CIC's Li Keping on fine-tuning the new era of Chinese outbound investment

China's outbound investment has increased by 39% a year since 2002, pushing the country's stock of foreign investment to $600 billion, according to statistics released by the Ministry of Commerce, the National Bureau of Statistics and the State Administration of Foreign Exchange in September 2014. Although the overall stock of Chinese foreign direct investment is ranked eleventh in the world, China's aggregate investment in 2013 ranked third, according to official Chinese statistics. With the volume of inbound and outbound investment having converged, China is now entering an era that will see it become a net exporter of investment in the coming decade. So it is essential to plan for the next steps.

This is especially important because China's economy has become highly integrated with the global economy. As the world's largest trading nation, this has an important impact both on demand and supply, with a great many Chinese enterprises now dependent on the global market. So it is imperative to have a global focus. As a result, it is natural to integrate vertical and horizontal industrial markets through capital export. This is also necessary to maintain rapid economic growth. In fact, a lot of multinational companies have been through the same process. In their optimisation of the allocation of the world's resources, these companies have simultaneously upgraded their distribution of products and improved their value chain. The issue is not whether China needs globalisation, but rather whether China can harness it successfully.

Turning point

Studies have shown that once GDP per head reaches around $4,000, a country hits a turning point regarding imports versus exports. At the same time, China's population is ageing - raising fears that the country ‘may grow old before it gets rich'. China's ageing demographic profile is similar to that of advanced countries, but its overall economy is still underdeveloped by comparison. More challenges and problems will arise from the ageing population, which will become more obvious in the next 10-20 years - meaning there is less time for China, compared with other countries, to work out solutions.

Another feature is that, although China has expanded its influence to more regions and industries, there is still a large gap in market knowledge, investment scale and economic development. An overseas investment project requires not only the right supply/demand environment, but also an overall level of development that determines the enterprise's appropriate standard of management and operation. China as a whole may not yet have achieved the capacity necessary for international management and global investment.

Management philosophy

The management philosophy of China's businesses is close-minded when compared with the rapid and internationalised growth of the real economy. Although enterprises import commodities and raw materials from the international market, and their products are delivered around the world, they lack an international view in terms of corporate management. The closed-minded management philosophy is, to some extent, determined by the stage of China's development. In addition, existing intricate rules and regulations for industries related to their responsibilities in areas such as the environment, ecology, sanitation and safety do not always protect the public from problems in these areas.

The whole of society is facing the pressures of these challenges. We have to admit that meeting strict rules and regulations have not been internalised as part of companies' management philosophy, but are treated only as measures that would add costs to their operations.

As for the relationship between employees and employers, as a developing nation, China's state-owned enterprises have the most fair employment relationships, much better than those in private companies. In other words, from the perspective of this employment relationship, social welfare, social networks, managers and the overseas investment environment, there are a lot of inequalities preventing enterprises from realising the opportunities available to them.

In addition, there is a gap in attitudes towards overtime working between domestic and foreign businesses in terms of corporate culture and value. In China, employees work overtime automatically, and it is expected by employers. However, the same culture does not exist everywhere, and Chinese enterprises attract a lot of negative comments regarding this issue when they operate overseas.

Another challenge for China's economic development is the requirement for enterprises to have internationalised views, global strategic capacity and - most importantly - talented people. It calls for talent in the areas of international operations and international management.

Changing mindsets

Excepting structural challenges, some tangible issues such as behaviour and mindset have had a negative influence on China's overseas investment. For instance, if a Chinese enterprise does not have overseas investments, it can be viewed as less developed than its peers. But it is more important for China's enterprises to be prepared before following the rush into overseas investment. This will result in a higher likelihood of success.

Also, if we have a look at the research reports and conference materials on the topic, it is easy to find that people tend to attribute greater importance to the scale and speed of investment, rather than the quality and efficiency.

The focus on scale might sound good, but it blocks many of China's enterprises from making efficient and successful investment decisions. Another issue is that some enterprises focus on the process of investment, but neglect the management that follows in order to realise added value.

Companies are observed to lack the capability of achieving certain foreign investment goals. But foreign investment, as a strategy for development, can be made in the long term. It involves the extension and optimisation of companies' global industrial chains, not only helping to add value, but also the upgrading of business techniques and brands to help the overall structure.

Learning new business models through domestic and overseas economic integration is a very important element for enterprises to realise their goal of overseas investment.

However, this element has not gained enough attention within the process of investment. It is not the media's fault, but that of investors. Investors should have a global vision, and be clear about what they need and what they need to prepare to reach this goal, in order to improve themselves through the process of investment.

For overseas investment, the government should provide service and guidance while also, more importantly, making sure that enterprises share the fruit of economic globalisation. Businesses should focus on learning, accumulating and improving their capacity to engage in international operations and investment management, and establish talented teams of staff capable of such endeavours. At the same time, enterprises need to develop broad partnership networks, including peers in the same industry and in recipient countries. These partnerships are indispensable in terms of realising mutual benefits.

CIC, as a sovereign wealth fund, has been focusing on longterm investment, while providing services for domestic and overseas economic partners, and establishing a global investment platform and our own team. We have built a mutually beneficial platform to generate more profits and optimise global resource allocation to improve people's livelihoods. We have also developed co-operation with domestic and overseas partners.

Long-term co-operation

At present, we are discussing China's overseas investment from the perspective of an angel investor. But we will need bilateral agreements before investing in some developing countries' infrastructure projects. Investors have long-term capital, and would like to build mutually beneficial architecture through long-term investment. Recipients need to provide feasibility plans and the right legal environment to guarantee the social atmosphere for a stable and long-term investment. Success requires other conditions, too: bilateral co-operation on a longer-term basis and honesty.