Destination Unknown: Investment in China’s “Go Out” Policy

Publication: China Brief Volume: 11 Issue: 17

Vice Premier Wang Qishan meets with the UK Chancellor of the Exchequer George Osborne.

From September 7 to September 10, Chinese Vice Premier Wang Qishan led a delegation of senior government officials and business leaders to hold the Fourth UK-China Economic and Financial Dialogue. This trip is just one of the many high profile visits Chinese central leadership have paid Europe in the last year and it came only eleven weeks after the Premier Wen Jiabao’s visit to Europe. During this dialogue, China officially supported the United Kingdom to become an offshore renminbi trading center. The two countries also reached a landmark memorandum of understanding on enhancing cooperation on infrastructure, which will likely open more doors for Chinese investment in the UK (Xinhua, September 9; Shanghai Zhengquan Bao, September 9).

This is yet another example of China deepening its "Go-Out" policy, targeting further entries to advanced markets such as the United States and Europe, where Chinese capital is growing remarkably and engaging in more sophisticated deals. China’s economic relationship with Europe however might be becoming more intimate than that with the United States, not only in trade but also investment. Different approaches to national security in the United States and Europe have made the entry into Europe much smoother for some large Chinese companies. So far, Chinese capital has not chosen to shift focus to Europe at the expense of the United States, but the potential persists.

An Evolving Strategy

At China’s National People’s Congress meeting in March, Beijing laid out its 12th Five Year Plan (the “Plan”) for 2011-2016. The Plan calls for accelerating China’s “Go-Out” strategy, which includes three parts: first, expand outward investment further; second, emphasize the equal importance of foreign direct investment (FDI) in China and Chinese outward investment; and, finally, speed up transformation of China’s international trade and outward investment models. The Plan also pays special attention to outward FDI by calling for a two-pronged approach. First, competitive Chinese manufacturing companies should invest overseas, establish international sales networks and globally-recognized brand names. Second, Chinese companies should invest in research and development (R&D) outside China. Finally, the Plan sets key goals for the Chinese development model by restructuring growth in favor of a cleaner, low-carbon, low resource-intensity, high-tech economy.

This apparent shift in the focus of China’s development is unsurprising. The concept of the “Go-Out” strategy was officially established during the 10th Five Year Plan (2001-2005) and was listed as one of China’s four main development strategies. During this Plan, the number of companies approved for overseas investment grew at an annual rate of 33 percent (China Economic Weekly, April 5, 2010). This international strategy became more visible during the 11th Five Year Plan (2006-2010), when large Chinese companies engaged in major multinational investment deals. From 2003 to 2009, Chinese outward FDI increased a staggering 1,400 percent. By the end of 2009. China’s total non-financial FDI stood at more than $240 billion (Wen Wei Po, September 6, 2010). For 2010 alone Chinese non-financial outward FDI totaled $59 billion, a 36.3 percent increase over the previous year [1].

While slow growth continues to characterize the world’s advanced economies in the post-crisis period, thereby hobbling global investment, outward investment by Chinese companies remains strong. Overseas investment by Chinese companies in non-financial sectors totaled $23.9 billion in the first half of 2011, up 34 percent from a year earlier [2]. This growth is set to continue, with experts predicting Chinese investment abroad will soar to $1 trillion by 2020 [3].

Go West with Changing Patterns

There are three important trends in the impressive growth emerging from China’s “Go-Out” strategy. First, though most Chinese FDI is still concentrated in Asia and Latin America,  the amount directed toward the United States and Europe is growing fast. Chinese FDI stock in the 27 EU member-states quadrupled to €5.727 billion between  2006 and 2009 [4]. Chinese businesses invested $64.3 billion in Europe from October 2010 to March 2011, more than double the comparable figure over the previous 11 quarters (Financial Times, April 25, 2011). The same picture applies to the United States: Chinese FDI stock grew from $1.238 billion in 2006 to $3.339 billion in 2009. Some experts note that the transatlantic market is overtaking Asia and the developing world as the top destination for Chinese investment [5].

Second, the forms of Chinese FDI are increasingly diversified and sophisticated. Mergers and acquisitions (M&A), which can help companies gain faster access to local technology and markets, are now playing a much larger role in Chinese FDI. M&A increased from $60 million in 1999 to $30.2 billion in 2008, accounting for 54 percent of total Chinese FDI.

Finally, acquiring advanced technology is emerging as a new priority for Chinese FDI, replacing a traditional focus on natural resources and sales (China Economic Weekly, April 5, 2010). This trend is particularly visible in FDI projects in the transatlantic market, which leads much of the world’s high-tech innovation. China’s Beijing Automotive Industry Holding, for example, acquired Sweden’s Saab for $200 million in 2009. Additionally, Chinese automobile manufacturer Geely bought Ford’s share of Volvo for $1.8 billion last year. These deals were designed not only to capture established brands but also, and more importantly, to provide access to core technologies and R&D capacities—key needs for Chinese companies looking ahead.

Closed U.S. Doors, Open European Arms?

The new phase of the “Go Out” strategy is meeting different responses in the United States and Europe, where large developed markets with a rich history of technological innovation attract Chinese investors’ interest. Though both indicate that they welcome Chinese capital, the United States has been much more cautious in granting access to sectors it deems to be important to national security.

A number of Chinese firms attempting to invest in or purchase U.S. companies over the last decade have faced political challenges. In 2005, the  China National Overseas Oil Corporation (CNOOC) withdrew its $18.5 billion bid for Unocal after fierce political resistance. In 2008, Chinese telecommunications giant Huawei retracted a bid for 3Com once it became clear that the Committee on Foreign Investment in the United States (CFIUS), the U.S. government panel that vets foreign takeovers of sensitive assets, would not allow the transaction. In 2010, China’s Anshan Iron & Steel Group shelved its investment in a Mississippi steel plant after 50 members of the Congressional Steel Caucus urged CFIUS to investigate the transaction—despite the potential for 200 new jobs (Bloomberg News, August 19, 2010). Later that year Huawei and fellow Chinese telecommunications giant ZTE were excluded from a deal with Sprint. Finally, earlier this year, Huawei was forced to reverse its acquisition of 3Leaf, a server technology company, after CFIUS refused to approve the deal (Financial Times, April 8, 2011). These events may be more over-hyped stumbles than evidence of a general U.S. rejection of Chinese investment. Beijing however is increasingly wary of U.S. barriers to investment and has raised the issue repeatedly in recent high level U.S.-China dialogues. Chinese Vice Finance Minister Zhu Guangyao said earlier this year “We hope that the [United States] will provide a healthy legal and institutional setting for investment by Chinese companies. In particular, we hope that the [United States] will not discriminate against state-owned companies”(China Daily, May 10, 2011).

Europeans appear more at ease with Beijing’s corporate incursions. Huawei, with its 5,500 European employees and multiple European offices, sells a wide range of products throughout the continent. During Vice President Xi Jinping’s June visit to Italy, the company sealed an agreement with Telecom Italia for a national fiber-to-the-home (FTTH) network (The Wall Street Journal, June 3, 2011). The firm is looking to integrate fully into the region’s industrial environment by hiring locally and entering its market for smart phones, tablets and cloud computing (China Daily, July 22, 2011). It is a similar story for ZTE, which has now emerged as a bitter rival for Huawei in the European market. Earlier this year, ZTE sued Huawei (and was subsequently countersued by Huawei) for patent infringement in Europe.

Europe’s importance as a hub of Chinese corporate R&D has been steadily increasing as many large Chinese companies set up R&D centers in Europe. Huawei, for example, has six large R&D centers in Germany and half of its European employees conduct R&D. Chinese machinery manufacturer Shang-gong Group established its main research center in Bielefeld after acquiring sewing-machine maker Dürkopp Adler AG. China’s auto sector is also taking advantage of German expertise. Northern Automobile and Sanyi Automobile have set up R&D centers and factories in Germany [6].

China has consequently become a major investment partner in Europe [7]. EU-China trade grew 21 percent in 2010, to $480 billion, vaulting the Europeans over the Americans to become China’s largest trading partner. During a five-day visit to Europe in June, Chinese Premier Wen Jiabao signed a trade agreement worth more than $2 billion with Britain and set a goal of $100 billion in annual Anglo-Chinese trade by 2015. Wen also secured $15 billion in bilateral deals with Germany. These included the purchase of high-tech products, such as Airbus aircraft, and joint development of “future green industries,” such as electric vehicles and carbon-capture systems (Financial Times, June 28, 2011). China recently overtook the United States as Germany’s largest non-European trading partner and bilateral trade is expected to double by 2015 (China Daily, June 29, 2011).  While the United States is suspicious of China’s intentions, EU Trade Commissioner Karel De Gucht and Chinese Commerce Minister Chen Deming launched on July 14 negotiations on a bilateral investment treaty (People’s Daily, July 15, 2011).

The warming economic ties between Europe and China are also reflected in China’s financial support of countries in fiscal crisis. In July last year, Beijing made a major investment in Greek bonds in exchange for a 35-year lease on the port of Piraeus. Three months later, Premier Wen promised to continue purchasing Greek debt. This culminated on July 28 when Greek Finance Minister Evangelos Venizelos told his parliament that a third source (after the EU/IMF and the private market)—thought by many to be China—could become a funding pillar for debt buybacks on the secondary market (China Daily, July 30, 2011).

In the past year, China also has promised to buy bonds from Spain, Portugal and Ireland. During his European visit in June, Wen even confirmed an interest in buying Hungarian bonds, labeling it China’s “helping hand from afar” in the European debt crisis. Most recently, while the global market anxiously wait to confirmed whether China will step in to purchase Italian bond, the Chinese government reiterated that China has confidence in European economy and the Euro, and Europe will continue to become a major investment market for China (MFA Press Conference, September 13).

Is China Shifting from the United States to the EU?

Not, at least, for the moment. As in the United States, China’s “helping hand” and increasing engagement has drawn cheers and jeers in Europe. Praise has come from those countries facing debt crises. Hungarian Prime Minister Viktor Orban said bond purchases by China would provide financial security and remove uncertainty about his country’s medium-term financing. German Chancellor Angela Merkel saw Premier Wen’s stop in her country (with 16 of his ministers) as the beginning of a “new chapter” in the bilateral economic relationship. Even EU Trade Commissioner Karel De Gucht admitted that Beijing’s bond purchases “certainly help."

On the other hand, some observers worry that China’s large R&D investments bring new challenges and “the battle over access to technology and intellectual property rights has now moved from China to Europe” [8]. Concerns also exist about China’s ability to gain political influence through its growing economic leverage. A recent review of the EU arms embargo on China is suspected to be linked to Beijing’s promises and ability to help restore liquidity to European markets. Despite Beijing’s pledges, however, the extent to which China is really active in the European bond market is unclear. Many in Europe suspect that it is less than Beijing touts.

Europe also is stepping up efforts to vet Chinese investment. Two European commissioner (Italian and French) proposed a European Union-level committee similar to the CFIUS to vet foreign investment on strategic grounds and to prevent Chinese firms from swallowing high-tech companies (Reuters, March 8, 2011, Financial Times, April 20th, 2011). National security plays a role in this new approach as concerns about Chinese access to critical infrastructure and telecommunications networks grow.

At the same time, not all the signs emanating from the United States are bad for Chinese firms. Despite concerns about the U.S. fiscal predicament and the need to diversify its foreign reserves, China bought $7.6 billion in Treasury bonds in April. The aforementioned controversial investment by Ansteel to the Mississippi steel mill moved forward eventually despite political resistance. The two companies signed the deal to establish joint venture in September 2010 (Xinhua News, September 15, 2010). Additionally, the latest controversial Sino-U.S. deal, the acquisition by China Aviation Industry Corporation of Cirrus Industries’ line of four-seat propeller aircraft, occurred without CFIUS objection.

Got to “Go Out”

With more than $3 trillion in foreign reserves, China has plenty of capital to invest internationally. High inflation and lack of investment opportunity at home will continue to force Beijing to relax capital controls and encourage overseas investment by private companies and sovereign wealth funds. These investments will be guided by the general national development strategy, which means more funds targeted to the United States and Europe. A recent corporate survey revealed that the United States and large European economies are among the most popular destinations for Chinese FDI [9].

China may yet move away from the United States and toward Europe, especially if an investment treaty between Brussels and Beijing is concluded. Washington’s terrible fiscal circumstances, the political deadlock that triggered the country’s historic credit downgrading and its continued security sensitivities may also make European markets more attractive for China.


1. China’s National Statistics Bureau, National Economic and Social Development Statistics Bulletin 2010,
2. 2011 nian shangban woguo duiwai zhijie touze jianming tongji [Concise Statistics of China’s Foreign Direct Investment  for the First Half of 2011], Ministry of Commerce, July 22, 2011,
3. Daniel Rosen and Thilo Hanemann, “An American Open Door?: Maximizing the Benefits of Chinese Foreign Direct Investment”, Asia Society Special Report, May 2011.
4. Eurostat, Data on “Balance of Payment Statistics."
5. Francois Godement and Jonas Parello-Plesner with Alice Richard, "The Scramble for Europe," European Council on Foreign Relations, ECFR/37, July 2011, p. 4.
6. Author’s interviews in Berlin, July 14, 2011.
7. Germany Trade & Invest Agency, "Germany’s Major Investment Partners," May 17, 2011.
8. Godement et al, “The Scramble for Europe,”  pp. 2, 5.
9. China Council for the Promotion of International Trade, “Survey on Current Conditions and Intention of Outbound Investment by Chinese Enterprises (2008-2010),” April 2010.