Foreign Investment Strategy of Chinese Companies and Governmental Funds

ABSTRACT

The foreign acquisition strategy of Chinese companies is gathering attention. The US$5 billion investment of the China Investment Corporation (CIC), a government fund tasked with managing a portion of China’s foreign reserves exceeding US$1.5 trillion, into the investment bank Morgan Stanley, hit hard by the subprime crisis, symbolizes the global expansion of China money. Given the backdrop of the “internationalization” strategy announced at the 2002 National Congress of the Communist Party of China, foreign investment by Chinese companies (excluding financial institutions) grew from US$5 billion in 2002 to US$20 billion in 2007. Having secured rich cash flow from high profits and the prosperous stock market, Chinese companies have begun to develop aggressive foreign acquisition strategies.

This paper first organizes the positioning of China’s governmental fund among other international sovereign wealth funds (SWF), as well as concerns regarding China’s governmental fund. Second, the background of CIC’s establishment, its management policy, and realities of its current management situation are analyzed. The state of foreign investment by Chinese governmental investment institutions including CIC, the correlation between CIC and other state-run investment institutions, and the linkage between state-run investment institutions and industrial policy are then examined. Three conclusions are reached: 1. concerns over CIC’s portfolio investment are groundless, 2. on the other hand, CIC supports other state-run investment institutions based on China’s industrial policy, and 3. management in line with CIC’s diplomatic and geopolitical goals could not been confirmed. The policy implications of this are: 1. CIC should establish its own governance systems and improve transparency with reference to the China Social Security Fund (CSSF), 2. the best way to alleviate concerns from overseas is to gradually eliminate the glut of “state-run investment institutions”, and 3. there is a need to create “state-run investment institution” rules with reference to the WTO’s “state-run trade company” rules.