily investing abroad to secure access to natural resources. Energy and metals are principal investment areas and account for nearly 70% of total outflows since 2005.
Chinese manufacturing companies have been investing in three main sectors: automotive, technology and shipping. These initiatives are allowing Chinese companies to build new skills and diversify their business strengths, in order to develop new products, improve their marketing and learn new forms of management.
Undoubtedly the Chinese investment boom is good news for us all. These investments provide a much-needed boost to the world economy. Two iconic takeovers in recent years include Volvo’s purchase by Geely purchased Volvo in 2009; and IBM’s PC and server business purchase by Lenovo. In both cases, the sales and profits of the acquired companies were boosted significantly.
But perhaps the biggest impact of Chinese investment has been in Africa. Total foreign investment in the continent has amounted to near $51 billion a year since 2007. In proportion to the size of the economy, Chinese direct investment in Africa has been five times larger than in the rest of the world.
A large share of these investments has focused on minerals, raw materials and in infrastructure. Fitch estimates that China’s Export-Import Bank (EXIM) lent USD 67 billion in the 2000s to Sub-Saharan Africa and that flows are likely to increase . In addition, China is building six economic and trade cooperation zones in Egypt, Ethiopia, Mauritius, Nigeria, and Zambia. The impact of Chinese investments is visible in terms of employment creation, infrastructure development and lower prices for many goods.
Confronting the Challenges ahead
Despite the positive developments however, numerous challenges lie ahead; many of them stemming from competition and national security concerns. Several countries today remain concerned that Chinese State-Owned Enterprises (SOEs) use their favoured status at home to outbid commercial companies in M&A transactions abroad.
OECD work points to many different ways that state-ownership can indeed give SOEs advantages, such as finance, public procurement, hiring of staff, or even the ability to incur losses over a long period and still stay in business. Concerns have also focused on investment that could imperil security interests, in particular in the infrastructure and energy sectors and in high-tech industries. Australia, Canada, Russia and the United States, for example, have special domestic provisions concerning the examination of investments by state-owned or -controlled entities.
A further challenge stems from attitudes towards corruption. In the past decade, societies have come to realise the extent to which corruption and bribery have undermined their welfare and stability. In China, authorities, the private sector, and civil society alike have consequently declared the fight against corruption to be of the highest priority. In February 2011, China amended its Criminal Law to establish a criminal offence of bribing non-PRC government officials and officials of international public organisations.
The next crucial step is to ensure full compliance with the spirit and the text of the law particularly since Chinese multinationals do not yet perform as positively as peers from major emerging economies.
Ensuring competitive neutrality and mutual benefits
The OECD engages with advanced and emerging economies on ensuring “competitive neutrality” in cross-border trade and investment in a way that provides mutual benefits to both home and recipient countries. Countries can use different instruments to implement competitive neutrality policies in practice – what is important is to engage in a dialogue on policies by home and recipient countries related to state-controlled enterprises’ international trade and investment.
Progress is being made on addressing challenges in this area. Increasingly, new free trade agreements specify that SOEs should not operate in a manner that creates obstacles to trade and investment. This is the case, for example, with the United States-Australia Free Trade Agreement. The WTO also contains a number of provisions applicable to trade and investment by SOEs.
At the OECD, various Committees have identified the issues pertaining to state-owned enterprises and their impact on the global competitive landscape, as well as challenges in international trade and investment. Our Ministerial Council Meeting, in May, will be an important opportunity to further discuss this theme at very high political level.
Today, China is actively participating in the Freedom of Investment Roundtable focusing on the role of SOEs in international investment and International Investment Treaties. It is also working with the OECD on corporate governance of State-Owned Enterprises.
We have invited China to participate in the upcoming review of the OECD Guidelines on Corporate Governance of State-Owned Enterprises. While the instrument has stood the test of time, its revision aims to improve State governance and ownership practices, for instance regarding accountability and transparency of SOE boards of directors.
Ensuring a level playing field is paramount to competing in China itself, but also in third markets. Going back to the case of Africa, there have been cases where OECD companies have complained about opaque business practices by Chinese SOEs and other competitors. G20 members, including China, have committed to the establishment of legal and policy frameworks that promote a clean business environment. In this respect, the OECD will continue to assist countries in their capacity-building efforts.
Ladies and Gentlemen:
We are very happy that China is participating in this multi-pronged dialogue. For any country hosting SOEs, the recommendation is to be transparent about government practices and refrain from providing SOEs undue advantages.
We also believe that Chinese companies should benefit from China’s pro-active engagement with the OECD. Business listens to business and you can do your part! You know that better corporate governance and responsible business conduct is in everybody’s interests. We also rely on you to convince Chinese companies that improvements in these areas will make them more efficient and help keep markets open to Chinese foreign investments.