By Michael Lelyveld
As much of the world looks to China as a major source of investment, the country’s economic slowdown has driven long-term commitments into decline.
On Dec. 19, the Ministry of Commerce reported that non- financial outbound direct investment (ODI) fell 1.2 percent from a year earlier in the first 11 months of 2019 to 680.31 billion yuan (U.S. $97.2 billion).
Investment linked to President Xi Jinping’s signature Belt and Road Initiative (BRI) also dropped 1.4 percent from previously reported year-earlier figures to U.S. $12.78 billion.
BRI investments in 56 cooperating countries accounted for 12.9 percent of China’s total ODI, according to calculations by the official Xinhua news agency.
The weak performances suggest that both ODI and BRI activity have suffered in the past year from the dual disincentives of China’s economic growth slowdown and concerns about the trade war with the United States.
The declines marked a reversal from stronger official results a year before.
In 2018, non-financial ODI stayed barely positive, rising 0.3 percent to U.S. $120.5 billion, while total ODI increased 4.2 percent to U.S. $129.83 billion.
Non-financial ODI for BRI projects in 2018 totaled U.S. $15.64 billion, gaining 8.9 percent, according to ministry figures cited by Xinhua last January.
Analysis of the numbers is difficult, since the ministry only provides investment totals without details or revisions of previous reports. Questions about how the investments are structured and recorded have gone unanswered for years.
The ministry’s 11-month report has been met with a wide range of conflicting readings, largely due to definitions of investment and distinctions with contracted projects backed by Chinese bank loans.
On Jan. 15, The New York Times concluded that BRI “has come roaring back,” based on the ministry’s data showing a 41.2-percent jump in contracts valued at U.S. $127.6 billion during the period.
But it seems clear from the ministry’s ODI totals that China’s outbound investment has fallen and flattened since its 2016 peak, and that BRI is no longer the source of long-term investment that it was cracked up to be.
China’s outbound investments in Europe and North America suffered far steeper declines last year than those indicated by the official Chinese figures for the 11-month period, according to an annual survey by the Baker McKenzie law firm and the New York-based Rhodium Group.
Investment in Europe plunged 40 percent from a year before to U.S. $13.4 billion, while completed deals in North America dipped 27 percent to U.S. $5.5 billion, the survey said, citing factors including Chinese capital controls and strengthened regulatory reviews in the United States and Europe.
China’s combined ODI in Europe and North America was the lowest since 2010, according to the survey.
By comparison, the ministry’s tally for BRI countries suggests sluggish investment and a milder decline.
Xi’s initial 2013 plan to recreate China’s historic trade routes through Asia to Europe with a “Silk Road Economic Belt” and a “21st Century Maritime Silk Road” has since expanded to include destinations throughout Africa, South America, and the Arctic region.
The overseas push became known as “One Belt, One Road,” or OBOR, and then as BRI in 2016.
Estimates of China’s planned investments in BRI have ranged from U.S. $900 billion to as much as U.S. $4 trillion.
A paper posted last year by the Council on Foreign Relations called BRI “the most ambitious infrastructure investment effort in history.”
According to the paper updated in May, China has already spent an estimated U.S. $200 billion on BRI projects.
This month, the China Global Investment Tracker compiled by the American Enterprise Institute (AEI) and the Heritage Foundation in Washington said that total BRI construction in 143 countries has exceeded U.S. $450 billion.
Some of the disagreement over numbers is due to the differing definitions of investment and contracting.
“Investment involves ownership and an indefinite presence in a host country. It is often conflated with the construction of port terminals, dams, public housing and the like,” the investment tracker said.
The two categories of investment and contracting activity are commonly lumped together, creating a magnified image of China’s BRI presence and financial resources abroad.
The effect is particularly strong in developing countries, although pressures on China’s economy now appear to be limiting outbound investment across the board.
But the ministry’s figures for BRI over the past year point to a smaller scale of actual Chinese outbound investment and overseas contracting for construction projects with less strain on Chinese finances.
The latest ministry figures reflect a downturn in both ODI and BRI investment, despite perceptions of rapid expansion overseas. The decline in the official numbers understates the extent of the drop, said AEI resident scholar Derek Scissors.
But the tracker’s estimate of a 41-percent decline in China’s ODI last year is also overstated because many contracts and transactions have taken place below the level of U.S. $100 million, which the publication does not count.
According to the ministry, China has signed 682 contracts for foreign projects with values over U.S. $50 million, a 2.7-percent increase from the year-earlier period. Infrastructure projects valued at U.S. $157.7 billion accounted for three-fourths of the contracts, it said.
The value of newly-signed overseas contracts during the period exceeded China’s reported investments in BRI countries by a ratio of over 16-to-1.
Overseas investment drops
Scissors believes the lower ODI numbers last year reflect less overseas investment by China’s state-owned enterprises (SOEs).
“The shift started over a year ago… and it’s state-owned enterprises that have retreated, which also explains the BRI result, since BRI is also dominated by SOEs,” he said.
The downturn in outbound investments coincides with domestic pressure to keep capital at home and the steady decline in China’s economic growth.
“It may be as simple as worries about foreign exchange, especially due to declining exports with the United States in the past year, curbing financing of SOE investment,” said Scissors.
“The best explanation for broad weakness is erosion of the previously abundant foreign exchange used to finance construction and investments,” the tracker said. “Beijing no longer has money to spend everywhere.”
Xi’s overriding directive to control financial risks may also be playing a significant part.
“Many banks in China have shown concerns about overseas loans, pointing (to) political instability in the neighboring countries and the economic viability of the projects,” said a recent paper titled “OBOR: Multidimensional Chinese Initiative,” published by Greenwich University in Pakistan.
“They are more concerned about the feasibility of OBOR projects and risks,” it said.
Constant, flat investment figures
While China’s ODI totals have undergone dramatic changes in recent years, annual BRI investment figures have been relatively constant and flat.
In 2016, China’s ODI soared 44.1 percent from a year earlier to U.S. $170.1 billion as deep-pocketed buyers and financial groups snapped up foreign real estate, entertainment companies, sports clubs, and hotels.
But while Chinese companies signed U.S. $126 billion in new contracts for infrastructure, power, and other projects, recorded investment in BRI countries declined slightly from a year earlier to U.S. $14.53 billion, according to RFA calculations based on official reports.
In 2017, ODI plunged 29.4 percent to about U.S. $120 billion, reflecting the government’s crackdown on “irrational outbound investment” and fears of capital flight. Investment in BRI countries remained at a reported U.S. $14.4 billion, although the Ministry of Commerce claimed this was an 8.5-percent increase from a year before.
The concerns continued in 2018 with ODI virtually flat and BRI investment showing a modest gain of U.S. $1.2 billion.
If the 11-month pace is sustained through the rest of 2019, China’s annual investment in BRI countries exclusive of contracting would fall below U.S. $14 billion, the lowest level since 2014.
Tightening the belt
Chinese investment at that level may still be attractive to cash-strapped developing countries, but it will be a fraction of the headline figures for BRI that have raised expectations and lured some into contracts that they cannot afford.
The falling investment figures may also challenge the view that China stands ready to commit vast financial resources to expand its influence in BRI countries, despite economic problems at home.
Instead, it appears to be tightening its BRI belt to control capital outflows while pursuing smaller construction contract opportunities abroad.
“The conventional wisdom is behind the trend on weaker Chinese spending. BRI has been overhyped from the beginning and now includes dozens of countries that should expect little in the way of Chinese activity,” Scissors said.