Xi's Dilemma OFDI, Financial Sector Reform and The Limitations of Socialism With Chinese Characteristics

Libraries and Learning Services
University of Auckland Research

Repository, ResearchSpace
Copyright Statement
The digital copy of this thesis is protected by the Copyright Act 1994 (New Zealand).
This thesis may be consulted by you, provided you comply with the provisions of
the Act and the following conditions of use:
• Any use you make of these documents or images must be for research or
private study purposes only, and you may not make them available to any
other person.
• Authors control the copyright of their thesis. You will recognize the
author's right to be identified as the author of this thesis, and due
acknowledgement will be made to the author where appropriate.
• You will obtain the author's permission before publishing any material
from their thesis.
General copyright and disclaimer
In addition to the above conditions, authors give their consent for the digital
copy of their work to be used subject to the conditions specified on the Library
Thesis Consent Form and Deposit Licence.
Xi’s Dilemma; OFDI, financial sector reform and the
limitations of socialism with Chinese characteristics.
Laura Elizabeth Bunting
A thesis submitted in fulfilment of the requirements for the degree of Master of Arts in
Politics and International Relations, The University of Auckland, 2018.
Declaration of Originality
I declare that, to the best of my knowledge and belief and in accordance with the policies of the
University of Auckland, this dissertation is my own work, all sources have been properly
acknowledged to the full extent of my indebtedness, and this assignment contains no
plagiarism. I further declare that I have not previously submitted this work or any version of it
for assessment in any other Department of Faculty or for any award offered by the University
of Auckland, its partner institutions, or any other institution. I further declare that I understand
the plagiarism policy of the University of Auckland and the Disciplinary Area of Politics and
International Relations, including the penalties for which I am liable should my work be found
to contain plagiarised material.
Signed:
Date: February 26, 2018.
ii
Acknowledgement
Foremost I would like to thank my supervisor who always managed to mask the harshest
critique with wit, and pushed me when I didn’t realise I needed it. I would also like to thank the
Estate of Diana Mirium Wilsie for supporting me financially through the Bill McAra
Scholarship in Politics and International Relations, without which I may not have embarked
upon this journey in the first place.
I would also like to thank a number of friends and family, who tirelessly listened to my
technological complaints throughout the year and patiently feigned high levels of interests in
the nuance of Chinese outward investment. In particular, I would like to thank my mother,
whose strong grammatical views shortened every internal debate.
iii
Abstract
Xi Jinping is the most powerful man in China, but does he have the ability to lead China
through the next stage of economic development to become a sophisticated, ‘innovative’
thriving economy? Although China’s economic ‘miracle’ is the source of much admiration, an
examination of financial sector reform reveals both the markets weakness, and the limitations
of the government to effectively intervene. Since China opened her borders, the Chinese
Communist Party has attempted to steer Outward Foreign Direct Investment (OFDI) through
strict regulatory intervention of varying degrees of intensity. This paper will examine the extent
to which the Chinese government has been able to effectively drive OFDI in relation to
particular policy objectives over time. Adopting a process-tracing approach, it is argued that 4
major factors can be used to consider the efficacy of financial sector reform. These factors
address the ability of the government to effectively implement reform, the depth of this impact
and considers; the complementarity of reform with private interests; the degree to which reform
was centrally-led; the level of commitment to reform; and whether or not the reform places
political considerations above economic motivations. These findings have direct relevance for
those seeking to secure Chinese investment and for those scholars conserved with the
theoretical and practical consequences of developmental path theory and the China ‘Model’.
These four factors themselves reveal the key dilemma facing Xi Jinping – how to balance the
clashing forces of centralised power and decentralised economy.
iv
Table of Contents
Abstract .............................................................................................................................. iv
Table of Contents ................................................................................................................ v
Table of Figures ............................................................................................................... viii
Abbreviations ..................................................................................................................... ix
PART 1 – PRELUDE TO INVESTIGATION ................................................................... 1
Introduction ...................................................................................................................... 1
A surprising decline ...................................................................................................... 3
Applied and theoretical significance .............................................................................. 6
Method ............................................................................................................................. 9
Measurement................................................................................................................... 13
What is OFDI and how is it measured? ........................................................................ 13
Data limitations ........................................................................................................... 15
Other important definitions.......................................................................................... 16
Literature Review............................................................................................................ 17
Perspectives on OFDI.................................................................................................. 17
General models of OFDI – political economy .............................................................. 18
Institutional Theory ..................................................................................................... 22
Perspectives on Chinese OFDI .................................................................................... 24
PART 2 – PRODDING AND PROBING ......................................................................... 30
What motivates Chinese firms to invest abroad?.............................................................. 30
Government and business objectives ........................................................................... 30
Government objectives ................................................................................................ 32
Distinct firm objectives ............................................................................................... 35
How the government pursues and defines its objectives................................................... 36
Key administrative actors (who) .................................................................................. 36
State methods (how) .................................................................................................... 38
v
A brief history of China’s globalisation ........................................................................... 40
1979-1991 ................................................................................................................... 41
The Beginning ............................................................................................................ 41
Government capability and the market........................................................................ 44
1992-2001 ................................................................................................................... 44
Stops and Starts .......................................................................................................... 44
2002-2012 ................................................................................................................... 48
Growth in Earnest....................................................................................................... 48
Findings .......................................................................................................................... 55
PART 3 – A CLOSER LOOK .......................................................................................... 57
Scrutinising 2013-2015 ................................................................................................... 57
Overview of the period ................................................................................................ 58
Key policies affecting investment ................................................................................ 60
Remaking ‘go global’ .................................................................................................. 62
Measuring the impact of ‘go global’ ............................................................................ 64
The formation of the Belt and Road Initiative .............................................................. 64
Measuring impact of the BRI....................................................................................... 66
2013 ................................................................................................................................ 68
China leads the way..................................................................................................... 68
‘Go global’ and industry activity ................................................................................. 70
BRI and locational investment ..................................................................................... 71
Government capability and the market ........................................................................ 72
Policy developments in 2013 ....................................................................................... 73
2014 ................................................................................................................................ 73
China's outward investment grows as global rates decline ........................................... 73

vi
Policy development in 2014 ........................................................................................ 79
2015 ................................................................................................................................ 80
A new era of investment? Positive net direct investment.............................................. 80
Policy development affecting 2016/17 ......................................................................... 86
Findings .......................................................................................................................... 87
PART 4 – FINDINGS AND CHALLENGES .................................................................. 89
2016 ................................................................................................................................ 89
Increased growth, growing debt and declining profitability.......................................... 89
Findings .......................................................................................................................... 95
2017 ................................................................................................................................ 97
The Great Decline ....................................................................................................... 97
Formalising new regulation and going forward from 2017. .......................................... 99
Conclusion .................................................................................................................... 101
Lessons learned ......................................................................................................... 101
A potential model for understanding policy efficacy in China ................................... 104
Theoretical implications ........................................................................................... 106
Limitations of study (opportunities for future research) ............................................ 107
What to expect ......................................................................................................... 108
Bibliography .................................................................................................................... 110
Appendix ......................................................................................................................... 120
vii
Table of Figures
Table 1a – Proportional distribution of Chinese OFDI by region ................................... 120
Table 1b – Directional change in Industrial distribution of Chinese OFDI – highest to lowerst

..................................................................................................................................... 120
Figure 1a – Foreign Direct Investment as a Percentage of GDP: Canada, Japan and China.
..................................................................................................................................... 122
Figure 1b – – Foreign Direct Investment as a Percentage of GDP: Australia, Canada and the
OECD ........................................................................................................................... 122
Figure 1c – FDI as a percentage of GDP: Japan and Korea ............................................ 123
Figure 1d – China’s OFDI Flows and Stock since the establishment of the Outward FDI
Statistical System .......................................................................................................... 123
Figure 2a – Percentage change in FDI inflows vs outflows ............................................ 124
Figure 2b – Chinese Instock vs Outstock of FDI............................................................ 124
Figure 3a – Percentage Change in inward and outward FDI........................................... 125
Figure 3b – Proportions of SOEs and POEs in China’s Outward FDI Stock................... 125
Figure 3c – China’s Outward FDI Stock by Region ....................................................... 126
Figure 3d – Growth in OFDI by Region ........................................................................ 126
Figure 3e – Regional Destination of OFDI in Asia (without HK and Macau)................. 127
Figure 3f – Percentage Growth in FDI from China to Asia in relation to Percentage Growth
in GDP from 2012-2015 ................................................................................................ 127
Figure 4a - OFDI Stock Composition 2015-2016 .......................................................... 128
Figure 4b – Industry Investment Flow ........................................................................... 128
Figure 4c – Return on Assets ......................................................................................... 129
Figure 5a – International Development Path Model ....................................................... 129
Figure 5b – China’s Net Outward Investment ................................................................ 130
viii
Abbreviations
ADM Asian Development Model

AFC Asian Financial Crisis
AIIB Asian Infrastructure Investment Bank
BRI Belt and Road Initiative
CCP Chinese Communist party
CNOOC Chinese National Offshore Oil Corporation
DO Domestic Output
EIU Economist Intelligence Unit
EY Ernst & Young
FDI Foreign Direct investment
FGP Flying Geese Paradigm
GDP Gross Domestic Product
GFC Global Financial Crisis
HKTDC Hong Kong Trade Development Council
IDP International Development Path theory
IFDI Inward Foreign Direct Investment
IMF International Monetary Fund
M&As Mergers and Acquisition
MIC2025 Made in China 2025
MNCs Multinational Corporations
MOFCOM Ministry of Commerce of the People’s Republic of China
MOFERT Ministry of Foreign Economic Relations and Trade
NDRC National Development and Reform Commission
NOI Net Outward Investment
OECD Organisation for Economic Co-operation and Development.
OFDI Outward Foreign Direct Investment
OLI - Model Dunning’s theory, known as the eclectic paradigm, or OLI-Model
OSC Office of the State Council
PBC People’s Bank of China or Central Bank
POEs Privately Owned Enterprises
R&D Research and Development
ROA Return on Assets
ROI Return on Investment
SAFE State Administration for Foreign Exchange
SASAC State Asset Supervision and Administration
SOEs State Owned Enterprises
SPC State Planning Commission
THAAD Terminal High-Altitude Area Defence system
UNDP United Nations Development Programme
USD /US$ United States Dollars
WTO World Trade Organisation
ix
PART 1 – PRELUDE TO INVESTIGATION
Introduction
This paper uses a variant of theory-building process tracing to argue that a broad framework
can be developed through which to understand the efficacy of Chinese financial sector reform.
This framework links political and economic motivations, policy instruments, and outcomes
through a set of causal mechanisms and illustrates the extraordinarily difficult balancing act Xi
faces in propelling socialism with Chinese characteristics into the 21st century.
Since the accession of China to the World Trade Organisation (WTO) in 2001 and the adoption
of its ‘go global’ strategy in 1999, Outward Foreign Direct Investment (OFDI) has grown
exponentially. Between 2002 and 2015 Chinese OFDI flows increased over 50-fold from US$
2.7 billion to US$ 145.67 billion.1 Furthermore, by 2016, China had become the world’s largest
trading nation and the second largest source of OFDI flows in the world; second only to the
United States.2 This growth, although atypically fast, still leaves Chinese outward investment at
a lower level proportionally, as a percentage of Gross Domestic Product (GDP), than other
countries. Consequently, the dramatic decline in OFDI in the first and second quarters of 2017
upended economic predictions and generated fear in the market. China's outbound non-
financial investment collapsed to just 41.8 per cent in relation to the previous two-quarters.3
This paper explores why this decline occurred and considers fluctuations in OFDI more broadly
as they relate to the governing capacity of the Chinese Communist Party (CCP).
Changes in OFDI reflect financial regulatory shifts, and in turn the political and economic
priorities of the Chinese Government. This is due to both the broad scope of policy shifts that
1Ministry of Commerce of the People’s Republic of China, National Bureau of Statistics of the People’s Republic of China, State
Administration of Foreign Exchange, 2015 Statistical Bulletin of China’s Outward Foreign Direct Investment, (Beijing: China Statistics Press,
2016), 89.
2MOFCOM, 2015 Statistical Bulletin, 89.
3“China says ‘irrational’ outbound investment curbed, figures show sharp drop,” The Straits Times, September 14, 2017, accessed November
11, 2017, http://www.straitstimes.com/business/economy/china-says-irrational-outbound-investment-curbed-figures-show-sharp-drop.

1
impact outward investment and the challenge that associated fiscal liberalisation poses to
market socialism. Increased openness to foreign markets can directly weaken the central tools
the government utilises to regulate the market. As outward investment also reflects domestic
market conditions and prioritisation, OFDI fluctuations can be used to infer the success of
broader economic policies domestically. Furthermore, the degree to which the CCP is able to
effectively realise their outward investment priorities reflects both the quality of key policies
and the degree to which the government can ensure compliance and successful implementation
across multiple levels of administration in the context of growing market liberalisation.
Therefore, an examination of OFDI fluctuations provides valuable insight into the
government’s priorities, and the limitations of market socialism.
In order to better understand fluctuations in outward investment, this paper adopts a variant of
process tracing, as its primarily concerned with patterns of change over time, or the evolution
of a particular dependent variable. In this case, that variable is OFDI. Process-tracing can be
considered a causal theory,4 focusing on the causal process between causes and outcomes,
rather than simply the cause itself. This allows for an exploration of the mechanisms that tie
policies to outcomes. Rather than testing a proven theory, weighted consideration of historical
trends informed by elements of established OFDI and economic theories are used to establish a
framework for understanding the Chinese case.
This paper examines the issue of OFDI as follows. Initially, in order to develop a set of
potential mechanisms the role of market-forces and generally applicable models of OFDI are
examined as they relate to the Chinese case. Due in part to the limitations of these models, an
historic overview of Chinese OFDI is utilised to supplement these findings. This has the
additional advantage of providing the historical context for the current short-term trends, which
are then considered in closer detail. The period of 2013-2017 is examined in further detail in
4Derek Beach, “It’s all about mechanisms – what process-tracing case studies should be tracing,” New Political Economy, 21 (2016): 464.
2
order to expand upon the mechanisms drawn from the previous analysis. For this period,
outward investment fluctuations are considered, in particular by sector and region, as relates
directly and indirectly to Chinese policy. From this, short-term and long-term trends are drawn
out, focusing on how they relate to particular policies, and how effectively those policies have
been realised. The role of both the market and the broader economic and political objectives of
the state are considered in order to better explain the mechanisms that link policy to
implementation. This enables a better understanding of what drove the CCP to implement
capital controls in 2016, and to what extent they achieved their broader desired objectives. This
exposes the difficulty in balancing the conflicting forces of centralised power and decentralised
economics. A unique dilemma that presents a daunting challenge for Xi Jinping.
A surprising decline
The rapid decline of Chinese outward investment in 2017 came as a shock. Authoritative
independent observers and Chinese officials alike failed to predict the possibility of a sharp
OFDI decrease throughout 2015/16. Indeed, the opposite was forecast both within and outside
of China. Accounts from leading research firms, such as EY and the Rhodium Group predicted
exponential growth in China’s OFDI,56 and the Ministry of Commerce of the People’s Republic
of China (MOFCOM) reported in 2015 that “China’s outward investment has entered into the
fast lane of development.”7 Bolstering the authority of such assertions, general foundational
economic models also suggest Chinese outward investment was set for accelerated growth.
Theoretically, as GDP increases, OFDI is expected to grow both in aggregate terms, and
relative to GDP. In comparison to global levels, Chinese OFDI remains relatively low,
suggesting ample room for exponential growth. In 2016, Chinese OFDI constituted just 11.4
5“Riding the Silk Road: China sees outward investment boom: Outlook for China’s outward foreign direct investment,” Global Markets – EY
Knowledge, March 15, 2015, accessed July 7, 2017, http://www.ey.com/Publication/vwLUAssets/ey-china-outbound-investment-report-
en/$FILE/ey-china-outbound-investment-report-en.pdf.
6John Reiss et al, “China’s rise in global M&A: Here to stay,” Rhodium Group, New York White Case, 2017, http://rhg.com/wp-
content/uploads/2017/03/chinas-rise-in-global-ma-here-to-stay.pdf.
3
per cent of GDP compared to the average in developing economies of 19.8, and 44.8 per cent in
developed economies.8 Furthermore, given China’s GDP grew at its fastest rate in seven years
in 2017,9 the relative drop in OFDI is inconsistent.
As significant interruptions to this predicted steady increase were largely unforeseen, their
emergence sparked much hurried debate early in 2017. A number of observers, particularly in
the West, argued that the decline was principally driven by firms’ reactions to market-forces,
and therefore an unavoidable contraction of the “spate” of high-value purchasing and irrational
investment in the years prior, seen as an inevitable consequence of market socialism.10 It was
argued that Chinese firms were not able to make informed and effective decisions due to
domestic bridling, and thus made poor investment choices symptomatic of the practice of State-
Owned Enterprises’ (SOE).11 Additionally, the decline in outward investment was considered
in part due to firms disillusion with foreign opportunities and lacklustre returns in 2016.12 This
prompted calls for greater liberalisation as the solution, despite such a view directly
contradicting the Lee Hypothesis.
The Lee Hypothesis posits that the more dictatorial or authoritarian the leadership style is, the
more capable the government is of conducting efficient policies, and in particular, that
democracy is unsuited to Asia.13,14 Consequently, the CCP is better equipped to effectively
steer outward investment than their democratic counterparts in the West, and that the true
source of irrational investment is found in the market itself. Therefore, the solution to spurious
8“World Investment Report 2017: Annex Tables,” United Nation Conference on Trade And Development, last modified June 7, 2017,
http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx.
9Kevin Yao and Elias Glen, “China’s GDO growth accelerates for the first time in 7 years,” Reuters, January 18, 2018, accessed February 11,
2018. https://www.reuters.com/article/us-china-economy-gdp/chinas-2017-gdp-growth-accelerates-for-first-time-in-seven-years-
idUSKBN1F70OJ.
10“China warns its banks about four of its most global companies,” The Economist, June 29, 2017, accessed December 11, 2017,
https://www.economist.com/news/china/21724433-campaign-clean-up-financial-system-turns-overseas-deals-china-warns-its-banks-about.
11“State-Owned Enterprise Policy Reform,” Asia Society Policy Institute, Rhodium Group, 2Q2017, accessed November 29, 2017,
http://chinadashboard.asiasociety.org/china-dashboard/page/state-owned-enterprise.
12“State-Owned Enterprise Policy Reform,” Asia Society Policy Institute.
13See Larry Sirowy and Alex Inkeles, “The effects of Democracy on Economic Growth and Inequality: A Review,” Studies in Comparative
International Development 25, no.1 (1990): 126-157 and; Adam Przeworski and Fernando Limongi, Journal of Economic Perspective 7, no.3
(1993): 51-69.
14The Chinese ‘miracle’ is considered by many as proof of the Lee hypothesis, without the CCP, China would have been “unable to generate
rapid economic development,” In Lee H.J. “Development, crisis and Asian values,” East Asian Review 15, no. 2 (2003): 27–42.
4
investment is more market intervention, not less. Both the Lee Hypothesis and economic
theories assume that the government’s decisions pertaining to economic policy are based on
puritan economic logic but assign a different level of capability to the government. This
discounts wider political and cultural considerations, limiting the scope of their analysis due to
the absolutist nature of both arguments.
Neither of these approaches adequately explains Chinese outward investment in 2017, or over
time. Irrational investments were observed and publicised throughout 2016, but this did not
trigger immediate reform or a market slowdown; in fact, the market welcomed it as it
contributed positively to economic growth. Given the acknowledgement that spurious
investment occurred, the decline in the following year was not a proportionate response
(limited to correcting variation) – and therefore not a mere market correction. Additionally, as
authoritarian regimes do not necessarily create market-optimisation conditions, their role in
economic development goes beyond responding to and internalising market fluctuations.
By the end of 2017, it was widely accepted that the decline in outward investment could be
attributed to an increase in capital controls at the behest of the CCP. The real puzzle is why
such a reform was imposed in the first place, and whether or not it achieved the desired policy
outcome. This paper explores what motivated the actions of the central government and to what
extent they were able to actively achieve their goals. To explain this policy at a particular point
in time this paper seeks to establish a broader theory of OFDI fluctuations over time in the
Chinese case. This is necessary for the broader purpose of inference – or learning more widely
from a specific phenomenon. Consequently, the paper addresses short-term and long-term
OFDI trends and uses this data to gauge the efficacy of government reform in the monetary and
financial sector across a number of policies.
5
Applied and theoretical significance
Better understanding Chinese outward investment is of both practical and theoretical value.
Practically, China is an important source of OFDI, particularly among developing countries,15
and as a growing feature of the global economic environment its investment and trade policies
are of ever-growing significance. Indeed, with a population of over 1.3 billion, China has been
the “largest contributor to world growth”16 since 2008, and given the current climate of
growing protectionism in the west, this trend is likely to continue.17 This makes attracting
inward investment from China a key consideration of both firms and governments. China
accounts for the greatest volumes of investment across a number of countries, including
Australia and New Zealand.18 To the firms and countries that seek to attract Chinese Inward
Financial Direct Investment (IFDI),19 more thoughtful consideration of the motivations driving
investment can enable more targeted and effective action to secure such ventures. Specifically,
what domestic policies impact the constitution of OFDI, and to what extent should market
motivations be relied upon as determinative of firms’ decision making? In short, if outward
investment fluctuations reflect more than just economic objectives, understanding the
motivations behind domestic market and financial regulation are of heightened importance.
This underscores the need for foreign firms to look beyond purely economic explanations and
elevates the significance of Xi Jinping core policies; including his centralisation program in
regard to the constitution and direction of OFDI.
Beyond this, OFDI composition can be extended to consider economic statecraft more
generally. China’s ‘peaceful rise’ has economic, political and military dimensions. A more
assertive China is increasingly relying upon economic tools of statecraft to achieve both
15“In 2013, 83.2 per cent of Chinese OFDI went to developing countries,” in MOFCOM, 2013 Statistical Bulletin, 101.
16“The World Bank in China,” The World Bank, last updated July 26, 2017, http://www.worldbank.org/en/country/china/overview.
17Ibid.
18Ibid.
19Due to the size of the Chinese market this is undeniably of interest to a huge number of firms and a majority of countries.
6
international and domestic political objectives, thus necessitating a broader understanding of
economic and fiscal policy-making. China’s use of ‘sharp power’20 (coercive and aggressive
economic statecraft), has rendered understanding the nature of economic and political trade-
offs more pressing in order to anticipate just how far China is willing to go. This assists us to
better understand the use of economic “carrots” (in the South China Sea) and economic
sanctions (in South Korea) in response to the Terminal High-Altitude Area Defence system
(THAAD) weapon deployment.
From a political-economy perspective, developing a more nuanced model of financial sector
reform in China has implications for theoretically universally applicable economic models and
for market socialism more widely. China’s economic miracle forms a valuable case study, as
generally speaking, China’s outward investment does not fit neatly into existing models. The
degree to which this is true continues to be hotly debated by business scholars, economists and
political scientists alike, suggesting there is value in greater analysis beyond developing and
developed world models, and that universal models have limitation applicability for China and
elsewhere.
For comparative studies theorists, the extent to which the Chinese case parallels the
developmental model characterised by Japan (and arguably adopted by South Korea) forms an
interesting and insightful case study. Whether or not China constitutes an independent model of
its own or should be considered within the context of the Asian Developmental Model (ADM)
is hotly contested among political theorists and has implications for the future development of
both China’s economy and political composition. The ADM considers the role of central
government planning in the economy and is credited with underscoring decades of economic
growth and widespread poverty reduction. The ‘China-Model’ adopts a number of these
20A play on soft power, see “Sharp Power: China is manipulating debate in Western democracies. What can they do about it?” The Economist.
(Singapore: December 16, 2007), 9.
7
characteristics but retains firm authoritarian control. For many in the developing world, China’s
economic model is an inspiring vision of growth. In just 30 years China has lifted 500 million
citizens out of extreme poverty,21 encouraging many in the developing regions of Africa and
Asia to closely consider adopting elements of the ‘China-Model’. Consequently, better
understand how the state regulatory system functions is of high value.
As a number of studies addressing China’s political economy focus heavily on inward FDI, a
better understanding of historical patterns of Chinese OFDI adds valuable insight to this
discussion of cross-border investment more broadly. This also relates to the studies addressing
SOE and Privately-Owned Enterprise (POE) differentiation, as SOEs play an important role in
outward investment. In particular, an examination of policy implementation provides us with a
more nuanced understanding of the behaviour of SOEs versus POEs and the broader role of
institutions in the Chinese case. Indeed, developing more nuanced theories of financial sector
reform are critical to understanding the future direction of the Chinese market, and the degree
to which the central government is willing to interfere. This also has implications for the extent
to which markets operate independently (and effectively) in China.
From a theoretical perspective, making use of process-tracing to consider both quantitative and
qualitative data suggests that its application may be able to be extended more broadly to
numerical datasets, which can be used to consider causal mechanisms in a more controlled way.
This contradicts Mahoney’s assertion that “the study of the intervening events that
connect X and Y makes process tracing a fundamentally qualitative and set-theoretic
21“China,”United Nations Development Programme, accessed March 11, 2017,

http://www.cn.undp.org/content/china/en/home/ourwork/povertyreduction/overview.html.
8
methodology,”22 and Collier’s view that “process tracing is a fundamental tool of qualitative
analysis,”23 which restrict process-tracing to only qualitative analysis.
Method
This paper begins with the question – “what is responsible for the dramatic decline in OFDI in
the first two quarters of 2017?” This is, in essence, the question: “what X caused Y”24 resulting
in Z, where Z is the outcome of a 44 per cent collapse in OFDI. Y is the capital controls that
drove it, and X is the unknown causes behind these controls. Consequently, this paper seeks to
classify X and to better explain the causal mechanisms that link X and Y, by adopting a variant
of process-tracing. In focusing on the causal processes linking OFDI and policy one can
analyse the efficacy of regulatory policies and how they interact with, and are shaped by, the
broader economic and cultural environment. From this, one is better able to consider the
original case.
Using a time series analysis is most appropriate “because in principle relevant X’s may have
occurred at any time prior to Y.”25 In other words, events in 2015 may have been necessary
precursors to 2017. Additionally, an exploration of the historical trends and context enables us
to test an X>Y>Z relationship across multiple Z’s within the one case – China. This in turn
provides us with insight into a broader and more important relationship: “how effectively is the
CCP able to affect OFDI?” Fluctuations in OFDI in accordance with, or contrary to,
government prioritisation are considered markers of the relative success of regulation
22James Mahoney, “Mechanisms, Bayesianism, and process tracing,” New Political Economy 21, no.5(2016):495, doi:
10.1080/13563467.2016.1201803.
23David Collier, “Understanding Process Tracing,” PS: Political Science &Amp 44, no.4 (2011): 827. doi:10.1017/S1049096511001429.
24“In this formulation, X and Y are specific categories, events, or particular values on variables.” Footnote 5 in Mahoney “Process Tracing and
Historical Explanation,” Security Studies 24, no.2 (2015): 200-218.

25Mahoney “Process Tracing and Historical Explanation,” 207.
9
implementation and optimisation. The successful management of OFDI is used as an indicator
of the efficacy of reform in the financial sector.26
The goal of this paper is not to establish or develop a generally applicable theory, but to better
understand the present nature of regulatory efficiency, the relative role of market forces, and
the future direction of the CCP’s policy over time, rather than across multiple countries.
Through “tracing the broad history of the [Chinese] case at a fine-grained level,”27 potential
causal factors are revealed then considered in relation to their effective implementation.
Process-tracing is well suited to this goal, as “the primary inferential power of process tracing
and other case study techniques, lies in allowing for a more in-depth test of the theoretical
argument.”28
Rather than applying an established theory of OFDI, such as the International Development
Path (IDP) theory or the Flying Geese Paradigm (FGP), onto the Chinese case, this paper
makes inferences within the Chinese case in order to build a set of plausible causal mechanisms
linking the cause to the outcome.2930 This is the most appropriate approach considering the
limited application of dominant theories in the Chinese case. Numerous studies have
considered the two theories as they relate to China but neither theory is sufficient to explain the
historical patterns and variations in OFDI in a holistic manner. A justification for this is
explored in ‘Part 2 – prodding and probing’. Instead, existing theories explaining economic
development serve as a grid, or framework, through which to consider the Chinese case in
order to note key divisions from accepted market-led patterns or one-party state generalisations.
26This is not a complete model, in that outward investment fluctuations are but one of the many consequences of governmental policy in the
financial sector.
27Mahoney, “Process Tracing and Historical Explanation,” 214.
28David Kuehn, “Combining game theory models and process tracing: Potential and limits,” European Political Science: EPS 12, no.1 (2013):
52-63, http://dx.doi.org.ezproxy.auckland.ac.nz/10.1057/eps.2012.9.
29In this case the outcome is fluctuations in OFDI.
30Richard Swedberg, “Theorizing in sociology and social science: turning to the context of discovery,” Theory Soc 41, (2012): 1-40,
doi:10.1007/s11186-011-9161-5.
10
They also inform the potential causal mechanisms, as while the Chinese case does not neatly
align with one theory; this is not to say that the theory is wholly irrelevant in practice.
In adopting a theory-building variant of process-tracing, “the first task is to generate a list of
potential causes or explanations, aka, X’s,”31 – consequently, explanations of governmental and
firm motivations are explored in detail. Firm motivations are incorporated (despite Y being a
government action) as the CCP is concerned with private motivations due to both the
requirement for domestic stability, and the desire to optimise economic policy. Furthermore,
better understanding distinct firm motivations enables us to consider market mechanisms more
generally and the push-back against some government policies. This exercise in descriptive
historical analysis enables close “attention to sequences of independent, dependent, and
intervening variables”32 - a critical element of effective analysis. An exploration of the
mechanisms utilised by the government to achieve their goals is discussed - as these are the
tools whose impact and efficacy are being explored. From this, a wide set of the available
empirical data is explored to provide a descriptive historical narrative and a detailed study of
the subset of data available for 2012-2017. As “good process tracing requires a strong
understanding of the history of the case”33 the development of Chinese investment is
considered from its origins to consider the nature of Chinese investment and the policy
environment generated by the government across three distinct time periods.
This provides the historical context for a detailed examination of the relationship between
various policy and outward investment fluctuations throughout 2013-2017. The period has been
chosen due to both data accuracy and utility. The data available for this timeframe is
significantly more reliable than the period before 2006, following MOFCOM’s adoption of the
Organisation for Economic Co-operation and Development (OECD) standards, and greater

32Collier,
“Understanding Process Tracing,” 827.
11
transparency and accountability concerning investment projects, allowing for a more detailed
analysis. Economic and political factors also support focusing on a modern period, as the view
of the government towards OFDI has transformed alongside China’s economic development.
International developments are also conducive to this timeframe. By 2013, economies around
the world had begun to recover from the Global Financial Crisis (GFC), reporting positive
growth for the first time since 2009. Thus, OFDI distortions due to external market conditions
are minimised.34 As this study is concerned with major policy decisions, focusing on the period
after 2010 is also optimal. From a policy perspective, the reinvigorated ‘go global’ policy was
enacted from 2011 and the ‘Belt and Road Initiative’ (BRI) had been announced at the end of
2012; thus 2013 marks the first year of observable data addressing the impact of this important
policy. The BRI is increasingly prominent as a keystone of economic and political foreign
policy, and the individual policies supporting the aims of the BRI and ‘go global’ were pursued
throughout 2012-2017. The evolution of these policies is considered in general, and on a year-
by-year basis. The impact and efficacy of each of these policies is analysed; the influence of
‘go global’ traced to the relative success of target industries; and the BRI in relation to target
countries. For example, greater investment than average, or sudden surges by SOEs and POEs
in countries that make strong commitments to the BRI (such as Kazakhstan) is seen as evidence
of the successful permeation of that policy in re-directing overall trends. Regulatory shifts in
OFDI are primarily considered from an endogenous perspective, as external conditions are
internalised to distinctive considerations by the CCP – rather than directly responsible for a
clear pattern of linear shifts.35
34The greater integrations of the Chinese market into the global economy by this time also mitigated the relative role of broader trends
impacting Chinese growth. Additionally, Chinese investment choices in some cases follow a pattern than contradicts economy theory, for
example investment into countries touched by political instability increasing rather than decreasing.
35This is not to discount the role of global markets more generally, but rather a perspective assumed by the author, given the regulatory
environment in China, and the deviation of official perspectives on global events and economic priorities.
12
This analysis covers the years 2013-2017 with detailed broader year-on-year analysis for 2013-
2016.36 Complete data is not yet available for 2016/17, however verifiable datasets are
adequately comprehensive for 2016. The first three years establish more recent trends and the
operating environment in which policy shifts occurred in 2016. Thus, the period 2013-15,
forms in essence the baseline data, providing insight into the sequencing of policy
implementation activity, through which to consider 2016 and 2017. These short-term patterns
are considered in relation to governmental regulation and impact, revealing the limitations of
governmental reform within the context of market socialism.
From this, 4 key factors affecting the efficacy of government policy are drawn out. They
considered the quality of reform construction, the method of implementation and the
relationship between state and market incentives. To conclude, the direction of the CCP under
Xi Jinping is further considered, as are the impacts of distinct political objectives on the ability
of the government to manoeuvre in the financial sector. The need to balance political and
economic objectives is a problem that faces almost every government, however in the context
of Chinese market socialism; Xi’s dilemma is one of unprecedented difficulty and profound
consequence.
Measurement
What is OFDI and how is it measured?
Foreign Direct Investment is calculated as both stock and flow data. For the purpose of this
paper, the OECD definition of OFDI is adopted as it is the definition most widely applied and
standard for WTO member organisations. China adopted OECD standards in 2006. According
to the OECD:
36These policies will be considered as relates to 2013, but due to their limited impact at this point, 2013 serves as an effective baseline.
13
“Foreign Direct Investment (FDI) flows record the value of cross-border transactions
related to direct investment during a given period of time, usually a quarter or a year.
Financial flows consist of equity transactions, reinvestment of earnings, and
intercompany debt transactions.”37
Flow data provides an indication about the attractiveness of economies and provides useful
insight into recent economic movements. However, it is subject to greater volatility and
confidentiality problems, particularly concerning politically sensitive industries or countries.38
Stock data by contrast is more robust, accounting for exchange rate fluctuations and price
movements due to holding gains or losses.39 In summary, flow data is better at providing less
accurate, but more up to date information, whereas stock data is best suited to establishing
trends over time and allows for great scrutiny.
The OECD defines Foreign Direct Investment (FDI) stock as the measurements of “the total
level of direct investment at a given point in time, usually the end of a quarter or of a year.”40
Outward FDI stock is made up of domestic investors' equity in, and net loans to, enterprises in
foreign economies.”41 While stock and flow data follow similar patterns (Figure 1d) stock data
is the dominate measurement standard for this paper as it is more heavily concerned with
change over time. Flow data is used to supplement this data, in particular for the period
2016/17 where stock data is not yet readily available.
37“Data” Organisation for Economic Co-operation and Development, https://data.oecd.org/fdi/fdi-flows.htm.

38“Foreign direct investment (FDI) statistic,” Eurostat.
39Ibid.
40“FDI Stock,” Organisation for Economic Co-operation and Development, https://data.oecd.org/fdi/fdi-stocks.htm
41Ibid.
14
Data limitations
While the quality of data on China’s cross-border investment has drastically improved,
“reliability remains a serious concern.”42 Prior to 2006, the Chinese Bulletin of Statistics was
inconsistent with the OECD, and importantly did not include non-financial OFDI. Following
the adoption of OECD standards in 2006 there was a sharp increase in OFDI stock actually
measured.
The majority of the 2013-2015 data in this paper is sourced from the Bulletin of Statistics
(MOFCOM), the OECD and the UN database.43 Since 2006, a number of factors continue to
distort the official data – found in the Annual Bulletin on China’s Outward Direct Investment.
MOFCOMs exact method for collecting and evaluating data remains opaque,44 and there are
similarly reasonable justifications for claims that official figures are both exaggerated and
undervalued. Aggregate figures can be under reported due to the data collection method itself.
MOFCOM relies on data reported to local commerce bureaus, that is then passed on to central
authorities. Local bureaus may have incentives to distort figures to better align with central
targets, or in order to attract government subsidies and investment. Firms wishing to avoid time
consuming approval procedures are incentivised to under report their foreign investment
figures. Another potentially more distorting issue is that Chinese firms do not report on re-
invested earnings that remain abroad,45 which is required under international standards.
Despite this, there is evidence to suggest that reporting actually exaggerates figures. One cause
for this is the high volumes of capital leaving China through unofficial channels.46 Tougher
regulation of the capital account encourages firms to disguise this ‘hot money’ by distorting the
42Daniel H Rosen and Thilo Hanemann, “China’s Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications,”
Peterson institute for International Economics 3, (2009), www.piie.com.
43This data can be made available upon request. Note: All figures areare based on this dataset (except 5a – Dunning et al
44For a discussion of China’s compliance with and outline of international FDI statistics, see OECD http://www.oecd.org/ctp/dispute/map-
statistics-2006-2013.htm.
45Rosen, “China’s Changing Outbound Foreign Direct Investment Profile.”
46Barry Eichengreen, “Chinese Currency Controversies,” CEPR Discussion Paper no.2375, (2004), https://ssrn.com/abstract=549261
15
direct investment value. Another potentially important exaggerating factor relates to Hong
Kong and Macau, both of which facilitate the “round-tripping” of Chinese Outward Direct
Investment. In essence, outward investment has gone ‘abroad’ and ‘“stayed abroad waiting for
opportunities to return back to the PRC,”47 rather than been directed towards tangible projects.
This could make up as much as 30-50 per cent of FDI, grossly exaggerating reported figures.48
For this reason, this thesis is principally concerned with changes in OFDI and relies on
consistent sources of data where it is available – MOFCOM, United Nations Development
Programme (UNDP), OECD, and for 2017 on official data channels through the Economist
Intelligence Unit (EIU), Reuters and the World Bank. This data has been supplemented by
other studies and is supported through case studies.
Note, all monetary values are in USD million unless stated otherwise.
Other important definitions
Industry breakdown is consistent with the MOFCOM accounting, specifying 17 industries in
2013, and growing to 19 by 2015. This is due to the high value placed upon data consistency,
although further breakdowns are available through alternative sources. As this paper relies
heavily upon the governments’ recording of industry performance, their classifications form the
basis of analysis, supplemented where useful. Locational data is examined principally by
region, rather than by state. Country examples are used to explain irregularities, trends, or
where a single country constitutes a distortionary force. Both stock and flow data are used to
assess the relative changes in regional orientation and industrial data where helpful. The
categorisation of regions goes beyond those outlined by MOFCOM and where there are
deviations these are detailed as they become relevant to each section.
47Xiao Geng, “Round-tripping Foreign Direct Investment and the People’s Republic of China,” ADB Institute Research Paper Series 58,
(2004), 1.
48Rosen, “China’s Changing Outbound Foreign Direct Investment Profile,” 3.
16
Literature Review
Perspectives on OFDI
While there are extensive economic studies on Chinese Inward FDI, the literature on outward
FDI is comparatively underdeveloped.49 A number of empirical studies “conclude that China’s
FDI is relevant to mainstream FDI theories,”50 suggesting that the motivations and
determinants of OFDI globally are transferable to the Chinese case. 51 Such analysis is generally
centred on the cost-benefit decisions of firms. Much of the broader FDI literature considers
developed economies, but studies on China are frequently supplemented by studies considering
the ADM, and broader studies addressing the unique determinants of OFDI in developing
countries more generally. Such studies include theories of “catch-up strategies” and the
“latecomer perspective.”52 By contrast, as with other fields of academic study relating to China
there is also a strong branch of ‘Chinese exceptionalism’ which questions the validity of
applying generally applicable models to China in any case, due to its historic uniqueness.53
Such an approach is more consistent with the Lee Hypothesis.
To better contextualise the literature on Chinese OFDI, generalised economic models of
outward investment are considered, followed by those ideas introduced through the ADM, and
theories that apply to developing states more generally. From this is it clear that the Chinese
case does not fit neatly into one model, but many of the theoretical findings of generalised
models are helpful in explaining the motivations behind, and determinants of, Chinese OFDI.
Subsequently, there will follow an examination of the literature discussing the Chinese case in
49Cross et al, “An econometric investigation of Chinese outward direct investment,” forthcoming in J.H. Dunning and T.-M. Lin (eds.)
Multinational Enterprises and Emerging Challenge of the 21st Century, Edward Elgar: Cheltenham, (2007): 55-85.
50Yao Shujie and Wang Pan, China’s Outward Foreign Direct Investments and Impact on the World Economy, (Palgrave Macmillan, London
2014), 11.
51See; Dunning and R. Narula (eds), Foreign Direct Investment and Governments: Catalysts for Economic Restructuring, (London: Routledge;
1996); and Liu, X., Buck, T., & Shu, C. “Chinese economic development, the next stage: Outward FDI?” International Business Review 14,
no.1 (2005): 97–115.
52Chan Shiu Hong and Chan Yin Ting Amy, “Can China’s Outward FDI be explained by general FDI theory? An empirical study on the
determinants of Chinese OFDI during 2003-2009,” 14.

53John Child and Suzanna B Rodrigues, “The Internationalization of Chinese Firms: A Case for Theoretical Extension,” Management and
Organization Review 1, no.3 (2005): 381-410.

17
isolation, addressing in particular the relative influence of the market and governmental
interventionism in China.
General models of OFDI – political economy
General models of OFDI are principally a concern for international business (IB) and
international political economy (IPE) theorists. These economic approaches tend to categorise
the profit motives of firms as the primary driver of internationalisation based on rational
decision making and cost-benefit analysis.54 Incentives for firm internationalisation were first
comprehensively outlined through Dunning’s theory, known as the eclectic paradigm, or OLI-
Model.55 This model stipulates that firms are motivated to go abroad by three major factors,
Ownership advantage, Location advantages, and Internationalisation advantages.56 All three
advantages are considered necessary and interrelated in order for a firm to “invest abroad
properly.”57 Ownership-advantage refers to “idiosyncratic firm-specific resources and
capabilities”58 that give a firm a competitive advantage (such as its size, access to raw
materials, and/or manufacturing technology). Location-advantage addresses the question of
why firms choose to operate where they do, indicated by market attractiveness. And
Internationalisation-advantages covers the benefit to a firm of expanding abroad “through its
hierarchy rather than the market,”59 essentially the advantage of operating abroad rather than
simply exporting or franchising.
The OLI-model is most helpful in purely empirical studies due to its high applicability, simple
categorisation, and explanatory power.60 While the OLI-model provides an excellent basis on
54Keith D. Brouthers and Jean-Francois Hennart, “Boundaries of the firm: Insights from international entry mode research,” Journal of
Management 33, (2007): 395-425.
55John H. Dunning, “The eclectic paradigm as an envelope for economic and business theories of MNE activities,” International Business
Review 9, no.2 (2000):163-190. doi.org/10.1016/S0969-5931(99)00035-9

56Ibid.
57Ibid.
58Junzhe Ji, Pavlos Dimitratos, “Confucian dynamism and Dunning’s framework: Direct and modern associations in internationalised Chinese
private firms,” Journal of Business Research 66, no.12 (2013): 2375-2382, doi.org/10.1016/j.jbusres.2013.05.023.
59Ibid.
60Shujie China’s Outward Foreign Direct Investments and Impact on the World Economy, 13.
18
which to analyse why an individual firm is motivated to go abroad, and the firms’ success and
failures, it can have limited utility when applied to trends in broader outward investment flows
on a national level. This is in part due to data and time constraints, as it would require the
aggregation of each individual foreign operating firm for robust results. However, of more
concern in regards to its applicability, this model fails to account for limitations of “rationality”
at the individual firm level, particularly across different institutional and cultural
environments,61 essentially providing a ‘one-size-fits-all’ approach. Despite these constraints
the OLI model has been successfully extended to the macroeconomic (or national) level, and
forms the basis of the IDP Hypothesis.62 This hypothesis is a popular explanatory tool among
macroeconomists and is often used in comparative and developmental analysis. Like the OLI-
model it assumes a universal status.
In general, macroeconomic models support the notion that as the size of an economy increases
(GDP) so too does the share and magnitude of FDI. Therefore, as an economy develops,63
OFDI should increase both in size, and proportionality. This was first established through the
IDP Hypothesis64 which ties inward and outward FDI to a country’s economic development.
This model addresses bi-directional flows, presuming an open marketplace with few
institutional constraints, and stresses the complementarity between inward FDI and
development. Dunning articulated five stages of development and stipulated that a country’s
Net Outward Investment (NOI) – the difference between inward and outward stocks – changes
with these stages, as indicated by GDP.
In the first pre-industrial stage, local firms have not yet developed sufficient ownership
advantages to enable them to invest abroad, and the location advantages of the host country are
61Ji,“Confucian dynamism.”
62Saime S, Kayam and M. Hisarciklilar, “Revisiting the Investment Development Path (IDP): A Non-Linear Fluctuation Approach,”
International Journal of Applied Econometrics and Quantitative Studies 6, no. 2 (2009): 64.
63Beyond a particular level of advancement.
64Dunning, “The Eclectic Paradigm.”
19
considered insufficient to attract FDI; therefore, FDI inflows are due entirely to natural
resources.65 In the second stage, inflows increase as the purchasing power of the local market
grows, but domestic firms remain unable to compete globally. Once a country reaches the third
stage of development, outward investment stock grows in tandem with the deceleration of the
growth rate of inward FDI. Governments are now able to promote outward FDI in select sectors
where domestic firms have established ownership advantages. In the fourth stage, inward and
outward stock approach parity and globalising firms become multinationals. This settles in the
final stage, where NOI averages to zero. This model stipulates that as GDP rises a country will
change from a net FDI recipient to a net source of FDI before equalising in the last stage of
development. This model inherently limits the role of the state; government can merely
promote or discourage activity - it is the firm that drives change. Numerous empirical studies
validate this theory in general terms. This model is particularly relevant to western developed
economies, (Figure 1b) as there is a clear correlation between inward and outward stock
movements. This supports Dunning’s claim that in the long run NOI tends towards zero. In the
Chinese case however, the proportion of OFDI has not increased at the same rate as either
developed or developing/transitional economies, limiting the explanatory value of this model.66
By limiting institutional and cultural limitation, this model does not adequately address the
variation and complexity behind the motivations for OFDI from developing and transitional
economies. Studies have shown that many developing economies such as the China, India, and
Southeast Asian countries, began to invest in projects abroad “earlier than that would be
predicted by the investment development path model.”67 These countries invest in both
65Saime, “Revisiting the Investment Development Path,” 64.

66Kefie You, “What drives China’s Outward FDI? A regional Analysis,” BOFIT Discussion Paper, May 8, 2015,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2983029.
67Douglas H. Brooks and Juthathip Jongwanich, “Cross-Border Mergers and Acquisitions and Financial Development: Evidence from
Emerging Asia,” Asian Development Bank Economic Working Paper Series, 2011,
https://www.adb.org/sites/default/files/publication/28703/economics-wp249.pdf.
20
developed and developing economies, suggesting there are a wider range of factors that
determine the investment desirability of a particular economy and/or industry.
Numerous studies have shown that among the ‘so-called’ developmental states of East Asia
(Japan, South Korea and Taiwan) the IPD Hypothesis is not wholly appropriate. Indeed, in the
case of Japan it appears that OFDI is increasing steadily, while IFDI remains the same (Figure
1a). This would suggest that Japan is in the third stage of Dunning’s model, despite being a
well-developed economy. A number of countries, particularly the ‘Asian tigers’, similarly do
not neatly align with this model.68 Instead they form the motivation for the construction of
alternative models that seek to explain the unique motivations behind an increase in OFDI from
developing/transitional economies. In many cases these are well suited to the Chinese case.
A dominant model used to discuss the development path of Asian countries is the FGP. This
theory gained popularity in Southeast Asia in the 1960s when published by Kaname Akamatsu
to explain the rapid economic growth in Asia following the Second World War, specifically in
Japan. The model “represents a special type of dynamism” outside of vertical or horizontal
growth.69 The FGP suggests that as a country develops, in order to ‘catch up’ with other
‘leading' economies, it is necessary to export labour to low cost countries through the
centralised promotion of OFDI. This pattern will continue as production sophistication
improves, e.g. from garments, to steel, to technology. In essence, as a country develops,
increased labour costs cause an “imperative for further restructuring”70 – in other words,
seeking labour markets abroad. This model does not help describe how China has been able to
jump so rapidly from a manufacturing base to high-end technological products, but does help
explain why Chinese OFDI seeks to relocate manufacturing abroad.
68Shigehisa
Kasahara, “The Asian Developmental State and the Flying Geese Paradigm,” United Nations Conference on Trade and
Development, 2013, http://unctad.org/en/PublicationsLibrary/osgdp20133_en.pdf.
69Kaname Akamatsu, “A Theory of Unbalanced Growth in the World Economy,” in Weltwirtschaftliches Archiv, Hamburg, no.86, (1961): 196-
217.
70Ibid.
21
The limitations of both these approaches stresses the importance of considering
macroeconomic conditions specific to individual countries, which can cause discrepancies in
the relationship between OFDI and Domestic Output (DO) across both time and space. A
number of more nuanced approaches, like those through institutional economics seek to further
explain this by internalising social factors such as culture, prejudice and nationalism into the
traditional profit-maximising decisions of both individuals and firms. Institutional theory also
extends to a discussion of how a range of factors contribute to the structure of the environment
in which firms operate.
Institutional Theory
Institutional theory has increasingly been applied to explain patterns of behaviour in
international business,71 and adds valuable depth to the field. Institutionalism proudly
internalises the insights available across a plethora of disciplines, from biology to
anthropology, and examines the role of institutions and norms in the market, focusing attention
towards the role of agency and complementarity. These ideas are synonymous with the
structure-agency debate present across the social sciences While there is widespread agreement
that institutions (or structures) matter, there is also a wide disparity of views over the extent to
which they actually influence individuals (or agents) behaviour. Further, there is debate over
how much this actually matters, or impacts upon the individual’s behaviour, in particular in the
field of economic analysis.
Traditional economic theory has tended to favour downward causation, a deterministic top
down view suggesting that individuals possess no agency and are mere “puppets of social or
cultural circumstances.”72 Such views are challenged by those who argue that “institutions are
71First
expanded by Richard Scott, Institutions and Organizations, (Thousand Oaks, SAGE, 1995); and Douglas North, “Institutions,” Journal
of Economic Perspectives 5, no.1 (1991): 97-112; and Douglas North, “Institutions,” Journal of Economic Perspectives, 5 no.1 (1991): 97-112.
72Geoffrey M. Hodgson, “What is the Essence of Institutional Economics?” Journal of Economic Issues 34, no2. (2000): 326.
22
the outcome of individual behaviour and habitation.”73 This approach posits that institutions are
both dependent upon, and moulded by individuals. Therefore, power is not simply coercion.
Instead of power being of one over the other, it is the nuanced way through which both
institutions and individuals shape one another. For example, the decisions of economic
institutions, such as MOFCOM, are influenced by firm’s objectives and actions both directly
and indirectly. Consequently, individuals and firms evolve in a delineated way, and their
preferences cannot be easily predicted, generalised or to assumed to conform with market
incentives. This is in contrast to the neoclassical economic approach which basis models on
such an assumption and argues that learning is merely the realisation of pre-existing ‘blueprint’
information or the “Bayesian updating of subjective probability estimates in light of incoming
data.”74
While this distinction posited by institutionalists is important, it makes little difference when
actually translated to economic theory. Neoclassical economic approaches are widely criticised
for not allowing for the evolution or ‘learning’ of the individual as a driver of change over time,
but this critique fails to acknowledge that as this data ‘blueprint’ is not a known quantity and
the factors that drive change (be they institutional or individually driven) do not affect the
calculation of the probability estimates. Consequently, the individuals’ preference function,
even if it accounts for cultural and institutional variables is in essence ‘eminently’ conceived.75
The focus remains therefore on rational choice and cost-benefit analysis, which can similarly
include cultural preferences.
Whilst limited in this regard the questions raised by institutional economists have wide value
when used to address causal mechanisms in greater detail. The ideas of Veblen and Galbraith,
when applied to longer-term analysis (which is better able to consider change over time, and
73Ibid;and Veblen The Vested Interest and the Common Man, (New York: B.W Huebsch, 1919).
74Hodgson, “What is the essence of institutional economics?” 327.
75Gary Becker, Accounting for Tastes, (Cambridge: Harvard University Press, 1998)
23
therefore relevant to this thesis) illustrate that the interaction and co-dependency of the agent-
structure relationship can provide valuable insight to otherwise more rigid economic analysis.
In particular, into how it is that the state is able to affect firms’ behaviour.
Perspectives on Chinese OFDI
A vast majority of research on Chinese OFDI adopts a firm-centred approach, focusing on
those incentives first addressed by Dunning, to determine investment motivations. In particular,
Location-advantage is examined in close detail.76 Many of these studies are limited to a
logistical breakdown of economic drivers, rather than a consideration of the motivations behind
them. This can limit the depth of analysis, imposing a realist lens on all major policy
developments. Consequently, such observers see OFDI as “driven more by a readjustment in
China’s economic growth model than by political considerations.”77 This ignores the flexibility
and fluidity of political considerations and how these interact with agents and the broader
environment over time. A number of other studies seek to compare the growth pattern of
Chinese OFDI against established economic models, such as the eclectic paradigm, or the FGG,
and supplement their findings through comparative analysis with industrialised countries and
the Asian developmental states.78
The debate concerning the origins, direction, and constitution of Chinese OFDI is one largely
embedded within wider debates concerning the nature of the Chinese Government’s broader
integration with the global economy, and whether it is the government or the market that
dominates. Perspectives can be loosely categorised into two understandings. Those who take a
statist approach who argue that all OFDI is in essence a state-led investment, under the absolute
control of the CCP. And those who argue that the role of private or market-forces are of greater
76See Peter J Buckley, L Jeremy Clegg, Adam R Cross, Xin Liu, Hinrich Voss and Ping Zheng. “The determinants of Chinese outward foreign
direct investment,” Journal of International Business 38, no.4,(2007): 499-518 and Wenjie Chen, Heiwai Tang, “The Dragon is Flying West:
Macro-level evidence of Chinese Outward Direct Investment,” Asian Development Review 31, no. 2 (2014): 109-140.
77Rosen, “China’s Changing Outbound Foreign Direct Investment Profile.”
78Hong, “Can China’s Outward FDI be explained by general FDI theory?”
24
importance, both in setting the institutional environment in which firms operate, and in
determining the constitution and direction of investment projects.
To those that champion the role of the market, the decline in OFDI in 2017 is a market
correction to what is determined as excessive and ill-considered rapid purchasing of foreign
assets by Chinese firms fuelled by cheap credit from Chinese banks. And the rapid decline in
OFDI illustrated the firms’ quick response to profit incentives. Therefore, capital controls were
initiated by the government, in response to “irrational investment.”79 A statist approach would
similarly support this conclusion that the Government is wholly responsible but would question
the rationality.
Both arguments in their absolute form are critiqued by Breslin,80 as mis-conceptualising the
problem, and overlooking the complementary nature of government organisations and market-
forces in the first place. Instead, Breslin argues that one should examine the way they evolve
together,81 urging a more institutionalist view. A number of scholars of political economy share
this view. Su Changhe and Chen Zhimin identify that the internalisation of market-orientated
norms by China’s leaders have altered China’s foreign strategic and economic policy,82
suggesting that when analysing patterns of behaviour, it is near impossible to isolate a sole
determining factor. Instead, scholarship should focus on the relationship between various
forces, the processes of institutions, and the role norms play.
Another limitation of the statist perspective is that it overlooks the role of organisations and
norms, instead stressing the power of the CCP in setting the institutional environment in China.
They assert that “given the extent of state control of the Chinese economy the institutional
environment is likely to have had far-reaching and profound effects on the internationalisation
79“China FDI falls 1.2%, ODI down 44.3%” Xinhua, August 16, 2017, accessed September 19, 2017,
http://www.chinadaily.com.cn/business/2017-08/16/content_30672704.htm.
80S. Breslin, China and the Global Political Economy, (London: Palgrave, 2009)
81Ibid.
82Changhe Su, “China in the World and the World in China: Domestic Impacts of International Institutions on China Politics,” in David Zweig
and Zhiming Chen, China’s Reforms and International Political Economy, (London: Routledge, 2007).
25
decision of Chinese firms,”83 denying the firm agency. While this view recognises the
“regulatory framework for OFDI (notably government policies, laws and regulations) as a
determinant of the country’s growing investment outflows,”84 they view this regulatory
framework as defined within the purview of government forces, uncompromisingly driven
towards the national interest. In short, the CCP dictates the investment decisions of firms
through direct control and intimidation, and a regulatory framework which overrides market-
incentives.85 Such a perspective tends to view SOEs as puppets of the Chinese State,86
intrinsically driven by the government’s political rather than economic objectives. The state’s
heavy interference with the domestic market and foreign trading conditions further supports
this conclusion. Fan Yongming argues that the state itself is in complete “control of the
country’s foreign trade behaviour,”87 in no small part due to the lack of agency exhibited by
internationalising SOEs. This view is more popular among Western observers, who argue that
“in China’s highly controlled economic system, the Government’s policy and strategy have
always been among the most significant determinants in explaining the development of China’s
OFDI.”88 In particular, such a perspective tends to be popular among nationalist newspapers
hostile to Chinese expansion abroad and sees the globalisation of companies as a tool “to build
greater economic power for China.”89
Conversely, some scholars argue that SOEs and POEs operate much as firms would in an open
market-economy, positing that the firms’ maximisation decisions are either immune from the
institutional environment engineered by the CCP or they are effectively operating in a market
83Buckley et al, “The determinants of Chinese outward foreign direct investment,” 501.
84see, Buckley et al, “The determinants if Chinese Outward Foreign Direct Investment.”; and Lin Cui and Fuming Jiang, “State ownership and
FDI ownership of Chinese firms.”
85Popular because it comes from a neo-liberal perspective and justifies restrictive trade policies against China.
86Curtis Milhaupt and Wentong Zheng. “Beyond Ownership: State Capitalism and the Chinese Firm,” Georgetown Law Journal 665, (2015),
http://scholarship.law.ufl.edu/facultypub/696.
87David Zweig and Chen Zhemin, China’s Reform and International Political Economy, (New York: Routledge 2007), 7.
88“China’s Outward Direct Investment,” OECD Investment Policy reviews: China 2008, ISBN 978-92-64-05366-3.
89“It’s a Wanda-ful life,” The Economist, February 12, 2015, accessed June 11, 2017, https://www.economist.com/news/business/21643123-
chinas-biggest-property-tycoon-wants-become-entertainment-colossus-its-wanda-ful-life.
26
dictated by international norms.90 Consequently, general economic models of the firm are
applicable to the Chinese case, and through these OFDI can be explained. Instead of the CCP
being in complete ‘control’ the global market dictates the direction of policy and reform. Such
scholars stress the growing role of POEs in both OFDI and DO,91 to show “that the motives of
Chinese firms going abroad are not state-driven, but mostly economic.”92 Markets are
considered to affect the government in similar ways, and consequently the CCP is beholden to
market fluctuations and forced to adjust policy accordingly.
The classification of SOEs and POEs plays an important role in driving these two perspectives
and can be used to argue converse truths. For example, Maggie Zhang argues that the private
sector “led the way for mainland China”93 with private firms such as Wanda Group and Huawei
initiating outward investment. By contrast, a number of observers’ stress that these firms are
heavily monitored by the government and by their very nature of being Chinese are beholden to
the government. Indeed, some studies have gone so far as to argue that SOEs can, in some
cases, operate with greater autonomy that POEs, citing widespread corruption in SOEs as
evidence of the limitations of “the Chinese government, as a controlling shareholder.”94 The
inability of the government to successfully reign in SOEs investment in the real estate sector
despite specific orders in 2010 demonstrates the autonomy exercised by a number of SOEs.95
As POEs are subject to the same institutional pressures as SOEs and are forced to pursue
political strategic alliances to gain a strategic advantage through closer ties to party organs, the
line between public and private is blurred. Indeed, Huawei relied on State funds to go global.
90Milhaupt “Beyond Ownership: State Capitalism and the Chinese Firm.”

91Gang Fan, “The role of State-Owned enterprises in the Chinese Economy,” China Focus, https://www.chinausfocus.com/2022/wp-
content/uploads/Part+02-Chapter+16.pdf.
92Tobius Brink, “Chinese firms’ ‘going global’: Recent OFDI trends, policy support and international implications,” International Politics 52
(2005): 667, doi:10.1057/ip.2015.19.

93Maggie Zhang, “Private sector leads China’s offshore investment drive,” South China Morning Post, September 22, 2016, accessed March
11, 2017, http://www.scmp.com/news/china/economy/article/2021753/private-sector-leads-chinas-offshore-investment-drive.

94“China FDI falls 1.2%, ODI down 44.3%,” Xinhua.
95Only 25% of SOEs had complied by 2012, despite specific orders from SASAC in March 2010.
27
Therefore, judgement on the way SOEs and POEs behave can influence both the conclusions
reached, and the perceptions on the market more generally.
Both these perspectives acknowledge the presence of institutions but see them as secondary to
the role of either the State or the market. These more absolutist perspectives arguably better suit
the pre-2002 era,96 where the CCP held far firmer control over all aspects of the economy, and
the internal structure and the running of firms themselves. After 2002 and the opening up of
China through the WTO, the Government hurried through a number of market reforms
amplifying the role of private forces domestically. The perspective that globalisation, and neo-
liberalising reform are a one-way street, further emboldened this absolutist perspective
supporting the role of private, or market forces. Both these perspectives are in essence top
down and fail to account both for the complicated and interrelated nature of economics and
politics, and the nuanced nature of the firm.
A number of scholars have built in institutional approaches to address these limitations. In so
doing, policy changes and norms become explanatory variables rather than static externalities.
This is pertinent in the Chinese case, given the complicated and evolving role of the CCP over
a short period of time. A majority of these studies address the role of external institutional
pressure on Chinese firms’ decisions to internationalise, rather than domestic institutions.97
Richard Scott finds that firms “driven by their self-interest … influence institutional
processes.”98 This principle, when applied to the relationship between domestic institutions and
firms, indicates that there is reciprocal causation, whereby the government behaves differently
due to private agency and private agents in turn behave differently due to governmental
regulation. This suggests that SOEs and POEs have both more and less in common that often
96
Zweig, China’s Reforms and International Political Economy, 11.
97
Tatiana Kostova, Kendall Roth and Tina Dacin, “Institutional Theory in the Study of Multinational Corporations: A Critique and New
Directions,” The Academy of Management Review 33, no. 4 (2008): 994-1006.
98
Scott, Institutions and Organizations.
28
assumed, and that both maintain a certain level of political and economic agency regardless of
their official affiliation with the Party. Consequently, the determinants of OFDI are considered
as an interrelated amalgamation of both market and government objectives. This paper seeks to
classify these objectives and actors to then assess their influence over time.
29
PART 2 – PRODDING AND PROBING
What motivates Chinese firms to invest abroad?
Chinese firms are incentivised to invest overseas by both domestic and international factors. As
China shifts from an investment-driven developmental model to a consumer-led growth model
its engagement with foreign markets also transforms. Chinese companies are increasingly
seeking foreign markets for more diverse reasons; from excess capacity (in particular in the
infrastructure industries) to technological advancements and access to branded goods. While
the international economic environment influences how and where Chinese companies invest
abroad, it does not form the focus of this study. These concerns are almost entirely outside of
the control of Chinese Multinational Corporation’s (MNCs) but are considered on a case by
case basis to explain data abnormalities, and fluctuations where appropriate.
The globalisation of Chinese companies is driven by both government and business. In some
cases, the objectives of the two overlap, particularly, when the government’s priorities are to
maximise growth and to enhance the size and sophistication of the economy. There are also a
number of objectives unique to both. These can in some cases conflict, which provides insight
into the relative impact of government and business influence. Additionally, overlapping
interests may be of higher priority to one party than the other. For example – the government’s
commitment to secure a stable supply of natural resources, is also beneficial to the wider
market and particular industries, but is key government policy. The major interests driving
shared, and distinct policies are outlined, and, while not exhaustive, presents the most dominant
motivations that relate to Chinese globalisation.
Government and business objectives
30
To the Chinese government, OFDI serves two primary objectives “to help Chinese firms
become more competitive internationally, and to assist the country in its development effort.”99
This translates into the government supporting Chinese companies to increase their overall
profit by entering new markets abroad. Consequently, a wide number of imperatives that lead
companies to seek profits abroad are, in general terms, supported by the government.
As China’s economy develops from its manufacturing base to one driven by consumer-demand
the impact on OFDI is twofold. It has led some firms to seek more advanced markets to “move
up the value chain’ into higher value-added products,”100 and others to expand into developing
markets to offset declining profits at home. Increasingly led by private entrepreneurs (or POEs
rather than SOEs), Chinese companies are buying up a range of assets, from luxury goods and
entertainment such as “American film studios and French fashion houses,”101 to chip makers
and crop technology in order to have access to more advanced technologies and established
brands names. Aside from an opportunity for growth, this also allows Chinese companies to
better meet the growing sophistication of domestic consumption demands. By contrast, many
large SOEs are expanding enthusiastically into developing markets to offset both variations in
domestic demand, and the growing costs of domestic production. This is a natural consequence
of China’s development and a trend highly unlikely to reverse. For industrial giants, such as
Sinopec, Petrochina and Chinese National Offshore Oil Corporation (CNOOC), declining
profits at home provided a strong incentive to go abroad.102 This is driven by overcapacity in
some particular industries and China’s relative skill in infrastructure industries.
Investment in, and access to, natural resources is a lucrative business. Around one-fifth103 of
global manufacturing trade is in natural resources, and China’s natural supplies do not meet
99Victor Chen and Karl Sauvant “China’s Regulatory Framework for Outward Foreign Direct Investment,” China Economic Journal 7, no.1
(2014): 141.
100Tobias ten Brink, “Chinese Firms ‘Going Global’,” 667.
101“China Deal Watch,” Bloomberg, updated weekly, https://www.bloomberg.com/graphics/2016-china-deals/.
102Brink, “Chinese Firms ‘Going Global’,” 671.
103“World Trade Statistical Review 2016,” World Trade Organisation, https://www.wto.org/english/res_e/statis_e/wts2016_e/wts2016_e.pdf.
31
domestic demand. A stable supply of natural resources is a top priority for the Government. As
a net-importer, China’s manufacturing sector is dependent upon them. This makes companies
who supply the domestic market with natural resources some of the largest in China. The top
three non-financial firms ranked by value of OFDI stock in 2013 were in primary industries104
and are state-owned. Securing access to these resources can be done through cross-border
investment where Chinese companies acquire foreign businesses to secure supply. For
example, CNOOC purchased Nexen, a Canadian oil firm in 2012 for $17 billion which is an
important strategic industry for the government, and an immensely profitable one for the firm.
The broader macroeconomic environment and international developments are additional factors
that similarly affect the state and firm decision making alike. Economic downturns in foreign
markets can provide a market opportunity for Chinese firms. For example, the GFC in 2008 left
a funding gap of US$8 billion in Asia over the following decade, which sparked China’s
regional OFDI.105 As Chenl Li and Xiaobo Zhang argue, “There is no doubt that the rising
global demand for capital funds pushes China to spread its capital across the world.”106 Global
trade policy also impacts on OFDI flows, Free-trade Agreements encourage bilateral flows, and
the ascension of China to the WTO in December 2001 caused OFDI to increase six-fold. The
Chinese Government has continued to actively support overseas investment through economic
policy and diplomatic efforts, helping firms to increase their profits abroad and seize on market
opportunities as a result of global developments.
Government objectives
Unlike business, the CCP does not seek to simply maximise profit. Indeed, in the current era
the Chinese government has committed itself to slower, stable, more equitable growth. This
104China Petrochemical Corporation; China National Petroleum Corporation; and China National Offshore Oil Corporation.
105Cheng Li and Xiaobo Zhang, “China as a Global Investor: Recent Trends and implications for Canada,” China Institute Occasional Paper
Series 3, no.1 (2017): 9, https://d1pbog36rugm0t.cloudfront.net/-/media/china/media-gallery/research/occasional-papers/globalinvestor-
201701.pdf.
106Ibid.
32
means that the government has interests in both promoting and limiting OFDI. This occurs
when certain policy objectives are deemed more important that aggregate economic growth, or
when the government disapproves of the form of outward investment taking place.
Unlike the private sphere the government is able to affect change through fiscal and monetary
policy. The CCP, in contrast to governments of many developed countries, plays a much
weightier role in monetary policy (through short-term interest rates) and adopts more intrusive
fiscal policy (such as greater tax incentives or disincentives). Through these, the government
seeks to create an environment favourable to Chinese business that also supports government
priorities, such as securing access to offshore natural resources for energy security. Firms
operate within an environment heavily affected by the government, either benefiting from
preferred industry status, or missing out. Therefore, domestic economic objectives impact on
OFDI constitution and distribution more than in many other countries.
The desire to diversify foreign reserves and promote the internationalisation of the renminbi107
has driven the CCP to encourage OFDI. This trend accelerated dramatically following the GFC
of 2008. Thanks to rapid industrialisation and trade expansion from the late 1980s, China
accumulated huge foreign exchange reserves, of which more than one third is in US treasury
bonds. China is the largest holder of these bonds in the world.108 These bonds yield relatively
low returns,109 and since the GFC are considered relatively unsecure. This sparked a “dramatic
upturn in FDI and aid,”110 as the government sought to diversify their foreign holdings to
mitigate risk. Furthermore, the excessive stockpiling of currency reserves has negative effects
on profitability and poses currency risks – in essence they stifle effective, or highly profitable,
investment. Consequently, through the loosening of capital controls and streamlining approval
107The renminbi is the official currency of the Peoples Republic of China (PRC) also referred to as the yuan.
108Jethro Mullen, “China is America’s biggest creditor once again,” CNN Money, August 16, 2017, accessed January 15, 2017,
http://money.cnn.com/2017/08/16/investing/china-us-debt-treasuries/index.html.
109Kevin P. Gallagher and Amos Irwin, “Exporting National Champions: China’s Outward Foreign Direct Investment Finance in Comparative
Perspective,” China and the World Economy 22, no.6 (2014): 18.
110Chen, “China’s Regulatory Framework,” 141.
33
processes for foreign investment, the Chinese government is able to successfully encourage
OFDI. A policy of maintaining relatively low renminbi further improves exporters’ advantages.
Despite the wide-reaching economic benefits of outward investment, the government has a
number of additional considerations, both economic and political, that motivate policies to limit
or heavily steer investment. Economically, the government may wish to “conserve foreign
exchange and prioritize domestic lending,”111 or to strengthen their own control over the rate of
internationalisation of the financial market through the heightening of capital controls. This can
in part be attributed to a lack of faith in the market. Indeed, the 2015/16 Chinese stock market
turbulence sent ‘jitters’ through Chinese regulators, revealing their shaky grip of the monetary
sector, which amplified the push to strengthen central control at the expense of the market.
An additional consideration is the government’s desire to rein in “inefficient spending,”112 in
particular of a number of large SOEs who have made spurious investments resulting in net
losses. Financed largely by governmental loans, this naturally concerns the government. The
government also wishes to improve the standards and practices of MNCs abroad in order to
decrease the negative publicity that tarnishes Chinese companies and the state more broadly. In
particular Chinese companies have been accused of not complying with domestic standards,
and solely employing Chinese workers, thus limiting the value to the investor country. For
example, despite the official enthusiasm for the project, the presence of a number of Chinese
workers sparked protests in Kazakhstan, due both to their occasional sub-optimal behaviour,
and the perception of Chinese money as predatory.113
It is important to note here, that while economic growth is often considered a pillar of the CCPs
legitimisation strategy, under Xi Jinping China is increasingly seeking to diversify its sources
111Gallagher, “Exporting National Champions,” 4.

112“Chinese clubs curb import indulgence,” China Daily, January 1, 2018, accessed January 22, 2018,
http://europe.chinadaily.com.cn/a/201801/19/WS5a61522ca3106e7dcc135454.html.
113Catherine Putz, “What’s Next for the Belt and Road in Central Asia,” The Diplomat. May 17, 2017, accessed January 10, 2017,
https://thediplomat.com/2017/05/whats-next-for-the-belt-and-road-in-central-asia/.
34
of legitimisation, away from economic growth and towards cultural-ideological foundations.114
This further strengthens the claim that the government does not seek to purely maximise
profits, as it is assumed businesses do in the short and long-run.
Distinct firm objectives
There are a number of objectives held by individual firms which are not naturally shared by the
government. In particular, enthusiasm for broader political reforms that would help a number of
firms develop more economically in the long-term. These include greater liberalisation of
market access abroad, more transparency in access to loans and a simplified investment
process. Domestically, firms are also likely to come into conflict with the government’s
interests as they seek legal reform to ensure higher protection for intellectual property (IP).
Additionally, firms that have benefited from the government subsidies seek to retain those
favourable conditions where possible – for example, fuel companies. Such policies enable some
firms to increase outward, often at the expense of others.
To a number of firms, ‘going out’ is necessary due to intense domestic competition. This drives
firms to increase their competitive advantage by going abroad, rather than aiming to achieve an
increase in their domestic market share. This is in some cases a product of export-orientated
developmental policies which have led to severe competition and overcapacity of some
products in the domestic market, “as is the case with China’s home appliance sector.”115 Thus,
domestic economic policy can force firms abroad out of sheer necessity.
There are a number of distinct, advantageous, profit motives of the globalising firm such as;
cheaper labour; tax benefits; lower levels of regulation; and greater access to particular
countries or industries, which may not align with the priorities of the CCP. As “the motives of
114Bruce Gilley and Heike Holbig, “Reclaiming Legitimacy in China,” Politics & Policy 38, (2010): 395-422.
http://www.web.pdx.edu/~gilleyb/ReclaimingLegitimacyInChina.pdf
115Barry Van Wyk, “Chinese OFDI on the world stage,” Pambazuka News, September 17, 2009, accessed July 10, 2017,
https://www.pambazuka.org/global-south/chinese-ofdi-world-stage.
35
Chinese firms going abroad are mostly all economic,”116 the need for structural economic
advancement in order to have greater and freer transparency and information runs in direct
conflict with the government’s desire to maintain its robust control. Firms often exert pressure
on the government to advance various privatisation reforms, through both direct (business
consultation meetings) and indirect means (public). The firms’ internationalisation desires
closely align with, and are generally explained by the Dunning’s eclectic paradigm, however
the reality in the Chinese case is that the firms’ desires are not uniformly realised. In real terms,
they are inconsistently reflected in the makeup and constitution of outward investment, due
largely to how and why the Government intervenes in the market.
How the government pursues and defines its objectives
Key administrative actors (who)
The CCP uses a range of administrative and political bodies to affect OFDI. Through firmly
steering the legal and regulatory environment in which firms hoping to internationalise operate,
and by directly intervening in the investment approval process, the government actively distorts
the market.117 The government actions their fiscal regulations principally through the State
Council, the Ministry of Commerce (MOFCOM), the State Administration for Foreign
Exchange (SAFE), the People’s Bank of China (PBC), and the National Development and
Reform Commission (NDRC).118 Understanding how they operate and relate to one another is
critical to assessing their weaknesses and the limitations of market socialism with Chinese
characteristics more generally.
The State Council oversees many of the bodies that impact OFDI and serves a coordinating role
in the pursuit of national economic development plans. The finer details of these policies often
116Brink,“Chinese Firms ‘Going Global’,” 667.

117HinrichVoss, Peter J. Buckley, and Adam R. Cross. “As assessment of the effects of Institutional Change on Chinese Outward Direct
Investment Activity,” in China Rules: Globalization and political Transformation, ed. Ilan Alon, (New York: Palgrave Macmillan, 2009): 140.
118Ibid.
36
originate from subordinate organisations (e.g. MOFCOM) but the overall vision is developed
by the State Council. MOFCOM has arguably the most power in terms of policy development
to guide and influence the scope and direction of Chinese OFDI both indirectly and directly.119
Indeed, it was MOFCOM predecessor MOFERT that was the first to issue regulation on
Chinese OFDI.120 The National Development and Reform Commission (NDRC) works in
cooperation with, and under the purview of MOFCOM, to design “strategies, goals and policies
to balance and optimise” China’s OFDI.121 The NDRC is directly involved with the approval
process for Chinese OFDI projects.
The PBC overseas both domestic monetary and financial policies in addition to foreign
exchange controls and the relationship with foreign international financial organisations, such
as the IMF. This gives the PBC the unique ability to arbiter one function against the other
which has “helped the PBC to fulfil a number of domestic monetary objectives.”122 In short, the
PBC can leverage international engagement in the pursuit of domestic objectives. This provides
the state with a large amount of central power. The State Administration of Foreign Exchange
(SAFE) has been overseen by the PBC since its establishment in 1982 and administers the
usage and flow of foreign exchange.123
Theoretically, each outbound investment project has to pass a thorough a two-stage process
involving all these institutions.124,125 Initially a firm applies to SAFE to use foreign exchange
earnings abroad and then to MOFCOM or the NDRC for the secondary approval of the project
119Ibid, 143.
120Y. Zhang, China's Emerging Global Businesses: Political Economy and Institutional Investigations, (Palgrave Macmillan: Basingstoke,
2003).
121Munro S. and Yan, S. “Recent government reorganisation in China.” China Law & Policy – Newsflash, O’Melveny & Myers LLP (2003).
122Ibid, 144.
123Yang Zhang, China’s Emerging Global Businesses: Political Economy and Institutional Investigations, (Palgrave Macmillan: Basingstoke,
2003)
124Ye G, “Chinese transnational corporation,” Transnational Corporations, no. 2 (1992): 125-133, and; Tseng, C-S. & Mak, S. “Strategy and
Motivation for PRC outward direct investment,” in Economic and Social Development in South China, ed. S. MacPherson & J.Y.S. Cheng.
(Chaltnham: Edward Elgar, 1996): 140-161.
125The involvement and responsibilities of the government authorities have varied since 1978 in accordance with a gradual liberalisation and
decentralisation of the approval process. This process mirrors the general pattern of economic reform in China, which is generally associated
with decentralisation and a careful introduction of market forces.
37
business case.126 This process can be cumbersome and time consuming but ensures that firms
need to have positive relationships with multiple Chinese agencies, this favours State-Owned
Enterprises, and subjects them to greater oversight
One further agency exclusively affects non-financial SOEs. Initiated in 2003 by the State
Council, the State Asset Supervision and Administration (SASAC) is charged with representing
the government in State-Owned Enterprises (SOEs). Although the State remains the ultimate
owner and investor in SOEs,127 the SASAC was tasked with appointing upper managers to
senior positions in order to exert direct control,128 suggesting the need for greater supervision,
in particular for internationalising firms. Indeed, not all SOEs are directly controlled by
SASAC, but all of China’s largest State-Owned MNCs are.129 The objects of the SASAC
therefore closely align with SOEs OFDI activity and provide an additional medium through
which the government can observe and impact firms’ behaviour.
State methods (how)
Governments’ possess a number of policy instruments through which they can affect the
environment in which firms make their outward investment decisions. In China, where high
levels of state-led intervention in the market is normalised, these tools are particularly diverse
and effective. The power of the central government is such that a mere oratorical commitment
to further liberalisation policy can greatly enhance the attractiveness of foreign expansion and
change perceptions.130 Indeed, the historic dominance of large SOEs leading OFDI is
illustrative of the heavy hand of the government. Regulations and reforms serve to both
encourage and discourage outward investment.
126J.-M, Deschandol, T. Luckock, “Tips for foreign vendors in Chinese M&A,” International Financial Law Review 24, no.1 (2005): 31-32.
127Ibid.
128Voss,“An assessment of the Effects of institutional change,” 147.
129Examples include Chinese National Offshore Oil Cooperation (CNOOC), China National Petroleum Corporation (CNPC), Sinochem
Corporation, and China State Construction Engineering Corporation.
130Buckley, “The Determinants of Chinese outward direct investment,” 59.
38
The CCP can render exporting more attractive through the manipulation of interest and
exchange rates.131 China is frequently accused of unfair currency manipulation,132 artificially
lowering the value of the renminbi to encourage exports. Interestingly, this trend appears to
have reversed in recent years, and the renminbi may now in fact have an inflated value.133 A
number of wider domestic policies, not so directly linked to foreign trade policy, can also
greatly impact the firms’ profit calculations. For example, a nominal commitment to industry
specific modernisation can enable certain firms to justify large global expansion underneath the
guise of research and development investment (R&D). Such industry specific or locational
support134 distorts the cost-benefit analysis of firms, favouring some at the expense of others.
This can encourage firms to go abroad due to traditional economic factors such as economies of
scale, or in order to move up the value chain. In such cases, private interests are, to some
degree, state engineered.
Some governmental policies unintendedly push firms to go abroad. Political uncertainty can
drive capital outflow as firms are incentivised to diversify where possible through OFDI.135 For
example, questionable IP protections at home can encourage firms to operate in markets where
legal regulation is more supportive of their particular needs. And caps on production can push
firms to operate abroad due to factors such as overcapacity. In order to encourage outward
investment in a holistic manner the government pushes to simplify the internationalisation
approval process through reforming the five principle bodies.136
The government also actively discourages firms to invest abroad and acts through these same
bodies to do so. Tightening the approval process and/or access to foreign funds serves to curb
131You, “What drives China’s Outward FDI?”

132Tim Worstall, “Yes, China Is A Currency Manipulator And Their Owning US Debt Doesn’t Matter,” Forbes, October 9, 2015, accessed
September 1, 2017, https://www.forbes.com/sites/timworstall/2015/10/09/yes-china-is-a-currency-manipulator-and-their-owning-us-debt-
doesnt-matter/#1b2342e754e1.
133Eduardo Porter, “Trump Isn’t Wrong on China Currency Manipulation, Just Late,” The New York Times, April 11, 2017, accessed September
1, 2017, https://www.nytimes.com/2017/04/11/business/economy/trump-china-currency-manipulation-trade.html.
134Wang, China’s Outward Foreign Direct Investments, 16.
135Ibid.
136MOFCOM, SAFE, PBC, NDRC and SASAC.
39
investment in general. The government can also seek to deter firms from investment in
particular industries or countries through indirect and direct policy. This can be both
economically and politically motivated. China has used economic sanctions to punish Taiwan
and South Korea in the past,137 and occasionally targets particular industries to illustrate a
point. This often impacts importers more heavily than exports but illustrated the government’s
willingness to pursue political objectives at the expense of firm and market interests. Indirectly,
domestic regulation can encourage firms to remain within the domestic market. The desire for
China to develop into a consumer driven economy indirectly encourages a decline in net
outward investment in order to meet domestic needs.
The ability of the state to engineer outcomes from these policies is indicative of their success,
and the speed with which they are achieved gives us insight into their efficacy and
enforceability. While notable patterns are explored through an historic analysis of China’s
outward investment policy, two key elements are already clear. Firstly, the degree to which
policies are consistent, rather than distinct from private interests is a factor, as is the relative
strength and commitment of the government’s policy as it relates to central objectives. This
paper will now consider the general trends in the central government’s motivations and
objectives over time.
A brief history of China’s globalisation
Before the opening up and reform era in 1979, Chinese markets were closed to the world. From
a policy perspective, the development of China’s OFDI can be divided into three major periods,
from 1979-1991, 1992-2001, and 2002 onwards. These periods are marked by distinct political
and regulatory shifts at China’s behest. Global events, such as the Asian Financial Crisis (AFC,
1997) and the GFC, 2008 also had a role in affecting OFDI throughout this period, as they
137Kristian McGuire, “Dealing With Chinese Sanctions: South Korea and Taiwan,” The Diplomat, May 12, 2017, accessed September 30, 2017,
https://thediplomat.com/2017/05/dealing-with-chinese-sanctions-south-korea-and-taiwan/.
40
altered the international environment in which China was operating. Their impacts were of
varying severity, but both illustrated the volatility of international markets, the GFC, rather than
the AFC, had far greater impact on China’s OFDI in part due to the greater integration China
had with global markets at the time, and new-found economy capacity to take advantage of
declining global prices. This section will describe these three distinct periods and consider the
relative strengths of governmental policy and the role of the market in OFDI constitution.
1979-1991
The Beginning
China’s reform and opening-up, or Open-Door Policy (1979) dramatically altered China’s
economic strategy forever, leaving behind its communist doctrine of self-sufficiency to become
an active participant in the global marketplace. For international trade and investment policy
this meant abandoning autarky138 and instead aiming to establish a domestic economic
environment favourable to FDI in order to spur economic growth. In contrast to pre-1979,
Chinese companies were also encouraged to invest internationally. Rules and regulations
concerning Chinese firms changed significantly; enterprises were now allowed (if able) to
establish foreign affiliates.139 This remained incredibly rare however, due to the limited nature
of these reforms, and the relatively low capacity of Chinese firms at the time. Indeed, by 1986,
there were only 113 non-trade Chinese enterprises investing abroad, with a total accumulated
foreign stock of US$ 150 million. This is consistent with IDP analysis, which has found that
long periods of inward investment must precede the capacity building that allows domestic
firms to internationalise. This is illustrative of the way IDP theory ties economic growth to the
necessary levels of inward investment and discounts domestic capacity building, and the power
138The quality of being self-sufficient and not engaging in trade.

139Yang Zhang, China’s Emerging Global Businesses: Political Economy and Institutional Investigations, (Palgrave Macmillan: Basingstoke:
2003).
41
a central government can wield. Throughout this period, it is clear that the central authorities
retained firm and direct control over the market and foreign investment activities.
Although foreign enterprises were now allowed to invest abroad, few had the capacity or
indeed the political support to do so. Reform itself remained severely limited. Despite being
one of the thirteen key official policies for the opening up of the economy proclaimed by the
State Council in 1979, the “setting up of enterprises overseas,” (chugou ban qiye), remained
highly restricted.140 This is in part due to the lack of a coherent framework regulating overseas
investment. All decisions on overseas investment projects had to be made by the State Council,
which approved projects on a case-by-case basis. Furthermore, during this time the State
Council established large strategic State-Owned Enterprises (SOEs), which were run
principally to serve political, not economic objectives.141 The limited level of Chinese OFDI
that was approved was entirely dominated by SOEs. The government thus influenced OFDI
directly from within each firm, and indirectly through the control of investment flows through
fiscal tools. Investment could only be made with foreign funds, of which there were very little,
and domestic re-investment for the purpose of development was considered the priority. This
meant that access to foreign funds was entirely at the government’s discretion, and no level of
domestic wealth accumulation could buy the ability to invest offshore.
The institutional environment further weakened Chinese firms’ desire to globalise. The State
Council established a retention scheme, whereby exporting firms were only allowed to hold a
certain amount of foreign exchange earnings, the rest was returned to the government. This was
consistent with the government’s macroeconomic priority of growing their foreign exchange
stocks, rather than investing abroad.142Consequently, the growth rate of OFDI stocks remained
140Zhang, China’s Emerging Global Businesses.

141“China’s Outward Direct Investment,” OECD.
142Guo Jinlong, Han Shengjun, “Reforms of China’s Foreign Exchange Regime and RMB Exchange-Rate Behavior,” Chinese Economy 37, no.
2 (2004): 76-101. Taylor and Francis Ltd.

42
low throughout this time and were mainly located in industrialised countries.143 International-
Joint Ventures were the preferred form of internationalising.
In the mid-1980s, the government moved to ease restrictive policies governing China’s OFDI
by introducing The Notice about Principles and the Scope of Authority for Examination and
Approval of Establishing Non-Trading Enterprises in Foreign Countries, Hong Kong and
Macao (1984) and the Interim Regulations on the Administrative Measures and Procedures of
Examination and Approval of Establishing Non-Trading Enterprises Abroad (1985). These
regulations aimed to standardise the approval process and extended the right to apply for
permission to invest abroad from just trading companies to SOEs more generally. MOFCOM
nominally extended these reforms to POEs also, however it was not until 1988 that private
property was first defined and not until 1999 that its legal status was formally recognised. Thus,
despite their inclusion, the reform did not spark POE outward investment due to a lack of
economic security and/or support.
In a move towards greater efficiency, case-by-case approval was now based on market
performance measures - profitability was introduced as an important factor to consider in the
approval process. Theoretically, any legal-entity enterprises which could demonstrate access to
sufficient capital, adequate technical and operational know-how, and had an agreement with a
suitable overseas joint-venture partner was now able to achieve internationalisation. These
reforms were complemented by a policy shift whereby the government moved to encourage
export-led growth. Coupled with the increased sophistication and the growing capacity of
Chinese firms, OFDI grew rapidly, the number of international investment projects growing
from 115 in 1985, to 904 in 1992.144 By this time, Chinese investments were recognised in over
one hundred and one countries. Although principally in developed nations (70%), the value of
143Ibid.
144Rosalina Tan, “Foreign Direct Investment Flows To and From China,” Philippine APEC Study Centre Network (PASCN), discussion paper
no. 99–21, (1999).
43
projects in transition and developing economies was greater (61% vs 39%). The deals in
developed nations were worth on average 4 times as much, suggesting that it was easier and
politically sensible for firms to invest in developing countries, but economically more valuable
to invest in developed states.
Government capability and the market
The Government remained firmly in control of OFDI throughout this period. Despite the
initiation of liberalising reforms addressing the private sector, OFDI was utterly dominated by
SOEs, and the state-centred approval process meant that OFDI projects continued to comply
with the State Councils’ political interest. This is further reinforced through the retention
scheme, which rendered foreign earnings firmly under the state’s control, consistent with the
pre-opening up and reform era. Although it is clear that political priorities dominated OFDI
flows throughout this period, the absence of a stronger private market push to internationalise
was in part due to the developmental status of Chinese firms at the time. Consistent with IDP
theory, Chinese firms lacked the capacity to successfully invest abroad. And, arguably, the
increase in the number of south-south145 trade reinforces the view that the majority of Chinese
companies were not competitive in developed markets. Indeed, large state-sponsored
investment projects were largely responsible for the spike in OFDI at the end of this period and
can be considered on a case-by-case basis rather than following a particular market trend. The
governments’ objectives were occasionally blurred and cautious; outward investment did not
occur without their direct approval. While, outward endeavours were not particularly profitable,
more importantly from the governments’ perspective, investment served political interests.
1992-2001
Stops and Starts
145Developed nation to developed nation trade.

44
A number of significant political and economic events distorted China’s trade trajectory
throughout the 90s. OFDI declined as a consequence of Tiananmen Square and the AFC, and
rose in response to Deng Xiaoping’s southern tour. The aftermath of the Tiananmen Square
incident in 1989 led to a tightening of economic and political control which translated into
restrictive and constraining trade policies.146 This trend was abruptly reversed following Deng
Xiaoping (de facto leader of China) tour of Southern China in 1992, in which he expressed his
continued strong support of domestic reform and opening up policies. This reenergised the
reform movement, and in Jiang Zemin’s (Deng’s successor) report to the fourteenth National
Congress he stressed the need for China to “expand OFDI and multinational operation of
Chinese enterprises.”147 This sparked a range of ambitious reforms to standardise the approval
process and render it more transparent. However, the AFC of 1997, and the growing reporting
of questionable ventures triggered a re-tightening of control, halting regulatory reform, which
was not reversed under the ‘go global’ policy of 1999. Consequently, OFDI grew unevenly
throughout this period.
In terms of distribution, the number of investment projects in developing nations remained
higher than those in developed states. However, it was in the developed world that a majority of
funds were directed; North America remained the largest recipient of Chinese OFDI stock, with
Canada receiving the largest share (18.3%). Australia was a close third at (16.3%). Investment
in these two countries reflects the resource seeking motivations of both firms and government
and illustrates the domination of the government in regards to OFDI distribution.
Central reform to encourage OFDI took two forms, as it did in the previous period. The
loosening of the monetary and financial markets was critical to encouraging broader
investment, and the need to simplify the complications of the approval process complemented
146Cross,et al, “An econometric investigation of Chinese outward direct investment.”

147JiangZemin, “Full text of Jiang Zemin’s Report at 14th Party Congress,” Beijing Review, March 29, 2011, accessed January 6, 2017,
http://www.bjreview.com.cn/document/txt/2011-03/29/content_363504.htm.
45
these reforms. From a monetary perspective, the retention scheme was abolished in 1994,
meaning that any Chinese company could now earn and use foreign currency to fund OFDI
projects - rather than the right to do so being confined to only select firms. In effect
(theoretically) any SOE or POE could now purchase foreign currency to invest abroad,
regardless of whether or not they had generated this currency themselves. This gave the
government one less method of control over foreign exchange reserves and reduced their
control of internationalising firms. It also became easier for firms to be granted approval, as the
authorisation process was further decentralised away from the State Council, and the local
organisations in charge of the process expanded so as to increase their capacity. Local branches
were now able to approve much larger projects, as investment thresholds were again adjusted
upwards. This meant that in 1992, OFDI flows from China increased three-fold from the
previous year to US$ 4 billion.
This momentum did not continue smoothly throughout the 90s, in some part due to negative
consequences of this loosened approval process.148 Decentralisation was seen as responsible for
spurious investments of state funds. Following speculative investments of state assets in the
real estate and stock markets MOFCOM initiated a more rigorous screening and monitoring
process addressing each investment project. This approval process now required deals of more
than US$ 1 million to be examined by an additional body such as the NDRC (at the time, State
Planning Commission - SPC), or SAFE before being sent to MOFCOM for final approval.
Consequently, although the government’s attitude towards OFDI shifted in the late 90s to one
of “active encouragement,”149 China’s OFDI stagnated around an average flow of US$ 2.3
billion per annum over the whole of the 1990s. This illustrates the limitations of Chine’s
outward investment policy design – they were unable to realise consistent effective growth in
outward investment.
148“China’s Outward Direct Investment,” OECD.

149Ibid, 83.
46
The Asian Financial Crisis came as a shock but did not impact China to a high degree. A lack
of global integration “given China’s relative autarky and limited involvement in international
markets,”150 meant that Chinese firms were highly insulated from international market forces. It
did however unsettle Chinese regulators who felt the need to exert more control over foreign
reserves given growing apprehension of foreign markets. Despite not affecting China directly it
was felt by Hong Kong who had to use up a large quantity of their money supply to protect
their currency. Given the large amount of Chinese outward investment through Hong Kong this
no doubt is the source of some downward pressure on Chinese outward investment, and indeed
reinforced the value of stockpiling large exchange reserves for the government. The limited
impact of the AFC on China was also seen a reaffirmation of central socialist planning, which
increased the confidence of the central government in their own ability to execute rational and
financially sensible economic policy.
The government’s efforts to reform investment regulation met with limited success throughout
this period, due in part to a lack of universal government commitment to the ideals of opening
up. The need for Deng to re-energise this movement through a tour of the provinces is clear
evidence of this. Furthermore, the loosening of control in many cases led to spurious
investment, and growing apprehension over the power of foreign countries and economies to
impact on the Chinese market. This reaffirmed to many in the central government of the merits
of firm economic control. Consequently, the desire to increase investment was mitigated by
those who argued that loosening control was not the solution. Despite this push-back, profit-
seeking initiatives consistent with market forces were encouraging the government to reform
from below.
150Zweig, “China’s Reform and International Political Economy.”

47
These private economic imperatives were increasingly recognised by government officials.151
The notion that Chinese firms needed internationalisation in order to increase their
competitiveness and to circumvent trade discrimination by host countries led both local and
provincial authorities to approve a greater quantity of overseas investments and provide greater
support. The continued flow of OFDI towards transitional and developing economies suggests
that smaller firms were incentivised to invest abroad, as these were generally low cost and less
strategic investments. These investments did however remain under strict state supervision, and
overall, in value terms, the majority of investment was directed towards official state priorities,
in particular resource seeking. Thus, while private interests were encouraging officials to
support greater outward investment, it was only if and when they were consistent with the
government broader objectives that they were approved. This reveals the limitations of political
reform throughout this period, as private interests were considered second to political stability.
Furthermore, this period reveals the extent to which central and regional motivations differ and
can be manipulated - an important angle through which to consider OFDI flows. In this period
political interests dominated the flows of OFDI and commitment to the reform movement was
tenuous and divisive, which had a strong role in weakening OFDI flows. In the next period the
political climate changed dramatically.
2002-2012
Growth in Earnest
From the early 2000s (1999) the promotion of OFDI received an official boost through the ‘go
global’ (zou-chu-qu, – literally “go out”) policy. This policy underscored the official
development policy of the Tenth Five-year Plan (2001-05). Enterprises of all forms of
ownership, across a majority of industries were now officially encouraged to expand their
151Tan, “Foreign Direct Investment Flows To and From China.”

48
operations abroad. This was reiterated again in the Eleventh Five-year Plan (2006-10). The
momentum for internationalisation was complemented by China’s accession to the WTO in
2001. Prior to this, China was required to initiate wide liberalising reforms, particularly in the
financial, trade and investment sectors. This meant, Chinese firms faced increasing pressure to
improve efficiency and competitiveness, and due to an increased lack of domestic protection
potentially seek foreign markets. Consequently, in 2001, China’s OFDI flows boomed,
outflows jumped to US$ 6.9 billion – more than six times the figure recorded in the previous
year. Throughout this period, the growth rate of China’s inflows of FDI were rapidly
outstripped by China’s outflows (Figure 2a) and at the end of 2012, Chinese inward stock
remained considerably higher than Chinese outward stock (Figure 2b). It is also important to
note the significance of the GFC which drastically altered the external environment in which
Chinese firms were operating. Inflows into China dropped dramatically following the crisis, a
13 per cent reduction on the previous period, due not to domestic conditions but rather
recessions in investee countries. This meant that by the end of 2012, Chinese outflows had
reached almost 80 per cent of Chinese inflows which was a record high. The government
actively supported the increase in OFDI but remained apprehensive towards the relative decline
in inflows.
Economic and administrative reforms throughout this period again took two primary forms,
streamlining the approval process and relaxing exchange controls. Approval authority was no
longer the sole purview of the State Council, but decentralised to allow smaller local deals to be
approved at the provincial level. Furthermore, the process itself was simplified, and a
maximum processing time limit imposed to address the delays associated with the previous
system. Restrictions were cut, some twenty-six approval requirements were repealed by SAFE
in 2002 and 2003 alone.152 Artificial restrictions capping OFDI were also abolished. Online
152Voss et al, “As assessment of the effects of Institutional Change on Chinese Outward Direct Investment Activity,” 151.
49
approval processes have since been introduced. This represented the biggest central
commitment to transparency and decentralisation to date.
From the financial side, the wider liberalisation of domestic markets throughout this period set
the scene for the loosening of monetary restrictions on foreign exchange. This amounted to the
freeing up of foreign exchange for OFDI. This was done in a two-fold fashion. Control over the
use of foreign exchange was decentralised, as was the scope of the size of projects which could
be managed provincially. This gave provincial authorities greater power, and smaller industries
more flexibility. Complementary reform was initiated to increase the profitability of OFDI –
China allowed enterprises to reinvest their profits abroad and abolished the deposit previously
required to guarantee remittance. More interesting though, from a policy perspective, from
2004 the government-initiated interest-subsidised loans for favoured industry and began
offering general information and guidance to Chinese companies, supporting their
internationalisation efforts. This was part of a broader aim of the government to transform it
“from one of approving and controlling” to one of monitoring and steering investment projects,
as stated in the Decision on Reforming the Investment System in July 2004. The political
commitment given by the ‘go global’ policy facilitated the development of an institutional
environment supportive of outbound investment across all levels of government. Despite the
number of bodies involved in the approval process increasing, they enjoyed greater autonomy
to approve projects and the breadth of requirements expected of firms had decreased
significantly, coinciding more closely with economic indicators. While OFDI was nominally
supported in it’s entirely, particular firms and industries received additional support, such as the
light industry sector, as they were deemed in the national interest. Over 33 experimental SOEs
were chosen to receive priority state assistance to invest abroad, primarily through subsidised
loans. Consequently, deregulation was married with increased intervention.
50
By contrast, many firms were actively reined in, as MOFCOM “tried to consolidate excessive
and poorly managed OFDI projects”153 – some of which failed publically. For example, the
collapse of the Chinalco-Rio Tinto deal, worth US$ 19.5 billion following the withdrawal of
support due to shareholder anger, was seen as evidence to the State Council on Chinas lack of
experience, talent and political acuity.154 Thus through the strengthening of the monitoring
process MOFCOM sought to better oversee outward investment operations whilst
simultaneously reducing regulation.
Throughout the period the regional distribution of OFDI drastically shifted, in monetary terms,
towards developing countries. The proportion of OFDI stock to developing economies
increased by 77 per cent, compared to a decline of 23 per cent in developed countries, in no
small part due to the GFC and declining domestic growth rates in host countries. Despite this,
both Africa and Latin America saw project numbers decline while the number in Asia/Oceania
increased. This suggests that the decentralisation of the approval process enabled small to
medium sized enterprises (SMEs) to invest more confidently. For SMEs, cultural similarity and
geographic proximity are strong encouraging factors for OFDI,155 leading to greater investment
in Asia and Oceania.
The form of this investment also shifted over time to include a higher proportion of mergers
and acquisitions (M&As) by 2012. Joint-ventures and the establishment of overseas
subsidiaries were typical of the earlier years of foreign expansion led by the State Council and
SOEs. An increase in cross-border M&A is significant as they arguably best represent the
“investment ambitions of MNCs.”156 They also account for a majority of investment between
153Ibid.
154Ken Davies, “China Investment Policy: An Update,” OECD Working Papers on International Investment, (2013)
http://dx.doi.org/10.1787/5k469l1hmvbt-en
155Hong, “Can China’s Outward FDI be explained by general FDI theory?” 17.
156Emily Kothe, Carly Avery, Michael Gestrin, “FDI In Figures: International Investment stumbles into 2014 after ending 2013 flat,” OECD,
April 2014, https://www.oecd.org/investment/FDI-in-Figures-April-2014.pdf,

51
mature companies and have accounted for a surge in global OFDI flows.157Thus the increase in
M&A parallels the increase in the sophistication of Chinese MNCs and their investment
desires. Indeed, while investment towards developing countries increased more rapidly,
investment to developing countries grew in terms of value and sophistication.
The GFC had a profound impact of OFDI and the Chinese domestic economy. The crisis
dramatically altered the international environment in which Chinese firms operated and
augmented the relative weight and attractiveness of Chinese OFDI to recipient nations. These
factors contributed to a massive spike in Chinese OFDI in the late 2000s. Furthermore, the
international importance of this was underscored as China’s OFDI became crucial to sustaining
the global economy. Indeed, Australia ‘survived’ the GFC relatively unscathed due to Chinese
investment.158 The CCP actively stimulated domestic demand to offset the fall in international
demand, releasing a 4 trillion-yuan stimulus package over 2009-2010, providing firms with a
huge influx in capital. Additionally, a large amount of liquidity was injected into the banking
system, and reductions in restrictions on lending requirements meant that the increase in money
supply and bank credits increased at their fastest rate since 1996, surging by 7.37 trillion
yuan.159 This all helped stimulate domestic demand, much of which sought newly low-cost
products abroad.
China is not the sole developing market to enjoy a rapid growth in OFDI throughout this
period. Rather, it is “part of the growing trend of emerging economies” towards outward
investment, which recorded an average growth rate of 31 per cent over 2000-06 and reached
US$ 174 billion in outward flows for 2006, accounting for 14.3 per cent of total OFDI flows
from the world. While China constituted an important share of this, this trend reflects the
157In2015, M&As accounted for over 60% of global OFDI according to the “2016 Annual DRI Report,” UNCTAD, June 24, 2016.
158Mark Dunn and Nicole Engwirda, “Tax office probes Chinese investors buying into Melbourne’s wealthiest suburbs,” Herald Sun, June 18,
2015, accessed September 21, 2017, http://www.heraldsun.com.au/news/victoria/tax-office-probes-chinese-investors-buying-into-melbournes-
wealthiest-suburbs/news-
story/a6b55543b8c9b442c9df243220c93ddc?utm_content=SocialFlow&utm_campaign=EditorialSF&utm_source=HaraldSun&utm_medium=
Facebook.
159Zweig, “China’s Reform and International Political Economy.”
52
growing diversification of the purpose of outward invest, and growing confidence of
developing states on the global arena.
Unlike previous periods, the government’s reform efforts reflected market changes. The
impetus for these reforms had clear macroeconomic and microeconomic foundations. At the
macro level, the need to diversify Chinese foreign exchange holdings and address the capital
account surplus both encouraged increasing OFDI levels. The alternative would be to allow for
the renminbi’s value to rise. Given the growing pressure on the Chinese government to revalue
the renminbi at the time, increasing OFDI was (and is) considered by officials to be a far more
favourable solution, as it allows the government to retain control over exchange rates. An
increase in OFDI offsets pressure on currency devaluation and allows Chinese exporters to
maintain their competitive edge. Chinese currency valuations continue to draw much critique
today, particularly from the Trump administration who has initiated over 30 cases at the WTO
against China.160
From a microeconomic level, consistent with IDP theory –the growing capacity of Chinese
domestic firms naturally encouraged them to ‘go global’. The increasing sophistication and
skill of Chinese enterprises has led them to seek markets abroad, providing access to new
opportunities, technologies and greater access to resources.161 Moreover, in other cases
overcapacity in the domestic market has rendered overseas expansion a necessity rather than an
opportunity, as manufacturers sought new markets rather than diversification and innovation.
Consequently, private interests were pushing for OFDI deregulation, and were increasingly
being listened to.
160David Lawder, “U.S formally opposes China market economy status at WTO,” Reuters, December 1, 2017, accessed February 8, 2018,
https://www.reuters.com/article/us-usa-china-trade-wto/u-s-formally-opposes-china-market-economy-status-at-wto-idUSKBN1DU2VH.
161This phenomenon is described in the third stage of Dunning’s, IDP theory.
53
The government’s regulatory changes took into account these economic developments. From
2005, the approval process for OFDI investments were more closely tied to their economic
viability. MOFCOM stated that firms are “guided via the approval process to invest in a
feasible project,” which carries benefits for the firms’ development in one of three ways (i)
promoting China’s exports of goods and services, (ii) enhancing the firms’ technological
capacity and R&D activities, (iii) enabling the firm to create and establish an international
brand.162 Consequently, improving the profitability of the firm is considered consistent with
China’s national interests in a broad sense. The official recognition and protection of POEs in
2004 is further proof of the Chinese government’s growing engagement with, and
acknowledgement of market forces. This does not however, translate to a growth-at-all-costs,
‘hand’s off’ approach to OFDI by the Chinese government, but rather reflects the strength of
the government’s conviction in regards to market-guided economic growth. While the central
willingness to support decentralisation and give up some of their control is a significant turning
point, the government was unprepared to forego control evenly across all sectors.
Through an ‘acquisition fund’, cheap loans, and the so-called ‘outbound catalogue’ listing
preferred countries and industries, MOFCOM continued to impact the investment decisions of
Chinese MNCs indirectly through the market. This was principally achieved through positive
discriminatory policies such as preferential access to finance and tax concessions, as well as
locational support.163 The establishment of country specific investment funds were supported
by wider policy, as ‘go global’ lends itself with a foreign policy agenda whereby trade links are
complemented by diplomatic links. Therefore, whilst market incentives increasingly played a
stronger role within government policy, it is only when they are actively sanctioned by the
government that they come into effect. Furthermore, the government continued to be willing to
162“Research Report on China-US Economic and Trade Relations,” Ministry of Commerce of the People’s Republic of China, May 25, 2017,
http://images.mofcom.gov.cn/www/201705/20170525093626470.pdf.
163Deschandol, “Tips for foreign vendors in Chinese M&A,” 32.
54
interfere with the market in order to favour particular industries and regions deemed
complementary to political interests at the expense of maximising efficient growth.
From the perspective of institutional reform, the prioritisation of international trade and
development meant that the “bureaucratic agencies that manage these affairs and the elites who
run them become key administrative players in the bureaucratic politics in Beijing and in the
provinces.”164 The decentralisation of investment and foreign trade controls, so as to allow for a
stronger role for ‘market-led’ forces, actually led to an increase in the broader participation of
the government in the investment approval process, despite the rhetoric. While the authority of
central bureaucrats was undermined somewhat, “their lower level counterparts benefited from
this shift in China’s development strategy,”165 as evidenced through the proportional increase
of regional outbound investment projects.166 Therefore the implementation of further
privatisation reform does not necessarily result in a decline of the government’s role as a
guiding force in OFDI. Indeed, in some cases, it has resulted in the limitation of central
oversight and the promotion of regional interests. This did not necessarily result in effective
reform or investment, which is illustrative of the limitations of policy design. A deeper look at
the period 2013-2015 examines these themes in closer detail.
Findings
A consideration of the historical development of Chinese outward investment identified four
key contributing factors to the efficacy of Chinese reform policy. Firstly, the degree to which
reform is consistent with and supportive of existing private interests affects how successfully
particular goals are realised. Another key element of implementation is the extent to which
reform is centrally and/or regionally implemented, as decentralisation has been shown to
decrease alignment with central goals and accountability in some cases. And lastly, two factors
164Zhemin, China’s Reform and International Political Economy, 10.

165Ibid.
166MOFCOM, 2013 Statistical Bulletin of Chinese Outward Foreign Direct Investment.
55
concerning conviction: the strength and spread of the government’s commitment to reform;
and whether or not reform places economic motivations above political considerations. These
factors are considered in greater detail as they relate to particular policies throughout 2013-
2017 to better understand the causal mechanism at play.
56
PART 3 – A CLOSER LOOK
Scrutinising 2013-2015
This section develops a deeper understanding of the mechanisms linking these four identified
factors impacting implementation and efficiency in relation to particular policies and outcomes
for the period 2013-2015. An overview of the period and the main policies affecting investment
from 2013 is outlined to provide context, in addition to a discussion of key policy initiatives
and an explanation of how the impact of these initiatives can be measured. This overview is
followed by an analysis of the development of particular policies year-on-year to enable a
deeper examination of their evolution and speed of implementation, and how it was that
government responded to the limitations of their own policies. A number of policies affect
regulations with regard to capital controls, in particular export policies. The major policy
initiatives considered for this period are
- the Belt and Road Initiative (BRI)
- the reinvigorated, modern form of ‘go global’, and
- the Twelfth Five-Year Plan.
The Thirteenth Five-year plan and Made in China 2025 (MIC2025) are also relevant but relate
more directly to 2016-2017. Coming into official effect in 2016 and 2015 respectively, both are
less significant with regard to the industrial breakdown of outward investment than ‘go global’
and the Twelfth Five-Year Plan. The Five-Year Plans represent the consolidation of objectives
already pursues and identify future priorities, and are thus important in a consideration of
investment policy and ‘go global’. Indeed, a close reading of the Twelfth Five-Year Plan
informs a deeper understanding of ‘go global’.
57
In assessing multiple policies’ effectiveness, beyond a singular example, broader trends can be
identified and then used to contextualise and better explain a particular case study. 2013-15 are
considered with respect to ‘go global’ and the BRI as they relate to industrial and locational
distribution respectively; followed by a broader discussion of policy efficacy and policy
development for the next period.
Overview of the period
2013 marked the beginning of the global recovery following the widespread economic
slowdown that followed the financial crisis of 2008. Global outflows and inflows recovered to
positive figures in 2012 bringing an end to years of recession.167 By 2015, for the first time in
China’s history, outward FDI exceeded inward FDI (Figure 3a), and outbound investment in
2015 reached $59 billion, an 18 per cent increase on the previous period. This trend increased
exponentially in 2016.
Throughout this period, there were indicators of the increasing role played by market forces.
Privately-Owned Enterprises (POEs) increased their share of OFDI (Figure 3b). In the first half
of 2013, POEs accounted for 4 out of the top 10 Chinese outbound M&As, compared with 1
just 6 months prior.168 M&As also increased in frequency as a form of investment, indicating
an advancement in sophistication of the economy. The greater flexibility given to private
operations suggests that the government was willing to cede control in exchange for greater
economic growth, and reform in line with market interests. Despite this, the change in
locational and regional investment distribution illustrates the heavy influence the government
continued to play, particularly in steering investment towards their political objectives.
167“FDI Flows,” OECD, https://data.oecd.org/fdi/fdi-flows.htm.

168“Going overseas holds the key to development,” China Daily, September 2, 2013, accessed January 3, 2017,
http://english.mofcom.gov.cn/article/newsrelease/counselorsoffice/westernasiaandafricareport/201309/20130900280076.shtml.
58
Similar to the years leading up to 2013, outward FDI continued to flow principally to Asia, and
in particular to Hong Kong (Figure 3d) with OFDI to Asia accounting for 69 per cent of total
outward investment from 2013-2015. The regional proportionality of OFDI by destination
remained relatively stable throughout this time (Figure 3c). A closer breakdown of Asian
investment for the following sub-regions better illustrates the regional fluctuations. The 4 sub-
regions are; Hong Kong169 and Macau, Central Asia, the Middle East170 and East and South-
East Asia (including India and Japan). From the assessed data it is clear that OFDI is increasing
in the Middle East and East and South-East Asia at a much faster rate than Central Asia. This is
all the more remarkable considering the relatively slow GDP growth in the Middle East
throughout this period and the ongoing political instability which should render their economies
less attractive (Figure 3f). This suggests that the cost-benefit analysis of the firm in the Chinese
context is directly and indirectly affected by the Chinese government.
Unlike regional distribution, the industrial break-down of OFDI changed dramatically
throughout this period. While the leasing and business services sector maintained a dominant
share of OFDI stock at 27 per cent between 2012-2015, as did banking (14.5%) and
manufacturing (9.4%), the general make-up of outward investment flows moved
substantially.171 Investment in the mining, construction, transport storage, and postal sectors
declined by 55, 14 and 18 per cent respectively. A number of sectors benefited from domestic
industry specific support, which enabled them to invest abroad, in particular those industries
considered crucial to modernising the Chinese economy.
169While Hong Kong constitutes the largest destination for China’s OFDI. OFDI flows to Hong Kong behave differently to other forms of
Chinese OFDI. A large amount of this investment either flows on to other regions or returns to China.
170Yemen and Syria have been excluded from this trend analysis due to ongoing conflict which has resulted in both the decimation of their
respective economies (and inward FDI) and the absence of reliable data. This does not impact conclusions from data.
171Together the three largest industries have accounted for over 50% of OFDI in the period from 2012-2015 and are proportionally significant
such that changes in relative share overall would be indicative of a huge disruption to the market, consequently fluctuations in sector-specific
areas rather than proportionality, are of high interest.
59
Key policies affecting investment
The 2013-2015 period is covered by the Twelfth Five-Year Plan on Industrial Reform and
Upgrading,172 which specified the sectoral and domestic developmental priorities of the
Chinese government. While 5-year plans most directly address domestic concerns, outward
investment plays an important role in achieving government policy objectives. For example, as
OFDI is an important tool for technological upgrading, an increase in outward investment
reflects a desire to improve the competitiveness of domestic industries.173 Additionally, as firms
become more profitable, they often seek greater revenue abroad. Therefore, the domestic
success of, and prioritisation of, certain industries can have direct impact on the composition of
OFDI.
Critical among the objectives of the Twelfth Five-Year Plan is shifting the Chinese growth
pattern towards a “services and consumption driven model, away from the past emphasis on
industrial production, capital investment and exports.”174 This recognises the need to ensure
sustainable economic growth through a new emphasis on innovation and low-carbon industries.
The key concept of "indigenous innovation" (自主创新) is underscored and directed almost
entirely towards advanced technologies. Seven key industries were outlined to lead the way,
including the high-end equipment and manufacturing industries who were to receive additional
development support, through subsidised loans and the loosening of regulatory constraints.
This in turn makes those manufacturing sectors more attractive to develop domestically and
able to expand abroad. Measures to reduce certain types of outward direct investment were also
included in the Twelfth Five-Year Plan, which saw it necessary to “effectively contain blind
172“The 12th Five-Year Plan: Overview and Policy Recommendations,” Asian Development Bank, April, 2011.
https://www.adb.org/publications/12th-five-year-plan-overview-and-policy-recommendations
173It is worth noting that particular industries are more reliant on OFDI for technological upgrading than others, such as information technology
and computing, and those associated with ‘moving up the value chain’ such as advanced manufacturing or education technology.
174“The 12th Five-Year Plan: Overview and Policy Recommendations,” Asian Development Bank, April, 2011.
https://www.adb.org/publications/12th-five-year-plan-overview-and-policy-recommendations
60
expansion and repeat construction”175 This reflected the need for China to “invest abroad more
wisely, with greater concern for local sensibilities and China’s image.”176 Thus the Twelfth
Five-Year Plan both encouraged and discouraged investment in certain industries.
Other major policy developments significant to China’s OFDI were implemented throughout
this period of time, although with diverse launch dates and development timeframes their
specific influence is difficult to trace but provides insight to the regulatory environment in
China. Specifying exact official instigation is a difficult task in the Chinese case, as official
policy often recognises established policies and then later formalises them. Central policies can
be implemented with varying urgency across provinces, and in some cases, take on slightly
different forms.177 Additionally, a policy can have influence before it is officially launched,
through a nominal commitment, much as Central Bank targets are often sufficient to translate
into outcomes.178
The following policies are driven from a national level and provide central direction within the
framework of the 5-year plans. Namely, the reinvigoration of China’s ‘go global’ strategy; and
the Belt and Road Initiative. These policies were developed in the context of the ‘New
Normal’, as China moved towards a consumer-driven economy with growth rates in the single
digits. They are also closely linked to Xi Jinping, as this period of time corresponded with his
consolidation of power, elevating their importance within the current political climate. These
policies, officially incorporated into the Thirteenth Five-Year-Plan altered the operating
environment in 2012-2015 for firms to varying degrees and are important to understanding the
political motivations impacting OFDI in 2016-17.
175China’sTwelfth Five Year Plan (2011-2015).

176“China’s Going Global Strategy: between ambition and capacity,” China Policy, (April 2017), https://policycn.com/wp-
content/uploads/2017/05/2017-Chinas-going-global-strategy.pdf.
177Regulatory decentralization has increased the implementation power of provincial authorities. This has led to a wide disparity in regards to
implementations.
178Douglas Darrell Evanoff, The role of central banks in financial stability: how has it changed? (New Jersey: World Scientific, 2014)
61
Remaking ‘go global’
The ‘go global’ policy evolved into its modern form, dubbed ‘go global 2.0’ in the Twelfth
Five-Year Plan (2011-2016). The policy itself “represents a conglomerate of individual
policies,”179 that affect outward investment through both domestic development policy and
investment regulation. In the early 2010s ‘go global’ mainly concerned decreasing regulation
and capital controls in order to support greater levels of outward investment. This happened in
stages, with the most far-reaching reforms being enacted throughout 2014-2016. At the heart of
these reforms was the greater privatisation of domestic firms; the liberalisation of financial
markets; the loosening of state regulatory control; and the active encouragement of private
enterprises to ‘go global’.
These reforms were pursued with varying vigour, indicative of central authorities’
apprehension of market reforms. Throughout 2014, curbing regulation was successfully
progressed by the NDRC,180 but it wasn’t until 2016 that financial liberalisation was truly
advanced. Reform predominantly simplified and streamlined approval procedures and raised
the ‘free-from approval’ outbound investment bar to US$ 1 billion. This had the effect of
speeding up the approval process and encouraging smaller enterprises to go abroad. Broadly
speaking, foreign direct investment was highly encouraged, although sensitive industries and
countries remained exempt from this regulatory easing. Outside of the direct administrative
environment the government also sought to increase the ease of doing business abroad through
the establishment of a variety of support schemes. They helped in the building of strategic
infrastructure, provided detailed country reports, and negotiated access to markets through the
expansion of free-trade deals.
179Ibid.
180Aravind Yelery, “China’s ‘Going Out’ Policy: Sub-National Economic Trajectories,” Institute of Chinese Studies 24, 2014, 3,
http://cbi.typepad.com/china_direct/2011/05/chinas-twelfth-five-new-plan-the-full-english-version.html.
62
Despite initiating far-reaching liberalisation policies, ‘go global’ progressed more slowly in
regard to financial deregulation. This was in part due to the inherent high-risks associated with
such reform. Moving towards greater privatisation often results in unsustainable surges of
credit and subsequent crashes, which can put upward pressure on the exchange rate, and send
shockwaves through the market. The government’s apprehension meant that the financial
system remained heavily directed by the CCP which distorted financial indicators.181 The
central bank (PBC) set uncharacteristically transitory, short-term interest rates through
quantitative instruments resulting in greater volatility when compared to developed markets.
This nullified the effects of interest rate signals and meant that they were not as useful as a
monetary policy device, reducing the effective allocation of capital. This is, in part, responsible
for spurious investments which became a serious concern by the end of 2016 and illustrates the
limitations of the government’s commitment to privatisation under go global.
From an endogenous perspective, ‘go global’ reflected industry specific incentives in
accordance with the sectoral priorities laid out in the Twelfth Five-Year Plan on Industrial
reform and Upgrading.182 While the manufacturing industries core competitiveness remained a
priority,183 improving innovative strategic industries as well as service industries was newly
prioritised. Scientific development and innovation were outlined as critical to supporting the
great task “of rejuvenation [of] our country.”184 As was the case for the development of
diversified and clean energy, special funds were set up to support new strategic industries and
investment. The domestic success of these measures, and regional preferences for technological
upgrading have had direct impacts of OFDI composition.
181“China: Structural Reforms for Inclusive Growth,” OECD. March, 2014. Accessed September 9, 2017. https://www.oecd.org/china/2014-03-
China-report-EN.pdf.
182trans. EU, “China’s Twelfth Five Year Plan (2011-2015) – the Full English Version” China Direct. 11 May 2011,
183Ibid.
184Ibid.
63
Measuring the impact of ‘go global’
Due to the holistic and broad ambitions of ‘go global’ it is difficult to isolate the impact of the
policy in its entirety. While the over-arching goals of ‘go global’ remain consistent, fluctuation
in associated regulation, year-on-year provide a helpful method to consider the effectiveness
and government considerations behind ‘go global’ over time. Noting that a strong policy push
can be indicative of a lack of efficacy of the original policy in the period proceeding.
Consequently, the change in the industrial breakdown of OFDI is considered as contingent with
or contrary to ‘go global’ goals year-on-year. This data is considered in relation to previous
rates of industry growth and the relative share each sector constitutes to the wider distribution
of overall stock and flows. Key Industries are identified as supportive of, or contrary to the
goals of ‘go global’ and the Five-Year Plans are considered more closely as they relate more
closely to the overall distribution of investment. Green technology, the services sector and
those industries associated with technological upgrading and the advancement of the economy
are associated with the success of ‘go global’, while greater investment in mining, and an
absence of a change in investment distribution suggests the policies limitations. Additionally,
M&As as the primary tool for climbing the “value-chain” are considered. An above-average
increase of M&As in specified industries suggests successful implementation.
The formation of the Belt and Road Initiative
The Belt and Road Initiative, comprising the Silk Road Economic Belt and the 21st Century
Maritime Silk Road is “designed to build a trade and infrastructure network connecting Asia
with Europe, Africa and beyond.”185 While much ambiguity continues over what the BRI
actually is, there is no doubt it is here to stay – with China’s permanent representative to the
185Ed. Mengjie. “Spotlight: Belt and Road Initiative injects new impetus into Guangdong,” Xinhua, May 25, 2017, accessed January 11, 2018,
http://news.xinhuanet.com/english/2017-05/25/c_136315156.htm.
64
UN stressing the BRI’s role in the “implementation of the [UN] 2030 Agenda.”186 Indeed, the
BRI is an increasingly important element of Chinese economic and foreign policy. In China’s
Thirteenth Five-Year Plan (2016-2020), the first Five-Year Plan to be developed under
President Xi’s leadership,187 an entire chapter is dedicated to the BRI which is also referred to
in sections addressing foreign and domestic policy. Official reports and domestic newspapers
have elevated its status,188 and the growth in the BRI’s eminence in policy has paralleled Xi’s
rise in power. This makes it a cornerstone of Chinese policy for the foreseeable future.
Throughout 2012-2014, The BRI was in its infancy but it gained more support and momentum
from 2015, when funds were officially allocated to support the project. The Asia Infrastructure
Investment Bank (AIIB) and the Silk Road Fund, in addition to preferential loans from Chinese
State-owned Banks all combined to render the BRI a trillion-dollar project. The AIIB has
funded 22 projects in over 10 countries along the BRI, principally in energy and transport.189
This economic support was matched politically and by the end of 2015 the BRI was
increasingly referred to in ‘go global’ as a tool to encourage more firms to expand abroad.190
Consequently its objectives, particularly those concerning locational distribution are critical to
OFDI constitution.
To many, the BRI is considered the “geopolitical expressions of Going Global 2.0,”191 and has
now expanded beyond infrastructure development, to encompass widely diverse forms of trade,
from technology to culture. Regionally, it has also grown in scope, to include developed and
transitional economies alike. New Zealand is the latest in a number of states to officially sign a
186“China stresses role of Belt and Road Initiative in UN 2030 Agenda,” Xinhau, May 24, 2017, accessed January 11, 2018,
187Scott Gardiner and Xu Pi. “China’s 13th Five Year Plan: the land of opportunity,” King&Wood Mallesons, April 14, 2016, accessed January
4, 2017, http://www.kwm.com/en/knowledge/insights/china-13th-5-year-plan-key-points-summary-new-normal-innovation-20160414.
188The BRI is now mentioned in the first or second paragraph of official documents reporting broad economic data; from 2014, MOFCOM
added a BRI assessment to its Annual Bulletin of Statistics; A BRI expo was held in Beijing in 2017, while numerous smaller provincial expo’s
have been held since 2014, for example a Silk Road Expo in Shaanxi and a 21st Century Maritime Silk Road International Expo in Dongguan;
Xinhua and other State newspapers make reference to the BRI where possible and run a number of articles to champion its diverse success.
189“About AIIB,” https://www.aiib.org/en/about-aiib/governance/members-of-bank/index.html#.
190Ed. Huaxia, “China Focus: Ancient route leads to new opportunities at Silk Road expo,” Xinhua, March 19, 2016, accessed September 16,
2017, http://news.xinhuanet.com/english/2016-05/19/c_135371288.htm.
191“China’s Going Global Strategy,” China Policy.
65
memorandum of agreement with China on the BRI, despite clearly falling geographically
outside of the proposed trade routes.192
This ambiguity, and the scale of the BRI has reinforced the perception that it is intrinsically
linked to national policy in a linear manner. To many scholars, the BRI is the culmination of a
number of factors that “are coming to define China’s new global role.”193 Indicating a shift
from “keeping a low profile” to “striving for achievement” in international relations, 194 the
BRI is seen as ultimately transforming China from being a global “game player” to a global
“game maker”195 and architect of new international institutions.196 This makes it a potentially
important policy through which to consider China’s economy statecraft and international
priorities more generally.
The BRI also has clearly articulated domestic dimensions, in particular the further integration
of the rest of China with the coastal regions, and the improvement of infrastructure in strategic
regions to facilitate increased trade. There is a strong practical and normative link between
domestic development and global orientation – domestic upgrading is required to support
international infrastructure. And geographically, trans-border thoroughfares are being pushed
ahead along the BRI routes, better linking China’s more isolated provinces with financial
centres as well as linking China with the world.197
Measuring impact of the BRI
In order to evaluate the influence of the BRI, the growth rates in BRI countries are considered
in relation to domestic and regional investment growth rates and to the overall rates of change
192In 2017, New Zealand and China signed a Memorandum of Understanding for the BRI.
193Anastas Vangeli,. “China’s Engagement with the Sixteen Countries of Central, East and Southeast Europe under the Belt and Road
Initiative,” China & World Economy 25, no. 5, (2017), 101-124.
194X. T Yan, “From keeping a low profile to striving for achievement,” The Chinese Journal of International Politics 7, no. 2 (2014):153–84.
195Z. B. Qiu,“The ‘Triple Win’: Beijing’s blueprint for international industrial capacity cooperation,” China Brief 15, no. 18 (2015).
https://jamestown.org/program/the-triple-win-beijings-blueprint-for-international-industrialcapacity-cooperation/.
196S. R. Heilmann, H. Moritz, Mikko, B. Johannes, “China’s shadow foreign policy: Parallel structures challenge the established international
order,” China Monitor: Mercator Institute for China Studies, Berlin, (2014).
197The 13th Five-Year Plan: For Economic and Social Development of the People’s Republic of China (2016-2020).
66
in Chinese FDI stock location. To discuss activity, flow data is considered. Additional sub-
regions beyond Chinese data, such as Central Asia and the Middle East, and country specific
cases are explored in closer depth where relevant. Much like the impact on industry, change in
stock of flow value is considered more important that aggregate stock.
Interestingly, the countries considered along the BRI according to the Ministry of Commerce,
extend only to Europe and Asia, specifically Western and South-East Europe, Central Asia, and
coastal Asian countries, and do not extend to the South Pacific (other than New Zealand) or
include Hong Kong (despite the central role Hong Kong plays in Chinese and regional trade
and as part of the southern Maritime Silk Road). This is parallel to a number of other studies
and research institutes, all of which have similar but not exact classifications for participatory
status.198 For the purpose of this thesis, I have chosen to build upon the Hong Kong Trade
Development Council (HKTDC) country profiles, as they provide a comprehensive
justification for why countries are included. I have also included Ethiopia, the Netherlands,
South Korea and New Zealand due to their official links to the BRI. This is appropriate as the
BRI constitutes more than economic and financial trade routes, with information and cultural
links as well. While some studies postulate that the signatories of the AIIB are BRI affiliates,
this paper rejects that notion because a large number of AIIB signatories are reluctant to
holistically embrace the BRI. A prime example of this is Australia and Canada, where public
opinion has not been overly enthusiastic.199 Also excluded is Bhutan, despite being included in
a number of studies as China does not recognise Bhutan as a state and therefore does not
provide FDI data. The other consideration is the relative commitment of those countries who
express a strong or more obvious link to the BRI. For example, Kazakhstan has been an
enthusiastic proponent of the initiative, while Poland has been relatively quiet. Fluctuations in
198There are an increasing number of research institutes focusing on the Belt and Road emerging globally; prominent examples include, The
Belt and Road International Centre at the University of Cambridge, Institute of Belt and Road & Global Governance at Fudan University,
Shanghai, the Silk Road Economic Development Research Centre and a focus of trade research.
199Dunn, “Tax office probes Chinese investors.”
67
OFDI are just one of the economic effects of the BRI and, like industrial policy, may take a
longer time to translate into outward investment increases.
The following sections look at each year in turn; discussing the BRI and ‘go global’ in the
context of government capability and policy reform.
2013
China leads the way
By the end of 2013, OFDI stock had reached US$ 660.48 billion, growing 25 per cent from the
previous year. This is significant in the context of a global growth rate in OFDI of just 1.4 per
cent. The scope of outward investment expanded significantly – with 5,300 Chinese business
entities investing in some 25400 FDI enterprises across 184 countries, with assets worth over
US$ 3 trillion. The non-financial sector continued to account for a majority of investment, with
leasing and business services accounting for 25.1% of total OFDI stock, mining (23%) and
wholesale and retail trade (13.6%). The financial sector grew at a faster rate than the previous
year due entirely to the outward expansion of the banking sector, which accounted for 14 per
cent of OFDI flows. By the end of 2015, China’s state-owned commercial banks such as the
Bank of China and Agricultural Bank of China200 invested in over 35 countries, establishing 61
branch offices, 49 affiliated institutions, and 10 overseas insurance agencies.201
Investment projects reached a record high and M&As regained some of their popularity as a
method of internationalising from the previous year, particularly in the mining industry -
energy and power were “the most popular sectors.”202 With 424 projects across 70 countries
and regions, M&As accounted for 31.3 per cent of China’s total OFDI flows, and the number
200Additional Banks include: Industrial and Commercial Bank of China, China Construction Bank and Bank of Communications.
201MOFCOM, 2013 Statistical Bulletin of Chinese Outward Foreign Direct Investment.
202Cai Xiao, “M&A deals reach record high in 2013,” China Daily, January 30, 2014, accessed January 10, 2018,
http://www.chinadaily.com.cn/business/chinadata/2014-01/30/content_17265829.htm.
68
of M&As increased by 22 per cent. The proportion of M&As by value tends to be dominated
by large SOEs, who through high value acquisitions can distort the data. Although mining
easily dominated in regards to percentage share of value, the industry was exceeded by four
others in terms of the quantity of projects initiated. The number of projects rather than the value
of the projects, is in this case is a better indicator of small-scale market motivated activity.
Some 129 M&As were carried out in the manufacturing sector, but only 43 in the mining
sector. If the share of each industry is calculated without the mining sector, manufacturing is
the highest in value.
This tendency of deals to be dominated by large SOEs is reflected in the broader data. China
Daily attributed just 14 per cent of outward M&A deals to POEs, despite POEs contributing to
almost 60 per cent of GDP domestically. This also reflects the tougher restrictions on POEs and
the greater difficulty they face in attracting investment capital. Across all forms of investment,
POEs proportionally constitute a smaller share of China’s OFDI stock. Despite rising by 4 per
cent, POE stocks remained below 50 per cent, at 44.8 per cent share of total stock. It is clear
therefore that POEs are disproportionately under-represented in regard to both outward M&A
projects and overall OFDI. This is, in no small part, due to the continuation of an alternative
and more cumbersome OFDI approval process requirement for POEs.203
The regional distribution of China’s OFDI stock did not alter dramatically year-on-year,204
despite some countries experiencing above average growth. The flow data for 2013 suggests
alternative trends and indicators. Both Europe and Asia (excluding Hong Kong) saw a decrease
in flows by 15 per cent and 6 per cent respectively. In contrast, Latin America, Oceania and
Africa all rebounded on negative flows from the previous year to enjoy a 133, 52, and 34 per
203MarieMeixner, Fabrice Warneck, Phillipe Morvannou, Alain Mestre, “China’s Investment Policy: Consequences for Workers,” European
Commission, January 16, 2016. https://www.etuc.org/sites/www.etuc.org/files/publication/files/eu_china_workers_gb.pdf
204No country deviated by more than 1%.
69
cent spikes in OFDI flows year-on-year respectively.205 This activity is averaged out through
the use of stock data, which establishes that across all regions the percentage change in OFDI
stock was positive.206
Disparate patterns can also emerge when stock vs flow data is considered by industrial
breakdown. The proportional breakdown of stock data reveals that the banking sector (despite
accounting for 14% of flows) holds a greater share of OFDI stock than both mining and the
wholesale and retail trade sectors together. Additionally, the share of stock held by leasing and
business services actually declined (from 33% to 30%) likely due to the increase in investment
towards mining. When considering the relative growth of an industry with itself (year-on-year
percentage change) the management of water conservancy, environment and public facilities
grew faster than any other industry (332%). The production and supply of electricity, gas and
water; construction: and lodging and catering services; all declined year-on-year, indicative of
China’s adoption of a greener domestic economy. Despite this, the top three non-financial
Chinese MNEs ranked by OFDI stock were China Petrochemical Corporation, China National
Petroleum Corporation, and China National Offshore Oil Corporation, all of which embody the
state’s non-green resource-seeking motivations.207 These three firms also ranked as the top
three in terms of foreign revenues. It is quite clear that while there was a push towards green
technology at home, this was not at the expense of the primary industries sector which remains
an immensely profitable and strategically important sector for China.
‘Go global’ and industry activity
In regards to the sectorial distribution of investment, ‘go global’ success was varied. Whilst the
management of water conservancy, environment and public facilities enjoyed exponential
205Positive spikes in OFDI flow habitually following negative spikes in regards to percentage change due to measurement volatility. A spike
can be, in some cases, merely a correction on the previous measure.
206MOFCOM, 2013 Bulletin of Statistics.
207Ibid,144.
70
growth, investment in the production and supply of electricity, gas and water declined by 64.8
per cent and investment in mining increased by 83.2 per cent. This suggests that whilst there
was some movement towards green growth, it was limited, and investment towards mining is a
clear violation of environmentally sustainable goals. In terms of fostering innovation,
Investment into education actually declined in 2013, although this is likely a response to
exponential and unsustainable growth rates in the years previously (904% and 412.1%
respectively), therefore this not a significant indicator of a lack of commitment to education.
Indeed, by 2016 education investment stock grew to US$ 284.5 million, up from just US$ 10.2
million in 2012. As a percentage of total stock, industries affected by ‘go global’ proportionally
changed very little throughout 2013, as a majority of activity was concentrated in mining and
banking.
BRI and locational investment
In 2013 the BRI was in its infancy and had a heavy focus on infrastructure and transportation
links, most heavily concentrated towards Central Asia. It was not until 2014 that official lists
were recorded from the State Council identifying BRI countries, nor was it until 2015 that
significant funding, through the AIIB and Silk Road Fund, was put aside to fund suitable
projects. Despite this, official preference was given to projects which satisfied the BRI, and
consideration of activity in Central Asia under the auspices of the BRI was in full swing.
Therefore, particular countries rather than broader regional patterns are an important focus for
analysis of 2013. It was in Astana (Kazakhstan) in 2013 that “Chinese President Xi Jinping
[first] unveiled the overland portion of the grand plan.”208 The project was enthusiastically
supported by the Central Asian states, who due to their geographical proximity, stood to gain
significantly from the development of trade routes and broader exchange across Central Asia.
208Putz, “What’s Next for the Belt and Road.”

71
Indeed, Kazakhstan had declared itself the buckle in the belt and road the year prior.209 Yet,
while cross border trade rose, OFDI did not.210 In fact, OFDI flows to Central Asia211 declined
by 59 per cent. Only Kyrgyzstan and Turkmenistan saw an increase in the growth in flows,
despite broader economic growth in the region. It is important to note that Kazakhstan
accounted for 80 per cent of Central Asia’s OFDI, and grew slowly due to a large injection of
OFDI in 2011, which doubled the total stock by 2012. The BRI in this case did not encourage
exponential growth, rather it consolidated the previous investment in transport infrastructure.
Furthermore, the impact of the BRI is not always primarily through an increase in outward
investment and can come in the form of increases in loans and trade rather than simply
investment. Since the announcement of the BRI, “Chinese banks have been encouraged by
Beijing to lend money to the countries that are part of the land-bridge,”212 in addition to
supporting Chinese owned and led investment projects in those countries. Indeed, Kazakhstan
has become a major beneficiary of these loans.213
The impact of the BRI on OFDI was understandably limited in 2013, and consequently a close
examination of 2013 provides comprehensive baseline data from which to consider changes in
2014 and 2015. Anxiety concerning the securing of funding for the BRI weakened foreign
enthusiasm for the project, and there remained high levels of apprehension towards what the
BRI meant in regards to China’s geopolitical strategy among investee countries. Much of the
fears directed towards China’s predatory investment, and China’s rise more generally, were
transposed onto the BRI in 2013. Subsequently, the BRI did not account for a shift in OFDI
209Daniel Rune, “Kazakstan: The Buckle in One Belt One Road,” Forbes. June 29, 2015, accessed January 9, 2017.
https://www.forbes.com/sites/danielrunde/2015/06/29/kazakhstan-buckle-one-belt-one-road/#6cb192a06b5b.
210“FDI Flows” OECD
211Central Asia refers to the states of; Afghanistan; Kazakhstan; Kyrgyzstan; Tajikistan; Turkmenistan; Uzbekistan.
212Ramtanu Maitra, “OBOR brings New Life to Central Asia: Kazakstan in Focus,” The Schiller Institute, February 2017, accessed January 10,
2018, https://www.schillerinstitute.org/economy/2016/1212-obor-kazakhstan/ok.html.
213Ibid.
72
towards countries situated along the BRI.214 The impact of ‘go global’ associated reforms were
also limited. While the reforms did have a positive impact on investment in the green
technology sector, this was limited and there was not a strong shift overall, signally that the
government’s broader vision was not being implemented in a timely manner. Furthermore, the
government’s general impetus to ‘go global’ and increase overall outward investment was
advanced throughout this period although did not grow evenly across provinces, 215 thus while
OFDI advanced in this period, it was limited by uneven policy implementation.
Policy developments in 2013
In November 2013, at the Third Plenary Session of the 18th CCP Central Committee, a number
of recommendations were made in order to encourage and develop the further opening of trade
and investment. These recommendations pushed for trade liberalisation through; the reduction
of tariff barriers; the loosening of constraints on investments (in particular in the service
industry); simplifying, streamlining and automating administration; and to permit overseas
portfolio investment by residents, thus supporting foreign investment by non-public companies.
Theoretically, if actioned, these recommendations would lower costs for foreign investment
and encourage more private industries to go abroad. The value of POEs foreign investment
projects did indeed continue to rise both aggregately and proportionately.
2014
China's outward investment grows as global rates decline
Chinese OFDI stocks increased 33.6 per cent year-on-year to reach US$ 882.6 billion in 2014.
By the end of the year, 18,500 Chinese enterprises had established projects across 186 countries
214Although not formally engaged in the project, those countries which are situated as a result of geography along the BRI trading routes are
considered in this analysis. This is an assumption made by a number of political analysists of the BRI and the State Council, in large part,
because actively engages or not, they are certain to see effects of BRI investment projects.
215Ministry of Commerce of the People’s Republic of China, National Bureau of Statistics of the People’s Republic of China, State
Administration of Foreign Exchange, 2014 Statistical Bulletin of Chinese Outward Foreign Direct Investment, (Beijing: China Statistics Press,
2015).
73
globally.216 China’s outward investment continued to grow at a comparatively fast pace and
accounted for 9.1 per cent of global flows. China’s growth in 2014 is in stark contrast to the
global average, in which flows declined by 1.2 trillion, or 16 per cent.217 In 2014, China
became the largest receiver of inward foreign direct investment (IFDI) flows, an indicator of
the perceived health of the Chinese economy, and its broader attractiveness to foreign
investment. Indeed, the value of assets of overseas enterprises grew by 36 per cent to US$ 2.25
trillion. This suggests that the profitability of overseas enterprises increased proportionally
year-on-year.
The share of OFDI flows in the financial sector declined (to 12.9%), although the overall
quantity of stock increased slightly. This is again entirely accounted for by the banking sector,
which grew by 5.4 per cent. Chinese state-owned commercial banks, by the end of 2014, had
established branches or affiliates in 38 countries and regions across the world. While the
number of branches grew by 10 to 71, the number of insurance agencies declined to 7, a 30 per
cent decrease. Divestment in insurance can therefore largely account for the ‘trend’.
M&As “were the star industry”218 of 2014 according to MOFCOM. Over 595 M&As were
conducted across 69 countries and regions. They made up 46.2 per cent of total OFDI with an
actual transactional value of US$ 56.9 billion dollars. A majority of this (57.1%) was financed
by domestic investors and/or domestic bank loans. The largest single transaction was US$ 5.83
billion dollars in which China Minmetals acquired a copper mine in Peru. M&As covered 17
industries and mining remained the dominant industry but declined dramatically (by 47.7%)
year-on-year “due to the continuous depression of [the] global commodities market.”219 In
regard to overall flows, mining only decreased by 32 per cent, and in terms of stock actually
216Ibid.
217Kimberly Amadeo. “Foreign Direct Investment: Pros, Cons, and Importance,” The Balance, June 24, 2017, accessed January 8, 2017,
https://www.thebalance.com/foreign-direct-investment-fdi-pros-cons-and-importance-3306283.
219MOFCOM, 2014 Statistical, 91.
74
increased by 245 per cent, suggesting that the industry was not hit too hard. Indeed, given the
boon of the previous year, a decline in flows may simply be a data correction. That said, the
construction industry was also hit by declining commodity prices, and flows declined by 22 per
cent in 2014. Investment in scientific research and technical services, and education, also
declined, by 7 and 62 per cent respectively. The industries that enjoyed the most year-on-year
increases in flows were the production and supply of electricity (159%), lodging and catering
services (198%), information transmission, computer services and software (126%), the
management of water conservancy (281%) and health and social works (801%). It is important
to note that none of these industries constitutes over 2 per cent of OFDI stock, or 3 per cent of
OFDI flows during any period in this analysis. Therefore, high growth-rates were concentrated
to those with lower original values, potentially over-representing the level of activity. In terms
of actual growth, flows into the leasing and business services sector went up by US$ 9.774
billion, and the wholesale and retail trade saw a boost of US$ 3.643 billion. The top industries
by stock value were; leasing and business services, wholesale and retail trade, mining, and
banking, which accounted for 77.8 per cent of OFDI stock, or US$ 686.75 billion (Table 1b).
The proportion of OFDI flowing to developed countries increased rapidly by the end of 2014,
with year-on-year growth of 72.3 per cent. By contrast the growth rate in developing economies
was 6.5 per cent and the amount flowing to transitional economies220 actually declined by 29.1
per cent. Despite engaging with 186 countries, in 2014 Chinese OFDI was highly clustered
regionally; Hong Kong, the Cayman Islands, the British Virgin Islands and Luxembourg
accounted for 68.4 per cent of total outward Chinese flows.
Regionally, Asia continued to be the primary destination of OFDI flows, accounting for 69 per
cent, but it was the developed economies of America and Europe which grew most rapidly
year-on-year, increasing by 88 and 82 per cent respectively. Growth in flows to Latin America
220China defines transitional countries in line with the UN, Transitional economies mainly include South-East Europe and Central Asia.
75
declined by almost the same degree as it had grown the previous year, yet the stock increased
overall, suggesting much of the previous year’s activity was not as fruitful as anticipated. In
Latin America, the British Virgin Islands and Cayman Islands accounted for 88.2 per cent of all
stock. Flows to Oceania slowed but remained positive, while Africa also saw a slight decline in
Chinese IFDI activity. In regard to the quantity of transactions rather than the value, Asia again
topped the list, with over 16,955 Chinese overseas enterprises established, accounting for 57.1
per cent. In 2014 the average value per transaction was US$ 5 million; by contrast the average
value in North America was under US$ 1 million, suggesting a greater number of lower level
deals. Smaller deals were now more easily approved at the provincial level and subject to less
central, and arguably, rigorous oversight, so long as they were not directed towards sensitive
industries.
The objectives of ‘go global’ were advanced throughout 2014. Chinese OFDI diversified, as
evidenced by the high growth in smaller industries. Both the total value and number of
investment projects increased rapidly. A number of these projects were established in the
business services sector and supported through the reinvestment of overseas enterprise
earnings. This reflects the loosening of reinvestment reforms. Additionally, investment in green
technologies grew considerably. The number of OFDI investments in water conservancy,
environment and public facilities went up by 139 per cent. The technology sector also received
a boost as investment in information transmission, computer services and software enjoyed a
relatively high increase of 46 per cent. Although this is slower growth than in previous years,
this is somewhat natural considering the small numerical proportion of overall deals accounted
for by the industry. The flows are on average of much higher value than the average investment
project, suggesting an energised investment push into to the sector. Supporting innovation, the
number of projects in education grew significantly, three-fold by the end of 2014. Furthermore,
76
indicators of the growing loosening of the finance industry were observed, as a number of
smaller financial firms “also became major players in financial OFDI”221 Privately supported
companies such as Anbang and Fosun made acquisitions in insurance and banking respectively.
Both deals were in Europe. This reflected a new-found enthusiasm for/or relaxing of concerns
directed towards POEs. All of these markers suggest that the government better pursued
diversification, modernisation and decentralisation through its guidance of the market.
2014 was the first year that MOFCOM began accounting specifically for OFDI along the BRI
trading routes. OFDI flow and stock to “countries along the Belt and Road”222 was considered
as a regional point of comparison with EU Countries and ASEAN countries in the Annual
Bulletin of Statistics from 2014. This is indicative of its growing policy prioritisation. The 59
Countries identified by MOFCOM were principally located in South-Eastern Europe, Central
Asia, the Middle East, and South-East Asia, and a number of Central European countries
including Austria, Belgium the Netherlands and Ireland. Clear explanations for the inclusion
and exclusion of countries were not provided, and there were numerous inaccuracies within the
official data set. Bangladesh was listed twice (the second of which appeared to have the figures
of Oman), while a number of other countries were not consistent with data provided by
MOFCOM. Consequently, an alternative dataset was used, based on consistent MODCOM and
NBS data. According to the data presented, the US$ stock along the BRI in 2014 was US$
92,460.48 million. Reconstructing this data taking into consideration data inconsistencies and
countries more broadly engaged along the Belt and Road,223 and actually resulted in a higher
quantity of OFDI stock along the BRI, finding that, by the end of 2014, Chinese companies
221Ed. Tom Rafferty, “Country Report: China,” Economist Intelligence Unit, October 4, 2016, 14.
222MOFCOM, 2014 Statistical Bulletin.
223This list was comprised through a consideration of a number of other research lists, while some countries were dropped, such as Austria –
who have no clear connection to the initiative, others were included such as Egypt, the number included in this list grew from 65 in 2013, to 67
in 2015.
77
held investment stock of US$ 252496.6 million, 29 per cent of overall figures, and more than
double than officially announced. However, OFDI directed towards BRI countries in 2014
actually declined as a share of OFDI stock, in no small part due to the growth in outward
investment in America and Europe. This masks the fact that the total stock grew 30 per cent
year-on-year in the specified countries, a marked increase on the year prior, and higher than the
average growth rate of 25 per cent. Furthermore, a large number of BRI projects take place
outside outward direct investment, supported through Chinese loans that specify a particular
project, typically involving a Chinese company in a donor country. A number of projects have
been carried out in this way, accelerating after the establishment of the Asian Infrastructure
Investment Bank (AIIB). 2014 marked a clear success for investment directed along the BRI
trading routes, however the extent to which this was determined by the CCP is not certain, nor
is there conclusive evidence of BRI prioritisation at the expense of other regions.
From these results, it is unclear how effectively the policies supporting and promoting BRI
were at redirecting OFDI toward the countries targeted. The broader global market conditions
appeared to have more impact on the overall destination choice of OFDI for domestic Chinese
firms, directing them towards the developed markets of the United States and Europe. There is
however, locational evidence that the BRI helped boost those countries along the Initiative, at
the expense of other substitute trading nations – e.g. Latin America and Oceania. This suggests
that it was the characteristics of the developed markets that attracted investment. Indeed, ‘go
global’ favours investment into developed economies for the pursuit of technological
upgrading. This illustrates the possibility for tension between the industrial priorities of ‘go
global’ and the BRI, and highlights the potential importance of the firms’ agency in the context
of looser regulation and converse political objectives. The bolder expression of private interests
in 2014 suggests that investment could potentially be swayed towards a profit-maximising

78
direction. However, there are signs to suggest that this was only due to the government’s desire
to improve investment profits through adopting greater privatisation. Indeed, there is evidence
of an increased willingness of the government to support POEs and allow more market
influence in 2014, as it supported the expansion of the private finance sector - the number of
banking M&As increased rapidly in 2014 (by 147%) - indicative of the loosening of
governmental regulation over POEs. This suggests that the government was increasingly
willing to adopt market-conforming reforms throughout 2014 in order to promote investment
holistically.
Policy development in 2014
The push to reduce regulation continued throughout 2014. The Ministry of Commerce set up
systems to provide greater support for firms seeking to go global. They enhanced their
guidance capabilities for particular regions, providing county specific support, and issued a
number of obstacle reports providing companies with exemplar case studies. Particular
industries were also targeted, The Guiding Opinions on Promoting the International Capacity
and Equipment Manufacturing Cooperation represent MOFCOM and NDRCs intention to
support the manufacturing industry specifically. Broader OFDI was also supported through the
implementation of the simplified approval and cancellations procedures of outward investment.
Financial advancement was similarly pursued in, and through, Hong-Kong, where the
Shenzhen-Hong Kong Stock Connect was initiated to “improve the efficiency of cross-border
capital flow”224 enabling the “mainland’s wealth [to] be diversified and deployed globally
through Hong Kong.” This project, initiated in 2014, reflected a new form of inter-connection,
and “marked the first cross-border stock market.”225 .
224“Shenzhen-HK Stock Connect marks a more open capital market,” Economic Daily, December 7, 2016, accessed January 12, 2018,
http://english.gov.cn/policies/policy_watch/2016/12/07/content_281475509961460.htm.
225Ibid.
79
By 2014, the productivity gap between state and private enterprises had widened the most since
the GFC, “with average return on assets for state entities at around 4.6 per cent, compared with
9.1 per cent for private companies.”226 Seeking to address this, the State Council issued a
number of reforms directed at reforming SOEs and rendering them more profitable, including
the push for “mixed ownership” reflecting the central push for greater partial privatisation.
Large exporting firms were included such as China National Building Materials Group and
China National Pharmaceutical Group Corporation (Sinopharm). Overall, since 2014, the
Chinese government has cut red tape on overseas investment to reduce costs to business and
speed up business activities.227
2015
A new era of investment? Positive net direct investment
In 2015, China’s OFDI stock increased by 24 per cent from 2014, to surpass US$ 1 trillion for
the first time.228 China’s outward flows accounted for 9.9 per cent of all international OFDI
flows, making China second among all countries globally in this regard. The large majority of
OFDI flows and stock continued to be centred in the non-financial sector. While investment
flows to the financial sector increased proportionally to 16.6 per cent, the stock actually
declined to 14.5 from 15.6 per cent. Flows grew year-on year by 52.3 per cent, once again this
is entirely accounted for by the banking industry.229 China’s state-owned commercial banks
established 79 branch offices, an increase of 8, and broadened their reach to an additional 3
countries.
226Gabriel Wildau, “China announces plan for reform of state-owned enterprises,” Financial Review, July 16, 2014, accessed January 11, 2018,
https://www.ft.com/content/07928638-0c24-11e4-a096-00144feabdc0.
227Yao Nian. “China’s private enterprises dominate ‘Go Global’ era 4.0,” March, 7, 2017, accessed January 10, 2018,
https://news.cgtn.com/news/3d496a4d34676a4d/share_p.html?t=1488893979823.
229The Banking Industry is also referred to as the Financial Industry and Includes; Monetary and financial services; Capital Market services; the
Insurance industry; and other financial industries as specified by MOFCOM in their “guidelines for the Industry Classification of Listed
Companies.
80
A large portion of this outward investment was conducted through M&As, with over 593
projects with a transactional volume of US$ 40.1 billion. These projects covered “almost all
industries of the national economy,”230 expanding in scope from the previous year.
Significantly, 75.6 per cent of the number of these deals can be attributed to local enterprises,
indicating more frequent but less high value transactions, a result of decentralisation reforms
from the previous year. In terms of M&A transactions, the regional distribution remained
relatively concentrated in terms of transaction value, dominated by the United States, Cayman
Islands, Italy, Hong Kong and Australia respectively. The domination of particular countries
continued across all forms of investment - investment into the top 10 countries accounted for
86.1 per cent of the total of outward non-financial direct investment.
In regard to aggregate outward investment, Hong Kong led the overall growth in OFDI. OFDI
flows to Hong Kong constituted 61.6 per cent of OFDI and Hong Kong was the only region to
increase OFDI at a higher rate than the average rate of total stocks (Figure 3d). This is in part
due to a distortion in the figures as a result of Hong Kong’s majority share of OFDI stock.
Looking instead at flow data, which reveals movements in transactions, Asia (excluding Hong
Kong) actually saw a greater increase in OFDI flows (32%) than Hong Kong (27%) and Latin
America grew more rapidly than the average.
A majority of OFDI stock continued to be concentrated in developing economies (83.9%), 71.3
per cent of which is accounted for by Hong Kong.231 Despite this, the proportion of stock to
developed economies increased proportionally, to 15.3 per cent, with the European Union
responsible for a majority share of stock at 41.9 per cent of the share. The United States and
Australia accounted for the majority of the rest, although the United States share declined
somewhat year-on-year to 26.6 per cent of the total, due to proportionally slower growth than
230“Official of the Department of Outward Investment and Economic Cooperation of the Ministry of Commerce Comments on China’s
Outward Investment and Economic Cooperation in 2015,” MOFCOM, January 18, 2016, accessed July 3, 2017,
http://english.mofcom.gov.cn/article/newsrelease/policyreleasing/201602/20160201251488.shtml,
231China classified Hong Kong as ‘developing’.
81
the developed countries of Europe. Outward investment flows into Europe from China itself
actually declined year-on-year by 34 per cent, and while North America saw modest growth of
18 per cent, this is a sharp deceleration when compared to the 88 per cent growth in 2014. This
can arguably be attributed to domestic factors in China, as overall IFDI flows to the EU and the
US grew dramatically in 2015 (by 98% and 125%) respectively.232 This suggests that
endogenous factors within China encouraged Chinese businesses to invest proportionally more
in Asia. This is particular true of small enterprises; Chinese M&As to Europe declined
significantly in average value in 2015, from 3.25 to 2.01 million, and in quantity, by over 30
per cent.
By contrast, the value of average M&As in Asia (including Hong Kong) grew by 27 per cent to
reach 44.94 million per transaction.233 For the first time since 2011, outward Investment flows
in Asia (32%) grew at a faster rate than Hong Kong (18.3%), while flows into Latin America
rebounded to increase by 20 per cent year-on-year. This is likely due to huge corrective influx
of OFDI flows into the Cayman Islands on the previous year’s decline.234 Across all other
regions OFDI flows year-on-year slowed throughout 2015. Europe, Oceania and Africa all had
negative net flows, declining by 34, 11, and 7 per cent respectively, while North America
growth was modest. Despite this, stock levels remained stable across the regions outside Asia,
increasing overall, with growth rates declining only modestly. Stock in Oceania remained
stable, with the rate of stock growth declining most rapidly in North America (from 68% to
9%) and Africa (24% to 7%). Oceania and Europe also all saw sharp decreases in stock growth.
From an industrial perspective, leasing and business services continued to constitute the largest
proportion of outward investment flows 25%), despite negative flows (of 2%) throughout
232“DATA,” Organisation on Economic Co-operation and Development, https://data.oecd.org/fdi/fdi-flows.htm#indicator-chart.

233This
figure is representative of large financial investments in or via HK).
234OFDI Flows in the Cayman Islands dropped from US$ 9,253.4 million in 2013, to US$ 4,191.7 million in 2014, and back to US$ 10,213 in
2015.
82
2015.235 Proportionally the banking sector grew hugely, as did the manufacturing sector (albeit
at a relatively slow rate) at the expense of the wholesale and retail trade, and mining, to become
the second and third largest industries proportionally. Manufacturing grew by 109 per cent
whilst mining declined by 32 per cent and growth in the wholesale and retail sector slowed
from 25 to 5 per cent year-on-year. Stock in both these industries did however continue to
increase by 192 per cent in mining, and a more modest 21 per cent in the wholesale and retail
sector. Service industries had high growth rates, with lodging and catering, and computer
services, information transmission and software growing by 195 and 115 per cent respectively.
Education also increased hugely, by 360 per cent as did investment in culture, sports and
entertainment (237%). These industries all are lower in base figures so high growth rates are
less significant from an aggregate perspective; however, this growing activity does reflect the
further diversification of the Chinese economy, and the promotion of innovative industries.
A number of the key industries identified in 2014 as growing quite rapidly in accordance with
‘go global’ experienced a slowdown throughout 2015, in particular, the green energy sector
where the number of projects in water conservancy, environment and public facilities declined
by 25 per cent. Despite this, overall flows continued to grow by 148 per cent, suggesting that
big projects were encouraged to go ahead. This is less than half the rate of the previous two
years. The rate of investment flows towards the production and supply of electricity, gas and
water also decelerated, growing at just 21 per cent, an eight-fold decline on the previous year-
on-year growth rate. Investment in innovation increased, with flows into scientific research and
technical services increasing quite rapidly (by 100% in terms of industrial flows) yet the
number of projects also declined with total stock level declining by 29 per cent. This suggests
235Note:
In 2015, MOFCOM changed the accounting matric of industrial distribution affecting some industries year-on-year comparisons,
which were renamed, this data was reconstructed in order to represent the core data.
83
there was a high level of enthusiasm for investment but difficulty securing projects or value-
for-money deals236 which parallels the experience in the green energy sector. The decrease in
investment towards mining further signifies the enthusiasm for green upgrading and broadening
of the economy through innovation.
Further diversification occurred throughout 2015, consistent with the core priorities identified
in the Twelfth Five-Year Plan. However, the sharp sectorial decline in transport, storage and
postal services (by 35 per cent) is a concern for the Central government, as such industries
improve the efficiency and effectiveness of the economy and contribute positively towards the
objectives of the BRI. The number of M&A project in this industry declined from 62 to 1,
suggesting a dramatic decrease in activity. This is principally due to the collapse in global
shipping, a delayed response to the GFC. This is indicative of a lack of progress along the BRI,
and the need to propel and advance global investment.
The BRI continued to gain pre-eminence in economic parlance among Chinese officials and the
state media. In 2015, China identified 62 countries associated with the Initiative, up from 59 the
previous year. Articles concerning the BRI increased in number, and it was increasingly cited
in official statements concerning the economy. 2015 MOFCOM triumphed “the leading role of
the ‘Belt and Road’”237 stating that it had “gained recognition and response from more and
more countries.”238 This claim is slightly misleading, while it is true that the BRI was gaining
more international parlance, support was not always forthcoming. While, OFDI stocks along
the BRI increased by 38 per cent by the end of 2015, the proportion of OFDI accounted for by
BRI countries, which by 2015 actually declined as a proportion of overall outward investment,
236Note that stock levels are measured in monetary values, if a project declines in value by 50% so does its stock value.
237“MOFCOM Department Official of Outward Investment and Economic Cooperation Comments China Outward Invest and Cooperation in
2016,” MOFCOM, January 18, 2017, accessed September 12, 2017,
http://english.mofcom.gov.cn/article/newsrelease/policyreleasing/201701/20170102503092.shtml.
238Ibid.
84
constituting just 13 per cent compared to 29 per cent in 2014. This is well below the average
growth rate of 24 per cent year-on-year globally. However, if Hong Kong is included as a BRI
country,239 or of Hong Kong is excluded from overall OFDI growth, the proportion of OFDI
going towards BRI countries increased from 28.44 in 2014, to 33.22 per cent in 2015. This is
the first-time stock to the region grew significantly as a proportion since the inauguration of the
BRI. Considering the context of high growth in 2015, this change can be considered in part due
to the preferential treatment afforded to projects considered suitable by the Central and
provincial authorities.
From these results it is clear that by 2015, the government had more effectively steered the
market towards BRI participating countries and to target industries associated with the
diversification and improved sophistication of the overall economy. However, their success
was widely uneven, with the BRI constituting markedly higher success. Investment in BRI
countries was pursued by smaller firms and deals of smaller value suggest that by 2015
incentives had filtered down through multiple levels of governance. Rather than directly
pushing large SOEs towards the BRI, market incentives successfully permeated the cost-benefit
calculations of firms, this is indicative of strong conviction throughout provincial government.
The push for industrial advancement of ‘go global’ met with greater resistance as, despite a
high level of interest (flows), the lack of economic success for firms entering these markets
weakened enthusiasm and resolve. This highlights the limitations of successful regulatory
policy when it runs against economic interests. This trend was augmented by the broader health
of the Chinese economy.
239Officially it is not a member country as Hong Kong is part of China.

85
Official rhetoric masked growing concerns about the overall health of the economy throughout
2015. Whilst, according to MOFCOM “Chinese enterprises strengthened transformation and
upgrading, and speeded up the “going out” policy240 the Chinese economy grew at its slowest
rate for more than 25 years, at just 6.9 per cent - below the government’s 7 per cent target,
prompting “doubts over China’s economic prospects.”241 Indeed, private finance firms
estimated that growth was lower than officially accounted for and that the rate “in the fourth
quarter was in reality 4.5 per cent” rather than 6.8 per cent.242 Given perceptions of growing
market weakness, and the power of OFDI to boost GDP facilitated by the vast capital stocks
available, it is unsurprising that throughout 2016 the government sought to enthusiastically
encourage further outward investment. This is an example of broader economic considerations
impacting upon OFDI regulation.
Policy development affecting 2016/17
A number of policies were released in 2015 which had a direct impact on OFDI in the
subsequent two years. In 2015, the reality of slower GDP growth and talk of a potential
accelerated slowdown, contributed to the formalisation of the loosening of capital controls
domestically to “practically optimise the business environment and further vitalise the market
and motives for development.”243A wide range of regulations were revised. On October 28,
MOFCOM issued their official revisions of Certain Regulations and Regulated Documents, in
order to promote the “reform of the registered capital registration system.”244 This revised 29
regulations and reform documents. A number of articles were deleted, particularly provisions
concerning the reparation of foreign capital. The deletion of article 8, 16, 19 from the Interim
240“Officialof the Department of Outward Investment and Economic Cooperation of the Ministry of Commerce Comments on China’s
Outward Investment and Economic Cooperation in 2015”
241“Spotlight: Top global firms closely followed ‘Two Sessions,’ confident in Chinese economy,” Xinhua, March 17, 2016, accessed September
1, 2017, http://www.xinhuanet.com/english/2016-03/17/c_135197915.htm.
242Jethro Mullen, “China posts slowest annual growth in 25 years,” CNN Money, January 19, 2016, accessed September 1, 2017,
http://money.cnn.com/2016/01/18/news/economy/china-2015-gdp-growth/index.html.
243Trans. Hou Zuowei “MOFCOM Order NO. 2 of 2015 Decision on Revising Certain Regulations and Regulated Documents,” MOFCOM,
November 5, 2015, accessed June 12, 2017, http://english.mofcom.gov.cn/article/policyrelease/announcement/201511/20151101158956.shtml.

244Ibid.
86
Provisions Concerning Some Issues on the Establishment of Joint Stock Limited Companies
with Foreign Investment (Order of the Ministry of Foreign Trade and Economic Cooperation
(1995) No. 1) all facilitated a relaxing of controls over foreign earnings. These reforms created
greater financial incentives for Chinese companies to invest abroad. Revisions to the
Administrative Measures of People's Republic of China for Export Registration of Sensitive
Item and Technology (Order of the Ministry of Foreign Trade and Economic Cooperation
(2002) No. 35) widened the scope of industries that could invest abroad, and the revisions to
Administrative Measures for Qualifications of Overseas Project-contracting (Order of the
Ministry of Commerce and the Ministry of Housing and Urban-rural (2009) No. 9) decreased
the economic requirements for Chinese enterprises to qualify to go abroad. Further revisions
addressed the need to normalise the examination, approval and supervision process.
All these reforms combined to both encourage and facilitate the expansion of Chinese OFDI.
They were also encouraged by broader structural improvements such as the introduction of an
online approval process which resulted in up to 95 per cent fewer procedures for some
companies planning on going global.245 In early 2016, these reforms were championed by the
press as facilitating greater foreign investment. Domestically, better quality, but simplified
regulation and stable monetary policy were emphasised and internationally, these reforms were
seen as a step towards the greater marketisation of Chinese OFDI. Both accounts predicted
greater and more efficient investment throughout 2016. To further enhance the innovation
priorities of the government, Made in China 2025 was released. This policy re-energised the
push towards innovation and domestic upgrading outlined in ‘go global’.
Findings
245“China paves way for more foreign investment via simplified procedures.” Xinhua, October 9, 2016, accessed January 10, 2017.
87
From 2015, it is clear that the degree to which reform is consistent with and supportive of
existing private interests affects how successfully particular goals are realised. When policies
support existing private profit motivations they are pursued with vigour at the expense of other
considerations – as evident in 2014 along the Belt and Road. Similarly, when government
objectives run contrary to profit maximisation, they are less successfully achieved in the long-
term, despite inciting increased interest and activity – as evident in regard to green growth in
2015. The positive correlation between economic and political motivations is not surprising.
The degree to which a policy was pursued at a provincial level or is consistent with
decentralisation correlated with an increase in activity amongst smaller firms with lower
transaction values. The extent to which this translates into greater economic efficiency is
debatable – many examples suggest that this actually results in weaker oversight, higher levels
of corruption and more spurious investment. The extent to which policies are pursued at a
decentralised level also reflects the governments’ central conviction and the relative strength of
enforceability though central versus decentralised bodies. The strength of government’s
conviction is more difficult to gauge and most easily measured when broken. Apprehension
over the success of reforms and a readiness to reverse policy reveals the limitations of central
conviction. Such trepidation can only be loosely predicted, particularly when the costs, or
political trade-offs of economic policy are considered.
88
PART 4 – FINDINGS AND CHALLENGES
2016
Increased growth, growing debt and declining profitability
China’s OFDI ballooned in 2016 to record heights, growing by 34.7 per cent to US$ 196.14
billion, double the growth-rate of the year prior. In November alone, outward investment
jumped by 76.5 per cent to reach US$ 15.74 billion.246 By contrast, inward investment flows
actually declined by 0.2 per cent - the first time since 2008.247 M&As continued to play a
growing role in OFDI, increasing year-on-year by 25 per cent. Chinese companies conducted
742 M&A projects across 73 countries and regions and 18 industries, with a transaction value
of US$ 107.2 billion. The number of M&As in manufacturing, and information transmission,
software and technology reached 197 and 109 respectively, taking up 26.6 per cent and 14.7 per
cent of the total. Non-financial outward investment grew in particular, increasing by 55.3 per
cent year-on-year. Some 7961 enterprises invested abroad in non-financial ventures and the
total revenue of these contracted projects was US$ 159.42 billion.248 Proportionally, non-
financial investment also grew as a share of overall stock due to a decline in the banking sector.
Outward investment from local firms led this growth, registering US$ 148.72 billion,
accounting for 87.4 per cent of the total – an increase from 66.7 per cent in 2015. This is
significant evidence of a push towards both decentralisation and privatisation, nominally
associated with greater efficacy due to the enhanced activity of smaller less politically
constrained firms. Despite this, throughout the year, it became increasingly apparent that a
large number of investments were ‘irrational’, that is making poor investment decisions
246“China FDI growth slows, ODI increases,” Xinhua, 15 December, 2016, accessed January 5, 2018, http://news.xinhuanet.com/english/2016-
12/15/c_135908422.htm.
247“FDI Flows,” OECD.
248“MOFCOM Department Official of Outward Investment and Economic Cooperation Comments China Outward Invest and Cooperation in
2016,” MOFCOM.
89
resulting in negative returns on growth.249 Throughout the first two quarters of 2016,
MOFCOM maintained that investment was ‘sound’ and ‘orderly’.250
OFDI stock increased in every region globally, however the growth rate varied considerably.
Stocks in Latin and North America grew substantially (by 64 and 45 per cent respectively), and
investment stock in Africa grew modestly by 15 per cent. By contrast growth rates in Europe,
Asia and Oceania all declined year-on-year, but in aggregate terms increased overall - Europe
returned the slowest rate of growth at 4 per cent. Flow data suggests that activity in Europe
actually grew by 50 per cent year-on-year, thus the slowdown in stock growth is due to a
decline in flows in 2015, rather than indicative of a push away from Europe throughout 2016. A
similar pattern is observable for Oceania, where flows grew by 35 per cent year-on-year and
decreased by 11 per cent in 2015. In regards to flows, Latin and North America again saw the
most activity as investment increased by 116 and 90 per cent respectively. Outward investment
flows reveal that this flurry of activity was often localised. Investment in the Virgin Islands
increased by 169 per cent and more than doubled in the United States (124%).251 Flows towards
Africa and Asia (non-inclusive of Hong Kong) declined somewhat in 2016. This was the third
consecutive year of decreased flows towards Africa. Despite the declining flows towards Asia,
curiously, a number of economically significant Asian states, such as Japan, Macao and
Singapore saw a return to 2014 levels after a turbulent 2015, suggesting uneven and
unsanctioned investment was corrected. By contrast, re-energised investment flows can also
suggest a new-found confidence to ignore economic indicators that had cautioned investors in
previous year. As firms, confident in political support ignore markers of weak economic
viability. In this case the confirmation of support for BRI projects by the government and the
249“China closely monitoring “irrational” outbound investments,” Xinhua, December 6, 2016, accessed December 17, 2017,
250 Ibid.
251“National Data,” National Bureau of Statistics China, http://data.stats.gov.cn/english/easyquery.htm?cn=C01.
90
newfound securing of funds through the AIIB would have undoubtedly raised the attractiveness
of Asian economies in 2016.
Sectorial stock fluctuations were uncharacteristically volatile, more so than any time since the
2008 GFC. Despite the overall increase in OFDI, numerous industries saw a steep decline in
investment activity. Investment stock in the wholesale and retail trade declined by 91.3 per
cent, and mining and construction dropped by 82.8 and 88.2 per cent respectively. The banking
sector also weakened, experiencing the largest fall since 2008 (38.5%). In real terms, stock in
the banking sector sank by the second largest amount of all industries. By contrast, in order to
account for the overall growth in OFDI, a number of sectors expanded exponentially.
Investment stock in the service industry grew with lodging and catering services increasing by
2789.2 per cent, and residents service, repair and other services up by 239.1 per cent. This
reflects the desire of Chinese firms to obtain service know-how from overseas to better meet
domestic demands. Education also saw a huge increase in investment stock, increasing by
4467.7 per cent year-on-year, as did health and social work, which recovered year-on-year to
increase by 5708.9 per cent. The sharp incline in education can be, to some extent, attributed to
its low base value, but this growth is also indicative of its continued growing political
prioritisation. Investment in both education and health reflect a central commitment to more
inclusive growth, and in regards to education, a more innovative economy. The real estate
industry grew by over US$ 746 million in 2016, nearly doubling (growing by 95.8%).252 This
was fuelled by both firms and private citizens who saw foreign real estate acquisition as a to
safe way to store assets abroad and insure their savings against the yuan. Concerns over the
stability and security of the financial sector further fuelled this. Firms amplified this trend,
making huge purchases in commercial and residential property. A Chinese property group,
252Ibid.
91
Boyuan Holdings, purchased 40.5 hectares in Sydney, Australia, for A$ 70 million, and
Minmetals bought a residential site in Hong Kong for HK$ 4 billion.253
This capital flight alarmed the government as high levels of investment in real estate, lodging
and catering services, and the entertainment industry sparked fears that firms were excessively
moving capital abroad, (reliant upon state loans) and making poor investment decisions in
nonstrategic fields.254 Such fears were amplified as profitability declined, which occurred
despite the increased participations of POEs who had historically enjoyed significantly higher
returns on assets (Figure 4c). This shift can be in large part be attributed to the fact that
investment was fuelled by high-value contracts. The number of newly-signed contracts for
projects with a value above US$ 50 million reached 815, an increase of 91 year-on-year, and
together their combined value amounted to US$ 206.69 billion. This is 84.7 per cent of the total
value of newly-signed contracts, thus fuelling the investment boo. However, the scale of
investment hid their weaknesses.
In 2016, SOEs became markedly less profitable (Figure 4c). Based on NBS industrial data,
SOE interest coverage (ability to service debt obligations), slumped significantly for SOEs,
proportionally faster than all other ownership categories (which also saw a consistent
downturn). SOEs ability to service their debt declined from a high of 4.58255 in 2014 to just
3.13 in 2016. This suggests that SOEs became considerably less profitable, despite their
enthusiasm to invest lavishly abroad. This also suggests a correlation between irrational
investment and SOE expenditure. This is despite additional government involvement in the
firm, suggesting that such investment projects are prone to mismanagement, corruption and
excessive confidence due to secure state financing. Indeed, the proposed US$ 14 billion
253Ellen Sheng, “Chinese Investment in Overseas Real Estate Hit Record High in 2016,” Forbes, January 31, 2017, accessed September 10,
2017, https://www.forbes.com/sites/ellensheng/2017/01/31/chinese-investment-in-overseas-real-estate-hit-record-high-in-
2016/#5899291e7971.
254Keith Bradsher, “After $225 billion in deals last year, China reins in overseas investment,” CNBC, March 12, 2017, accessed January 19,
2018, https://www.cnbc.com/2017/03/12/china-reins-in-overseas-investment.html.
255Leverage ratio, or debt-to-equity ratio, see Figure 6b.
92
purchase of Starwood Hotels was abruptly abandoned in 2016,256 and just 6 months later
Anbang’s chairman was arrested for corruption.257
Most alarmingly however, is that this declining profitability is in the context of the leverage
ratio (aka budget) increasing for SOEs, while the budgets for other enterprises with different
ownership-forms enterprises declined. In essence, this meant that SOEs were receiving and
spending more money, while earning less. In effect, SOEs were spending the governments’
money with less concern than private industry as to the profitability of their projects. More
alarmingly to the government however, was their declining control over the constitution of this
investment, and their inability to successfully manage state-owned firms.
MIC2025 and the Thirteenth Five-Year-Plan theoretically energised both the economy and the
push to ‘go global’. However, in reality, some of the success of ‘go global’ in the previous two
years appeared to be undone in 2016. This is all the more remarkable in the context of growing
OFDI but could potentially be attributed in part to the stronger focus “on the entire
manufacturing process not just innovation,”258 and a higher emphasis on domestic capacity.259
Outward investment stock in sectors booming under ‘go global’ declined sharply. Stock in the
information and technology sector dropped by 76.2 per cent, despite exponential growth in the
previous years. Investment towards the management of water conservancy, environment and
public facilities also suffered from this trend, declining by 38.1 per cent, despite huge growth
for the years prior. This could also be evidence that investment returns did not meet
256Greg Roumeloitus and Matthew Miller, “China’s Anbang abandons $14 billion bid to buy Starwood Hotels,” Reuters, April 1, 2017,
accessed January 12, 2017, https://www.reuters.com/article/us-starwood-hotels-m-a-anbang/chinas-anbang-abandons-14-billion-bid-to-buy-
starwood-hotels-idUSKCN0WX2PE.
257Terence Baker, “Chinese capital squeeze hits major hotel investors,” Hotel News Now, August 31, 2017, accessed January 11, 2017,
http://hotelnewsnow.com/Articles/232884/Chinese-capital-squeeze-hits-major-hotel-investors.
258Scott Kennedy, “Made in China 2025,” Centre for Strategic and International Studies, accessed March, 11, 2017,
https://www.csis.org/analysis/made-china-2025.
259Ibid.
93
expectations, and that previous growth was spurious. By contrast, the shift towards green
growth remained firm.
Investments in green energy increased at the expense of mining, which declined dramatically in
2016. Mining stock reduced by US$ 906 million to just US$ 19.3 million in 2016.
Manufacturing by increased by 45 per cent, particularly directed towards high-end equipment
and manufacturing as stipulated in MIC2025. Domestic support towards “emerging industries,
won more attention,”260 from firms, who seized on the opportunity to receive favourable
financial support – this aided the diversification of outward investment, which was also
promoted through the reduction of sectorial restrictions. The objectives of ‘go global’ were thus
pursued to a limited and varied degree in 2016.
According to MOFCOM in 2016, co-operation with countries along the Belt and Road became
the highlight of outward investment.261 Indeed, the significance of the BRI was solidified in
2016, with an update on the Initiative becoming the first thing mentioned in MOFCOMs annual
performance review. According to MOFCOM, 51.6 per cent of the newly-signed contracts (by
value) were in countries along the BRI, and the number of cooperation zones established along
the BRI was 56. Despite this, proportionally, the percentage of investment flows directed
towards Asia (excluding HK) actually declined by 14 per cent. The BRI was however
expanding further beyond Asia, in particular to Oceania and Europe. Notable new additions to
the BRI received much activity - New Zealand investment inflows increased by a huge 262 per
cent year-on-year and the Netherlands enjoyed an exponential increase since 2014.262 Asia
continued to account for proportionally less BRI volumes, despite increasing as an investment
260“MOFCOM Department Official of Outward Investment and Economic Cooperation Comments on China’s Outward Investment and
Cooperation in 2016”
261Ibid.
94
destination overall, illustrating the successful permeation of the BRI more widely. An
additional indication of the successful pursuit of the BRI was the growth enjoyed by the
transport, storage and post sector (584.3%) The Belt and Road enjoyed greater success
throughout 2016 than any of the years prior, and the securing of finance emboldened the
initiative.
Findings
The efforts to spur economic growth and stimulate outward investment by the government in
2015 achieved that objective but failed to satisfy the government’s broader criteria for success,
particularly in regards to investment make-up, direction and quality. The industrial breakdown
of OFDI, and movement of investment towards the United States in non-strategic industries,
illustrates the limitations of central regulatory control. This was amplified by lower returns on
profits. Given that the government pushed for less regulation, decentralisation and a nominal
commitment to prioritising economic means to achieve efficacy, the experience of 2016 sheds
considerable light on the limitations of the government’s ability to reform the financial system
effectively.
Reform in 2015 was consistent with private economic considerations, as it loosened market
restrictions almost uniformly. Despite this, the lack of internal fiscal and monetary
accountability meant that less regulation did not translate to better growth, but rather just more
growth. This suggests policy could have been better designed in order to be more effective and
illustrates the complicated nature of the distortionary role of financial sector regulation. The
regulatory shift was designed with the premise that less oversight of the financial sector would
yield high returns, and provincial governments rather than the central authorities should
increasingly take the lead due to their localised knowledge. Privatisation was not as successful
as presumed.
95
A vital element of reform in 2016 was a push towards decentralisation, which gave more power
to provincial governments to oversee firms and local capital flows. This removed central
oversight from a plethora of deals, which in many cases led to greater corruption and
mismanagement.263 The localised nature and higher number of lower value deals to some extent
provided greater opportunities for graft and corruption as it gave officials a sense of anonymity
and security. In the context of numerical export targets, the calibre of such outward investment
was of secondary priority. The lack of profitability could also be attributed to the inherent flaws
of the firms themselves, who were used to competing within a more direct support from the
government. Decentralisation as a tool of implementation of regulation revealed itself to be
particularly weak.
The lack of oversight of the central government also extended to SOEs. With less direct
oversight, SOEs made less sound financial decisions which seemingly contradicts market
theory and triggered a drastic rethinking of capital control flexibility. Indeed, excessive and
unprofitable investments by SOEs validates the view among some in the CCP that market
liberalisation is not compatible with the Chinese market.
By the end of 2016, the central government’s commitment to reform revealed itself to be weak,
due both to the lack of success of these reforms and how investment flows more broadly
contradicted political priorities. The lack of control and oversight over OFDI composition was
a problem for the CCP both in terms of being able to exercise direct control over regional party
members and to protect the image of the state, which came under critique from investee
nations. In this context of disillusionment, Xi Jinping saw an opportunity to regain lost control,
across not just the economy, bur broader political and social life also.
263Lowreturns can in some cases be considered indicative of corruption, as companies win deals due to political connections rather than
economic viability.
96
2017
The Great Decline
The short-term solution to this perceived crisis was capital controls. Anxiety over the
seemingly uncontrollable, rapid acceleration of outward investment and capital flight was
amplified by the number of investments that were revealed to be excessive and unprofitable. In
particular, the acquisitions of luxury goods, hotel chains, and football clubs with state-funded
support, proved both distasteful to a public weary of corruption, and financially ill-advised.
Excessive expenditure in certain industries was viewed particularly unfavourably by a number
of countries,264 such as in Australia concerning real estate and in America in regards to the
acquisition of large national brands.265 The government was thus under both domestic and
international pressure to respond to the ‘excess’ outward investment in 2016. Towards the end
of 2016, significant moves were made to tighten capital outflows.
Domestically, a growing number of reports highlighted the unprofitability of a number of
investments, reminding the public of the failed projects of the early 2000s.266 This put
additional pressure on the central government to address the situation at a time when concerns
rose regarding the liquidity of Chinese financial markets. The revelation that the profits from
investment were actually declining came as a shock to some in the ruling elite, to others it
underscored the need for the central government to maintain a firm and heavy hand in fiscal
policy. The Ministry of Commerce, the People’s Bank of China, the National Development and
Reform Commission, and the National Development and Reform Commission all released a
264Roumeloitus, “China’s Anbang abandons $14 billion bid to buy Starwood Hotels.”
265Ibid.
266“China closely monitoring “irrational” outbound investments,” Xinhua.
97
joint statement towards the end of the year advising companies to make decisions “carefully,”
suggesting greater scrutiny, in particular over certain industries.267
The political environment was now ripe for the introduction of firm controls to curb outward
investment. This could be done through either the tightening of broader regulatory controls, or
by increasing capital controls –essentially shutting off the supply to cheap money. The CCP
chose to initiate capital controls rather than regulatory tightening, which indicates an increasing
unwillingness of the central party to have faith in provincial authorities to achieve their
objectives through decentralization. Financially, the high levels of outward investment “raised
concerns about capital outflows at a time when the Chinese currency was under depreciation
pressure,”268 further reinforcing the need for capital controls. In regards to currency valuation,
the Chinese government had ruled out sustained depreciation of the renminbi,269 thus
amplifying the pressure to curtail capital outflow through alternative means.270
The Party communicated to provincial offices and firms the newfound tightened regulations at
the end of 2016, but they were not formalised until August 2017. This strengthened the
significance of MOFCOM official statements, which in many cases were vague and
misleading. In response to announcements of intent, that China will tighten regulations on
investment to slow capital outflows, MOFCOM (December, 6, 2016) assured the public/firms
that there was “no change in government policies to encourage businesses to ‘go global’ [and]
the principle in investment management policies has not changed.” However, they did
acknowledge that they were closely monitoring the tendency of ‘irrational’ overseas investment
267“China FDI growth slows, ODI increases” Xinhua.

268Ibid.
269“China closely monitoring ‘irrational’ outbound investments,” Xinhua.
270To USD, note Yuan remained stable to other major currencies.
98
in some areas.”271 This ambiguity amplified market uncertainty and triggered a sharp reduction
in outward investment
Formalising new regulation and going forward from 2017.
China’s OFDI in the first two quarters of 2017 declined by 44.3 per cent. Despite this, by the
end of the year it had recovered somewhat, to 1 per cent growth. The transient nature of this
decline underscores the responsibility of regulatory controls, considering the trend was able to
be reversed. According to MOFCOM outward investment was mainly directed towards; the
leasing and commercial service industry; manufacturing; wholesale and retail industry and
information transmission; and the software and information technology services industries,
constituting 32.4, 17, 12.3 and 9.9 per cent respectively.272 MOFCOM also specified that “no
new projects were added in real estate, culture, sports and entertainment areas,”273 stressing
their commitment to curb ‘irrational’ outward investment, not investment overall. Additionally,
according to MOFCOM outward investment along the BRI countries increased by over 20 per
cent, stressing their continued commitment to central objectives.274 Note that this is still a
decline on 2012-2016 averages.
Capital controls successfully decelerated OFDI in the first two quarters, but potentially too
effectively, due in no small part due to the ambiguity concerning new legislation. The
Government made a concerted effort to appear in complete control but was unable to formalise
or clarify new legislation until August 2017. This discouraged investment by all forms, as it
was not until this time that firms across China could make well-informed investment decisions
based upon confirmed legislation. These policies made explicit the Party’s de facto campaign
271Ibid.
272“MOFCOM Department of Outward Investment and Economic Cooperation Comments on China’s Outward Investment Cooperation in
January-October,” MOFCOM, Accessed January 11, 2017,
http://english.mofcom.gov.cn/article/newsrelease/policyreleasing/201711/20171102674847.shtml.
273“China’s Outward Investment Cooperation in January-October,” MOFCOM.
274Ibid.
99
against ‘irrational’ acquisitions of assets, and the need to prohibit certain forms of overseas
investment and to limit the development of investment across sensitive regions and industries.
In essence, all industrial sectors were classified under three categories; “banned; restricted; and
encouraged.”275
Ø Banned categories were prohibited, and affecting such industries as pornography,
gambling, military technologies and any “other overseas investments that endanger or
may endanger national interests and national security.”276
Ø Restricted industries were those subject to new found rigorous restrictions, such as the
hotel, film, and entertainment industries. All of which were identified as sectors in
which spurious investment propagated. Investment was only sanctioned in certain
countries under a new strict approval process.
Ø Categories identified as encouraged were those supportive of the ‘Belt and Road’; those
which pertained to oversized high-tech and advanced manufacturing; and those that
facilitated superior production capacity, high-quality equipment and improved
“business, culture and logistics services.”277
This provided much needed clarification to the murky environment following the restricting of
capital accounts in late 2016, and helped OFDI recover by the end of 2017.
275“China Codified Crackdown on ‘Irrational’ Outbound Investment,” Bloomberg News, August 18, 2017, accessed December 11, 2017,
https://www.bloomberg.com/news/articles/2017-08-18/china-further-limits-overseas-investment-in-push-to-reduce-risk.
276Office of the State Council, “General Office of the State Council Forward Notice of the Ministry of Foreign Affairs of the People's Bank of
China on Guiding Opinions on Further Guiding and Standardizing the Orientation of Overseas Investment by the National Development and
Reform Commission,” National Development and Reform Commission Ministry of Commerce People's Bank of China Ministry of Foreign
Affairs, August 18, 2017, accessed December 11, 2017, http://www.gov.cn/zhengce/content/2017-08/18/content_5218665.htm.
277Ibid.
100
Conclusion
Lessons learned
The CCP, much like any other governing body globally, does not have the ability to perfectly
orchestrate policy so as to ensure its objectives are met. However, while the CCP by no-means
exerts complete control over the domestic market or the decisions of Chinese firms, it does
have the power to drastically alter the cost-benefit calculations of firms so as to direct them
towards achieving the CCPs prerogatives. More so than those states who do not fall under the
classification of market socialism.
The ability of the CCP to utilise policy in the short term to achieve its long-term objectives is
not always a smooth process. In the 2017 OFDI collapse, the consequences of the liberalising
policies of the 2015 were evident. Deregulation policies were rushed through in an effort to
counter sluggish growth (the lowest in 25 years) and address fears of further drops in
investment levels in 2015. Such liberalising policies were meant to result in higher growth and
profits, not the expansion of graft and irrational consumption. Yet due to the way these policies
were implemented and the power they gave to firms to pursue their own personal interests, the
broader economic objectives of the CCP were not actually realised, and stricter reform was
required at the end of 2016 to cool down this overheating market. Such reform was arbitrarily
imposed and poorly communicated, resulting in a disproportionate decrease in OFDI. Between
2015-2017, the party was twice driven by short-term fluctuations to adopt ill-conceived short-
term solutions. The frenzied and rushed manner in which there were enacted is illustrative of
the current limitations of the party as a regulatory body. The weakness of the reforms further
suggests inconsistent commitment to reform and varied levels of conviction and faith in
market-conforming regulation across the party. This explains the speed with which assumptions
can be changed, and this pattern can be traced back to the disunity that led Deng Xiaoping on
101
his southern tour. Consequently, a lack of clarity and varied conviction weakened the reforms.
In addition to not meeting the economic objectives of the CCP, spurious investment throughout
2016 violated a number of political objectives, in particular China’s reputation abroad, and
domestic party discipline. This set the scene for a reform response that went beyond just
correcting the previous financial sector reform.
A contextual consideration of broader policy reveals that the decision to clamp down on
outward investment served both political and economic objectives. Economically, greater
oversight, and the streamlining of regulatory parameters was considered beneficial to the
efficacy of outward direct investment. Seen to have both positive effects on the quality of short-
term investment projects, and the durability of long-term investment and overall economic
growth under the ‘New Normal’. Greater control over firms’ activities abroad would also
mitigate the risk of offending investee countries, and reducing the likelihood of offensive, non-
strategic investment. Furthermore, greater oversight enables the central government to better
steer outward investment in line with the political and economic priorities of ‘go global’ and
the BRI in the future. Furthermore, this ‘clamp down’ enabled Xi Jinping’s to gain more
extensive political control over SOEs and POEs alike, so as to strengthen the central oversight
by the party, and further energised his corruption campaign.
Therefore, economic and political reform can be considered within the prism of state control
and their effect on the role of the party. Since the 2000s, the decentralisation of reform has
undercut party discipline and weakened the central government’s ability to implement effective
reform. Broader economic policy can be used to supplement central control. Through the BRI,
‘go global’ and the clarification of the OFDI regulatory environment, the State Council is able
to reassert formal control over the process of overseas investment, and provincial authorities.
Justification for the far-reaching nature of these reforms was supported by the glut of
‘irrational’ expenditure in 2016, which facilitated greater oversight of internationalising firms

102
and detailed accounts of firms’ finances. Direct party involvement in SOEs was also enhanced
through a separate set of complementary legislation. Such reforms are consistent with Xi’s
broader policies. They are supportive of his drive against corruption and all champion
strengthening the party through promotion of intensified party discipline278 and centralising
power. Xi Jinping considers a strong party essential to the success of the country.279 However,
the success of these policies is not guaranteed.
This study identifies one principal dilemma concurrent with financial sector reform in the
context of market socialism with Chinese characteristics - how to pursue regulatory policies
effectively in the one-party state context. The 2017 reforms of outward investment contained a
number of paradoxes; while nominally supporting market liberalisation they also emphasised
the need for greater central Party control. Reform stipulated the need to “deepen the
decentralisation of administration,”280 whilst simultaneously pursuing greater management
oversight. Similarly, despite the clear list of supported vs. prohibited industries, the reform
notice highlighted the principle of letting the market play the “decisive role … in allocating
resources.”281 The consistent prioritisation of party objectives (economic and political) over the
period covered in this paper suggests that the oral commitment to market reforms is pursued
only insofar as it serves the party’s interests. Furthermore, there is evidence that the faith in
market mechanisms to solve economic problems is decreasing among the party’s elite, as
illustrated by the policy responses in 2017, and the depth and scope of Xi Jinping’s anti-
corruption campaign.
Indeed, it is clear from Xi Jinping’s actions in the past 5 years that he views the solution to this
impasse as strengthening the discipline and authority of the one-party system, ensuring
278Xi Jinping has gone beyond his predecessors, promoting motivational team-building runs, and even an online campaign urging members to
write out the party constitution by hand. See; “Xi Jinping has been Good for China’s Communist Party; less so for China,” The Economist,
October 14, 2017, accessed, 22 December, 2017. https://www.economist.com/news/briefing/21730138-contradicting-deng-xiaoping-mr-xi-has-
concentrated-vast-power-his-own-hands-xi-jinping-has.
279Gilley, “Reclaiming Legitimacy in China.”
280Office of the State Council, “Forward Notice of the Ministry of Foreign Affairs of the People's Bank of China.”
281Ibid.
103
economic principles and considerations are internalised, and to achieve successful reform
through multiple levels of government with strict central oversight. His charismatic
commitment to economic rationality both domestically and abroad is not insincere, rather he,
like many other Chinese leaders no longer views growth at all costs as the long-term solution to
sustaining the Party’s legitimacy.282
A potential model for understanding policy efficacy in China
From this study, a potential model through which to better understand the past and potential
efficacy of Chinese financial reform is generated. An examination of the relationship between
government objectives (X) and policy instruments (Y) across 2013 and 2017, with respect to
measurable outcomes (Z) reveals four causal mechanisms linking X and Y. These four
mechanisms shed light onto the efficacy of policy instruments at the CCPs disposal, and the
future challenges that face Chinese regulators. In particular, they illustrate the extent to which
efficient policy within the Chinese context involves balancing a number of conflicting and
complicated agents and objectives.283
The 4 variables address 2 elements of efficacy.284
- Implementation
- Degree to which reform is consistent with private interests
Ø a higher level of consistency = more effective.
Ø private interests contrary to reform = less effective285
282Gilley,“Reclaiming Legitimacy in China.”

283Ofthe policies considered in depth; The Belt and Road Initiative and ‘go global’ served to more clearly define policy objectives and
associate policies with measurable outcomes.
284Note, efficacy relates to the Government’s ability to meets desire objective, regardless of quality of reform.
285Recall here that Private Interests are not necessarily effective economic interests, rather profit maximizing. SOEs often behave much like
monopolies, taking advantage of their privileged position to increase shareholder returns or pursue personal objectives.
104
- Degree to which implementation of reform is predominantly centrally or
regionally driven;
Ø regionally implemented = less effective.
Ø centrally driven = more effective.
- Conviction
- Spread and strength of government commitment to reform
Ø higher spread + higher strength = most effective.
Ø higher spread + lower strength = more effective.286
Ø lower spread + higher strength = less effective.
Ø lower spread + lower strength = least effective.
- Economic motivations supersede or secondary to political considerations within
reform.
Ø Political supersedes economic motivations = more effective.
Ø Complementary reform = most effective.
Given these assumptions, one can consider policies through this framework to have a better
understand their limitations. For example, should a policy be effective in regards to alignment
with private interests but fail to maximise political considerations, its success will be limited
insofar as political considerations are violated by economic considerations. Additionally,
should private interests not actually align smoothly with government policy, as was the case in
2016, a policy may be effectively implemented but not realised holistically. In other words, it
will shift so as to reflect private or profit-related motives.
286The balance between the importance of spread versus strength is subject to changed based upon central Party reform.
105
However, should a policy enjoy wide support (conviction) throughout all levels of the party,
and should the political considerations be preferred over short-term simplistic economic targets,
it is less likely that private interests will be able to dominate the Party’s objectives. It is for this
reason that Xi Jinping sees the solution to the Party’s regulatory limitations in the strengthening
of the party itself.
A liberal observer would suggest that giving up greater control over the market, such that
private interests were accountable to the market, would similarly solve this dilemma. This fails
to account for the party’s keen desire to retain firm influence over multiple spheres of
governance, and indeed maintain the one-party state.
Theoretical implications
This study has particular relevance for comparative theorists who seek to compare China’s
developmental path to that of other developed and developing states, and those who wish to
apply neoliberal assumptions to the Chinese case. The preliminary review of the literature
implied that the Chinese case is not easily transferable. This study affirms this view, with
regards to broader economic models, it is clear that Dunning’s IDP model fails to fully explain
Chinese OFDI. This is due principally to two factors. Firstly, it does not account for uneven
domestic development (SEZ and border regions) or significant quantities of OFDI being
directed toward developing and transitional economies. Secondly, the institutional structure of
the state is not considered as a factor capable of affecting the change in OFDI. By contrast, the
investment priorities of the CCP are revealed to play a strong role, and thus China’s economic
development does not neatly follow the development path as posited by Dunning (Figure 5a).287
However, if the ‘stages’ of development are reconceptualised it is clear that at times Chinese
OFDI is flowing in a similar pattern to the IDP gradient measuring NOI, suggesting that there
287Note – this data is from the world bank rather than the OECD, UNDATA, MOFCOM, or the National Bulletins of Statistics. There are some
discrepancies on the absolute figures offered from the World Bank, however the overall trend was maintained. The World Bank was the only to
provide a holistic weighted overview from 1980
106
is scope for comparative NOI analysis exploring the relationship between inward and outward
investment if one adopts a more flexible approach.
What this study does reveal is that the Dunning’s model fails to account for a government led
push to bolster IFDI. Despite the fact that a decline in IFDI is consistent with achieving a
higher level of economic development, the consequences of this decline and slower growth are
uneven across the country. Regional governments, wary to ensure that their provinces were not
those who would disproportionately loose out, actively encouraged IFDI. This generated a
strong domestic push to challenge this trend. The Chinese case serves as an interesting point
from which to consider developmental theory in the context of a highly interventionist state,
and to consider the relative ability of the government to counteract ‘natural’ market forces.
For those who wish to normalise the Chinese case, and who argue that market liberalisation
will invariably lead to political liberalisation, this paper suggests that market liberalisations
occurs only when they comply with the central government’s objectives, implying the need for
an alternative model for authoritarian states. The CCP remains comfortable in distorting
markets and reducing overall growth should these actions meet their political objectives, the
most central of which must be accepted to be the continuation of a monopolisation of power in
China at the hands of the CCP.
Limitations of study (opportunities for future research)
There are a number of limitations that affect this study. Like all analyses of China relying
heavily upon numerical data, financial indicators and consistency remain a concern. For the
author the additional inability to speak Chinese limited access to particular sources and meant
having to rely upon translated versions of a number of texts, which despite their official nature
were not always of the highest quality. The scope of the study could have been improved
through in-country research and interviews, and a heavier focus upon domestic policy changes
107
and domestic economic conditions. More time could also have been given to a detailed
discussion of the broader political objectives beyond those associated with economic
imperatives but these were excluded due to both time constraints and the contested nature of
political prioritisation within the CCP and among their many observers.
This paper has limited applicability outside the Chinese case as it is developed purely within
the Chinese context, however it could potentially be used to form the framework through which
to analysis financial reform efficacy for other one-party states. Further discussion of the
implementation process within China would help build this framework. Furthermore, this study
could be extended once official data is released to include a similarly detailed comprehensive
breakdown of 2016 and 2017 to better evaluate the BRI, ‘go global’ and MIC2025. It would be
interesting to see whether or not the governments’ reform effort becomes more effective in line
with Xi Jinping’s new approach.
What to expect
Xi Jinping has and will continue to use the excesses of 2016 as a pretext to facilitate greater
direct control and oversight over all firms under the guise of economic motivations. This is
illustrated by the government’s preoccupation with the role of the firm being irrational, rather
than their own potential culpability, despite the proportional responsibility of SOEs in contrast
to other firms. The irrational investment of 2016 accelerated Xi’s anti-corruption drive and
emboldened a commitment to reverse the trend towards decentralisation in favour of greater
central control. In the context of Xi’s unprecedented288 grip on power, this policy step clearly
aligns with his broader vision of a strong and unified CCP. ‘Decentralisation’ will continue due
to the necessity of scale, as the central authorities simply cannot handle the quantity of
288Xi Jinping is the paramount leader of China and widely considered the most powerful man in the position since Deng Xiaoping (some say
Mao). Paramount leader refers to holding three positions in tandem; General Secretary of the Communist Party, Chairman of the Central
Military Commission, and President of the PRC. Following the recent party congress there is stipulation that he is to break tradition and stay on
as Party leader past the standard two-terms. See: AFP "Xi's here to stay: China leader tipped to outstay term," Daily Mail, August 9, 2016,
accessed September 23, 2017, http://www.dailymail.co.uk/wires/afp/article-3730755/Xis-stay-China-leader-tipped-outstay-term.html.
108
applications for investment, however direct oversight of these provincial authorities will
increase, and tactics may extend beyond passive reprimands, as the anti-corruption drive has
shown. In essence, decentralisation is likely to be pursued not for the purposes of local decision
making and greater efficiency but rather due to increasing demand for services.
In regards to future outward investment flows, it is likely, in concurrence with greater
centralised power, that the increased politicisation of outward investment priorities will be
transposed onto the environment in which firms operate. Consequently, firms are likely to
pursue investment opportunities that better align with the BRI and ‘go global’. Greater, and
more intrusive regulation of the financial sector is also expected, despite official rhetoric. And
is likely to matched by deeper regulation domestically, in order to steers firms to align more
closely with easier financing avenues through MIC2025 and BRI. If successful, this will result
in further strategic outward investment in these industries. Overall economic growth and
investment may slow, but it is likely to result in more effective reform from the government’s
perspective.
The Party will focus more heavily on linking domestic and international objectives, which will
closely align with the Thirteenth Five-Year Plan, and emphasis the need for strategic and
efficient growth rather than aggregate targets. There remains the potential for delineation, as
Xi’s power may be challenged internally or externally, but given the current climate and his
present support that would appear unlikely in the near future. The largest potential threat to Xi
is being undercut and discredited, should his solution to his dilemma proves insufficient, and he
fails to deliver on his promise of a rejuvenated China.
109
Bibliography
“About AIIB.” Asian Infrastructure Investment Bank. Accessed January 10, 2017.
https://www.aiib.org/en/about-aiib/governance/members-of-bank/index.html#.
“China closely monitoring “irrational” outbound investments.” Xinhua. December 6, 2016.
Accessed December 17, 2017. http://news.xinhuanet.com/english/2016-
12/06/c_135885408.htm.
“China Codified Crackdown on ‘Irrational’ Outbound Investment.” Bloomberg News. August
18, 2017. Accessed December 11, 2017. https://www.bloomberg.com/news/articles/2017-08-
18/china-further-limits-overseas-investment-in-push-to-reduce-risk.
“China Deal Watch.” Bloomberg. Updated Weekly.
https://www.bloomberg.com/graphics/2016-china-deals/.
“China Exim Bank lends more to help China firms go global.” Xinhua. January 29, 2017.
Accessed January 11, 2018. http://news.xinhuanet.com/english/2017-01/29/c_136019897.htm.
“China FDI falls 1.2%, ODI down 44.3%” Xinhua. August 16, 2017. Accessed September 19,
2017. http://www.chinadaily.com.cn/business/2017-08/16/content_30672704.htm.
“China says ‘irrational’ outbound investment curbed, figures show sharp drop.” The Straits
Times. September 14, 2017. Accessed November 11, 2017.
http://www.straitstimes.com/business/economy/china-says-irrational-outbound-investment-
curbed-figures-show-sharp-drop.
“China stresses role of Belt and Road Initiative in UN 2030 Agenda.” Xinhua. May 24, 2017.
Accessed January 10, 2018. http://news.xinhuanet.com/english/2017-05/24/c_136311484.htm.
“China to keep monetary policy stable as growth stabilizes.” Xinhua. November 15, 2016.
Accessed January 10, 2018.
“China warns its banks about four of its most global companies.” The Economist. June 29,
2017. Accessed December 11, 2017. https://www.economist.com/news/china/21724433-
campaign-clean-up-financial-system-turns-overseas-deals-china-warns-its-banks-about.
“China.” United Nations Development Programme.
http://www.cn.undp.org/content/china/en/home/ourwork/povertyreduction/overview.html.
“China: Structural Reforms for Inclusive Growth.” Organisation for Economic Co-operation
and Development. March, 2014. Accessed September 9, 2017.
https://www.oecd.org/china/2014-03-China-report-EN.pdf.
“China’s economy in ‘new normal’ continues to power global growth.” Xinhua. December 22,
2015. Accessed January 18, 2017.
“China’s Going Global Strategy: between ambition and capacity.” China Policy. April 2017.
https://policycn.com/wp-content/uploads/2017/05/2017-Chinas-going-global-strategy.pdf.
“China’s Increasing Outbound M&A.” JPMorgan Chase and Co. 2016. Accessed 6 January
2017. https://www.jpmorgan.com/global/insights/chinas-key-drivers.
“China’s Outbound Investment To Slow In 2017: Ministry.” Xinhua. February 10, 2017.
http://english.gov.cn/state_council/ministries/2017/02/10/content_281475563839316.htm.
110
“China.” World Bank. http://www.worldbank.org/en/country/china/overview.
“Country Report: China.” Ed. Tom Rafferty. Economist Intelligence Unit. October 4, 2016.
See: http://www.eiu.com/home.aspx.
“Chinese Clubs Curb Import Indulgence.” China Daily. January 1, 2018. Accessed January 22,
2018. http://europe.chinadaily.com.cn/a/201801/19/WS5a61522ca3106e7dcc135454.html.
“Chinese Enterprises Enter ‘Go Global’ Era 4.0.” Xinhua. April 11, 2016. Accessed January
11, 2018. http://english.gov.cn/news/top_news/2016/04/11/content_281475325205328.htm.
“Data.” Organisation for Economic Co-operation and Development.
https://data.oecd.org/fdi/fdi-flows.htm.
“FDI Flows.” Organisation for Economic Co-operation and Development.
https://data.oecd.org/fdi/fdi-flows.htm.
“FDI Stats.” United Nations Conference on Trade and Development.
http://unctad.org/Sections/dite_fdistat/docs/webdiaeia2014d3_CHN.xls.
“FDI Stock.” Organisation for Economic Co-operation and Development.
https://data.oecd.org/fdi/fdi-stocks.htm
“Foreign Direct Investment (FDI) Statistic.” Eurostat.
https://unstats.un.org/unsd/tradeserv/workshops/hanoi2010/docs/14%20FDI%20general%20pre
sentation.pdf.
“Foreign Trade Law of The People’s Republic of China.” The State Council: The Peoples
Republic of China. Updated August 24, 2014. Accessed December 20, 2017.
http://english.gov.cn/archive/laws_regulations/2014/08/23/content_281474982987386.htm.
“Going Overseas Holds the Key To Development.” China Daily. September 2, 2013. Accessed
January 3, 2017.
http://english.mofcom.gov.cn/article/newsrelease/counselorsoffice/westernasiaandafricareport/
201309/20130900280076.shtml.
“Hong Kong Chief Executive Announces Belt And Road Organs.” Xinhua. January 13, 2016.
Accessed June 19, 2017. http://news.xinhuanet.com/english/2016-01/13/c_135005366.htm.
“MOFCOM Department Official of Outward Investment and Economic Cooperation
Comments China Outward Invest and Cooperation in 2016.” MOFCOM. January 18, 2017.
Accessed September 12, 2017.
http://english.mofcom.gov.cn/article/newsrelease/policyreleasing/201701/20170102503092.sht
ml.
“MOFCOM Department of Outward Investment and Economic Cooperation Comments on
China’s Outward Investment Cooperation in January-October.” MOFCOM. Accessed January
11, 2017.
ml.
“No Hard Landing Scenario For Chinese Economy: Expert.” Xinhua. February 3, 2016.
“Official of the Department of Outward Investment and Economic Cooperation of the Ministry
of Commerce Comments on China’s Outward Investment and Economic Cooperation in 2015.”
MOFCOM. January 18, 2016. Accessed July 3, 2017.
111
ml.
“Reforms, Curb Key To Efficient Open Economy In 2018.” Xinhua. January 8, 2018. Accessed
January 12, 2018.
“Riding the Silk Road: China Sees Outward Investment Boom: Outlook for China’s Outward
Foreign Direct Investment.” Global Markets – EY Knowledge. March 15, 2015. Accessed July
7, 2017. http://www.ey.com/Publication/vwLUAssets/ey-china-outbound-investment-report-
en/$FILE/ey-china-outbound-investment-report-en.pdf.
“Sharp Power: China Is Manipulating Debate in Western Democracies. What Can They Do
About It?” The Economist. Singapore: December 16, 2007.
“Shenzhen-HK Stock Connect Marks A More Open Capital Market.” Economic Daily.
December 7, 2016. Accessed January 12, 2018.
“State Council urges strengthened efforts to supervise SOEs.” Xinhua. December 1, 2016.
“State-Owned Enterprise Policy Reform.” Asia Society Policy Institute, Rhodium Group
2Q2017. Accessed November 29, 2017. http://chinadashboard.asiasociety.org/china-
dashboard/page/state-owned-enterprise.
“Spotlight: Belt and Road Initiative injects new impetus into Guangdong.” Xinhua. May 25,
2017. Accessed January 11, 2018. http://news.xinhuanet.com/english/2017-
05/25/c_136315156.htm.
“The World Bank in China.” The World Bank. Last Updated July 26, 2017.
http://www.worldbank.org/en/country/china/overview.
“World Investment Report 2017: Annex Tables.” United Nations Conference on Trade and
Development. Last Updated June 7, 2017.
http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx.
“World Trade Statistical Review 2016.” World Trade Organisation.
https://www.wto.org/english/res_e/statis_e/wts2016_e/wts2016_e.pdf.
"Xi's here to stay: China leader tipped to outstay term." Daily Mail. August 9, 2016. Accessed
September 23, 2017. http://www.dailymail.co.uk/wires/afp/article-3730755/Xis-stay-China-
leader-tipped-outstay-term.html.
“Xi Jinping has been Good for China’s Communist Party; less so for China.” The Economist.
October 14, 2017. Accessed, 22 December, 2017.
https://www.economist.com/news/briefing/21730138-contradicting-deng-xiaoping-mr-xi-has-
concentrated-vast-power-his-own-hands-xi-jinping-has.
Akamatsu, Kaname. “A Theory of Unbalanced Growth in the World Economy.”
in: Weltwirtschaftliches Archiv, Hamburg, no.86 (1961): 196-217.
Alon, IIan and Fetsherin, Marc, ed. P. Gulgar. Chinese International Investments. London:
Palgrave Macmillan, 2012.
Alon, Ilan, Wang, Hua, Shen, Jun and Zhang, Wenxian, (2014) "Chinese state-owned
enterprises go global." Journal of Business Strategy 35, no. 6. (2014): 3-18. https://doi-
org.ezproxy.auckland.ac.nz/10.1108/JBS-12-2013-0118.
112
Amadeo, Kimberly. “Foreign Direct Investment: Pros, Cons, and Importance.” The Balance.
June 24, 2017. Accessed January 8, 2017. https://www.thebalance.com/foreign-direct-
investment-fdi-pros-cons-and-importance-3306283.
Ayres, Clarence E. The Theory of Economic Progress. Chapel Hill: University of North
Carolina Press, 1994.
Baker, Terence “Chinese capital squeeze hits major hotel investors.” Hotel News Now. August
31, 2017. Accessed January 11, 2017. http://hotelnewsnow.com/Articles/232884/Chinese-
capital-squeeze-hits-major-hotel-investors.
Beach, Derek “It’s all about mechanisms – what process-tracing case studies should be
tracing.” New Political Economy 21, (2016): 463-472.
https://doi.org/10.1080/13563467.2015.1134466.
Becker, Gary. Accounting for Tastes. Cambridge: Harvard University Press, 1998.
Bradsher, Keith, “After $225 billion in deals last year, China reins in overseas investment.”
CNBC. March 12, 2017, Accessed January 19, 2018. https://www.cnbc.com/2017/03/12/china-
reins-in-overseas-investment.html.
Brink, Tobius T. “Chinese firms’ ‘going global’: Recent OFDI trends, policy support and
international implications.” International Politics 52, no.6. (2015): 666-683.
doi:10.1057/ip.2015.19.
Brooks, Douglas H and Jongwanich, Juthathip “Cross-Border Mergers and Acquisitions and
Financial Development: Evidence from Emerging Asia.” Asian Development Bank Economic
Working Paper Series. 249. February 2011.
https://www.adb.org/sites/default/files/publication/28703/economics-wp249.pdf.
Brouthers, Keith D and Hennart, Jean-Francois. “Boundaries of the firm: Insights from
international entry mode research.” Journal of Management 33, (2007): 395-425.
https://doi.org/10.1177/0149206307300817.
Buckley, Peter J. Clegg, Jeremy L. Cross, Adam R. Liu, Xin Liu. Voss, Hinrich and Zheng,
Ping. “The Determinants of Chinese Outward Foreign Direct Investment.” Journal of
International Business Studies 38, no. 4 (2007): 499-518. http://www.jstor.org/stable/4540439.
Chan Shiu Hong and Chan Yin Ting Amy. “Can China’s Outward FDI be explained by general
FDI theory? An empirical study on the determinants of Chinese OFDI during 2003-
2009.”http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=1963296&fileOId=1
963297.
Chen, Victor and Sauvant, Karl P. “China’s Regulatory Framework for Outward Foreign Direct
Investment.” China Economic Journal 7, no.1 (2014): 141-163.
https://ssrn.com/abstract=2354348.
Chen, Wenjie and Tang, Heiwai. “The Dragon is Flying West: Micro-level Evidence of
Chinese Outward Direct Investment.” Asian Development Review 31, no. 2, (2014):109-140.
https://www.mitpressjournals.org/doi/pdf/10.1162/ADEV_a_00032.
Child, John and Rodrigues, Suzanna B. “The Internationalization of Chinese Firms: A Case for
Theoretical Extension.” Management and Organization Review 1 no.3 (2005): 381-410.
doi: 10.1111/j.1740-8784.2005.0020a.x.
Collier, David “Understanding Process Tracing.” PS: Political Science &Amp 44, no. 4 (2011):
823–30. doi:10.1017/S1049096511001429.
113
Cross, A.R., Buckley, P.J., Clegg, L.J., Voss, H., Zheng, P., Rhodes, M. and Liu, X. “An
econometric investigation of Chinese outward direct investment”, forthcoming in J.H. Dunning
and T.-M. Lin (eds.) Multinational Enterprises and Emerging Challenge of the 21st Century,
Edward Elgar: Cheltenham, (2007): 55-85.
Cui, Lin and Jiang, Fuming. “State ownership and FDI ownership of Chinese firms.” Journal of
International Business Studies 43, no. 2 (2012): 264-284.
http://www.jstor.org/stable/41472787.
Davies, Ken. “China Investment Policy: An Update.” Organisation for Economic Co-operation
and Development Working Papers on International Investment. January 2013.
http://dx.doi.org/10.1787/5k469l1hmvbt-en.
Deschandol, J.-M. and Luckock, T. “Tips for foreign vendors in Chinese M&A.” International
Financial Law Review 24, no.1 (2005): 31-
32. http://link.galegroup.com/apps/doc/A127975971/ITOF?u=learn&sid=ITOF&xid=ca05e4ed.
Dunn, Mark and Engwirda, Nicole. “Tax office probes Chinese investors buying into
Melbourne’s wealthiest suburbs.” Herald Sun. June 18, 2015. Accessed September 21, 2017.
http://www.heraldsun.com.au/news/victoria/tax-office-probes-chinese-investors-buying-into-
melbournes-wealthiest-suburbs/news-story/a6b55543b8c9b442c9df243220c93ddc?
Dunning and R. Narula ed. Foreign Direct Investment and Governments: Catalysts for
Economic Restructuring. London: Routledge, 1996.
Dunning, John, H. “The Eclectic Paradigm as an Envelope for Economic and Business
Theories of MNE Activity.” International Business Review 9, no.1 (2000): 163-190.
https://doi.org/10.1016/S0969-5931(99)00035-9.
Eichengreen, Barry. “Chinese Currency Controversies.” CEPR Discussion Paper. No. 2375.
(2004) Available at SSRN: https://ssrn.com/abstract=549261
Evanoff, Douglas Darrell. The role of central banks in financial stability: how has it changed?
New Jersey: World Scientific, 2014.
Fan, Gang. “The role of State-Owned enterprises in the Chinese Economy.” China Focus.
https://www.chinausfocus.com/2022/wp-content/uploads/Part+02-Chapter+16.pdf.
Gallagher, Kevin P. and Irwin Amos. “Exporting National Champions: China’s Outward
Foreign Direct Investment Finance in Comparative Perspective.” China and the World
Economy 22, no. 6 (2014): 1-21. doi: 10.1111/cwe.12089.
Gardiner, Scott and Pi, Xu. “China’s 13th Five Year Plan: the land of opportunity.” King &
Wood Mallesons. 14 April, 2016. Accessed 4 January, 2017.
http://www.kwm.com/en/knowledge/insights/china-13th-5-year-plan-key-points-summary-
new-normal-innovation-20160414.
Geng, Xiao. “Round-tripping Foreign Direct Investment and the People’s Republic of China,”
ADB Institute Research Paper Series 58, (2004).
https://www.adb.org/sites/default/files/publication/157240/adbi-rp58.pdf.
Gilley, Bruce and Holbig, Heike. “Reclaiming Legitimacy in China.” Politics & Policy 38,
(2010): 395-422. http://www.web.pdx.edu/~gilleyb/ReclaimingLegitimacyInChina.pdf
Heilmann, S., Moritz, R., Mikko H., and Johannes, B. 2014. “China’s shadow foreign policy:
Parallel structures challenge the established international order.” China Monitor, Mercator
Institute for China Studies, Berlin. https://www.merics.org/sites/default/files/2018-
01/China_Monitor_18_Shadow_Foreign_Policy_EN.pdf.
114
Hodgson, Geoffrey M, “What is the Essence of Institutional Economics?” Journal of Economic
Issues 34, no.2 (2000): 317-329. http://www.geoffrey-
hodgson.info/user/image/essenceinstecon.pdf.
Huaxia, ed. “China Focus: Ancient route leads to new opportunities at Silk Road expo.”
Xinhua, March 19, 2016, Accessed September 16, 2017.
http://news.xinhuanet.com/english/2016-05/19/c_135371288.htm
Huaxia, ed. “China’s supply-side structural reform ‘real eye-catcher’: Tesla.” Xinhua. 21
March, 2016. Accessed 18 July, 2017. http://news.xinhuanet.com/english/2016-
03/21/c_135208437.htm.
Ji Junzhe and Dimitratos, Pavlos. “Confucian dynamism and Dunning’s framework: Direct and
modern associations in internationalised Chinese private firms.” Journal of Business Research
66, no.12 (2013): 2375-2382. doi.org/10.1016/j.jbusres.2013.05.023
Kayam, Saime S, and Hisarciklilar, M. “Revisiting the Investment Development Path (IDP): A
Non-Linear Fluctuation Approach.” International Journal of Applied Econometrics and
Quantitative Studies 6, no. 2(2009): 63-82.
https://www.researchgate.net/publication/46529868_Revisiting_the_investment_development_
path_IDP_A_non_linear_fluctuation_approach.
Kennedy, Scott. “Made in China 2025.” Centre for Strategic and International Studies.
Accessed March, 11, 2017. https://www.csis.org/analysis/made-china-2025.
Kostova, Tatiana, Roth, Kendall and Dacin, Tina M. “Institutional Theory in the Study of
Multinational Corporations: A Critique and New Directions.” The Academy of Management
Review 33, no. 4 (2008): 994-1006. doi: 10.2307/20159458
Kothe Emily, Avery, Carly and Gestrin, Michael. “FDI In Figures: International Investment
stumbles into 2014 after ending 2013 flat.” OECD. April 2014.
https://www.oecd.org/investment/FDI-in-Figures-April-2014.pdf.
Kuehn, David. “Combining game theory models and process tracing: Potential and
limits.” European Political Science: EPS 12, no.1, (2013): 52-63.
http://dx.doi.org.ezproxy.auckland.ac.nz/10.1057/eps.2012.9.
Lawder, David. “U.S formally opposes China market economy status at WTO.” Reuters.
December 1, 2017. Accessed February 8, 2018. https://www.reuters.com/article/us-usa-china-
trade-wto/u-s-formally-opposes-china-market-economy-status-at-wto-idUSKBN1DU2VH.
Lee, H.J. “Development, crisis and Asian values.” East Asian Review 15, no. 2 (2003): 27–42.
JSTOR.
Li, Cheng and Zhang, Xiaobo. “China as a Global Investor: Recent Trends and implications for
Canada.” China Institute Occasional Paper Series 3, no.1 (2017).
https://d1pbog36rugm0t.cloudfront.net/-/media/china/media-gallery/research/occasional-
papers/globalinvestor-201701.pdf.
Li, Lang. “China’s manufacturing locus in 2025: With a comparison of ‘Made-in-China 2025’
and ‘Industry 4.0’.” Technological Forecasting & Social Change. 2017
http://dx.doi.org/10.1016/j.techfore.2017.05.028.
Lind, Jennifer. “Democratization and Stability in East Asia.” International Studies Quarterly,
55, no. 2 (2011): 409–436. https://doi-org.ezproxy.auckland.ac.nz/10.1111/j.1468-
2478.2011.00652.x.
115
Liu, X., Buck, T., & Shu, C. “Chinese economic development, the next stage: Outward FDI?”
International Business Review 14, no.1 (2005): 97–115.
https://doi.org/10.1016/j.ibusrev.2004.12.003.
Long, Yongtu, “Upgrading Chinese Business Enterprise Globalization.” March 23, 2016.
Accessed January 9, 2018. http://en.ccg.org.cn/china-goes-global-the-impact-of-chinese-
overseas-investment-on-transforming-business-enterprises/.
Lundan, Sarianna M. "What are Ownership Advantages?" Multinational Business Review 18,
no.2 (2010): 51-70, https://doi.org/10.1108/1525383X201000010.
Mahoney, James. “Mechanisms, Bayesianism, and process tracing.” New Political Economy
21, no.5 (2016): 493-99. doi: 10.1080/13563467.2016.1201803.
Mahoney, James. “Process Tracing and Historical Explanation.” Security Studies 24, no.2
(2015): 200-218, doi: 10.1080/09636412.2015.1036610.
Maitra, Ramtanu. “OBOR brings New Life to Central Asia: Kazakstan in Focus.” The Schiller
Institute. February 2017. Accessed January 10, 2018.
https://www.schillerinstitute.org/economy/2016/1212-obor-kazakhstan/ok.html.
McGuire, Kristian. “Dealing With Chinese Sanctions: South Korea and Taiwan.” The
Diplomat. May 12, 2017. Accessed September 30, 2017.
https://thediplomat.com/2017/05/dealing-with-chinese-sanctions-south-korea-and-taiwan/.
Meixner, Marie, Warneck, Fabrice, Morvannou, Phillipe and Mestre, Alain. “China’s
Investment Policy: Consequences for Worker’s” European Commission. January 16.
https://www.etuc.org/sites/www.etuc.org/files/publication/files/eu_china_workers_gb.pdf.
Mengjie, ed. “China Focus: Maritime silk road fosters ‘blue partnerships’” Xinhua. 21 June,
2017. Accessed January 11, 2018. http://news.xinhuanet.com/english/2017-
06/21/c_136384304.htm.
Milhaupt, Curtis J. and Zheng ,Wentong. “Beyond Ownership: State Capitalism and the
Chinese Firm.” Columbia Law School. http://www.law.columbia.edu/node/5344/beyond-
ownership-state-capitalism-and-chinese-firm-curtis-j-milhaupt-and-wentong-zheng.
Ministry of Commerce of the People’s Republic of China, National Bureau of Statistics of the
People’s Republic of China, State Administration of Foreign Exchange 2013 Statistical Bulletin
of Chinese Outward Foreign Direct Investment. (Beijing: China Statistics Press, 2014),
People’s Republic of China, State Administration of Foreign Exchange 2014 Statistical Bulletin
of Chinese Outward Foreign Direct Investment. (Beijing: China Statistics Press, 2015)
People’s Republic of China, State Administration of Foreign Exchange. 2015 Statistical
Bulletin of China’s Outward Foreign Direct Investment. (Beijing: China Statistics Press, 2016)
Morton H, Halperin, Siegle, Joseph T and Weinstein, Michael M. The Democracy Advantage:
How Democracies Promote Prosperity and Peace. New York: Routledge, 2005.
Mullen, Jethro. “China is America’s biggest creditor once again.” CNN Money. August 16,
2017. Accessed January 15, 2017. http://money.cnn.com/2017/08/16/investing/china-us-debt-
treasuries/index.html.
Mullen, Jethro. “China posts slowest annual growth in 25 years.” CNN Money. January 19,
2016. Accessed September 1, 2017. http://money.cnn.com/2016/01/18/news/economy/china-
2015-gdp-growth/index.html.
116
Munro S. and Yan, S. “Recent government reorganisation in China.” China Law & Policy –
Newsflash. O’Melveny & Myers LLP. (2003)
North, Douglas. “Institutions.” Journal of Economic Perspectives 5, no.1 (1991): 97-112.
JSTOR.
OECD, “China’s Outward Direct Investment.” OECD Investment Policy reviews: China 2008.
ISBN 978-92-64-05366-3
Office of the State Council. “General Office of the State Council Forward Notice of the
Ministry of Foreign Affairs of the People's Bank of China on Guiding Opinions on Further
Guiding and Standardizing the Orientation of Overseas Investment by the National
Development and Reform Commission.” National Development and Reform Commission
Ministry of Commerce People's Bank of China Ministry of Foreign Affairs. August 18, 2017.
Accessed December 11, 2017. http://www.gov.cn/zhengce/content/2017-
08/18/content_5218665.htm.
Pettis, Michael. The volatility machine emerging economies and the threat of financial
collapse. Oxford: Oxford University Press, 2001.
Ploberger, Christian. “One Belt, One Road – China’s New Grand Strategy.” Journal of Chinese
Economic and Business Studies 15, no. 3. (2017): 289-305.
https://doi.org/10.1080/14765284.2017.1346922.
Porter, Eduardo. “Trump Isn’t Wrong on China Currency Manipulation, Just Late.” The New
York Times. April 11, 2017. Accessed September 1, 2017.
https://www.nytimes.com/2017/04/11/business/economy/trump-china-currency-manipulation-
trade.html.
Przeworski, Adam and Limongi, Fernando. “Political Regimes and Economic Growth.”
Journal of Economic Perspectives 7, no. 3. (1993.): 51–69.
http://www.jstor.org/stable/2138442
Putz, Catherine. “What’s Next for the Belt and Road in Central Asia.” The Diplomat. May 17,
2017, Accessed January 10, 2017. https://thediplomat.com/2017/05/whats-next-for-the-belt-
and-road-in-central-asia/.
Ramasamy, Bala, Yeung, Matthew, and Laforet, Sylvie. “China's outward foreign direct
investment: Location choice and firm ownership.” Journal of World Business 47, no.1. (2012):
17-25. https://doi.org/10.1016/j.jwb.
Reiss John, Zhang Alex, Zou Francis, Tsoi Vivian and Jalinous, Farhad. “China’s rise in global
M&A: Here to stay.” Rhodium Group. New York White Case. 2017. http://rhg.com/wp-
content/uploads/2017/03/chinas-rise-in-global-ma-here-to-stay.pdf
Rosen, Daniel H and Hanemann, Thilo. “China’s Changing Outbound Foreign Direct
Investment Profile: Drivers and Policy Implications.” Peterson institute for International
Economics 3, (2009). www.piie.com.
Roumeloitus Greg and Miller, Matthew. “China’s Anbang abandons $14 billion bid to buy
Starwood Hotels.” Reuters. April 1, 2017. Accessed January 12, 2017.
https://www.reuters.com/article/us-starwood-hotels-m-a-anbang/chinas-anbang-abandons-14-
billion-bid-to-buy-starwood-hotels-idUSKCN0WX2PE.
Rutherform, Malcolm H. Institutions in Economics: The Old and the New Institutionalism.
Cambridge: Cambridge University Press, 1994.
Scott, Richard. Institutions and Organizations. Thousand Oaks: SAGE, 1995.
117
Sheng, Ellen. “Chinese Investment in Overseas Real Estate Hit Record High in 2016.” Forbes.
January 31, 2017. Accessed September 10, 2017.
https://www.forbes.com/sites/ellensheng/2017/01/31/chinese-investment-in-overseas-real-
estate-hit-record-high-in-2016/#5899291e7971.
Shi, Weilei,, Sun, Sunny Li., Yan, Daying and Zhu, Zhu. “Institutional fragility and outward
direct investment from China.” Journal of International Business Studies 48, no. 4. (2017):
452-476. https://doi-org.ezproxy.auckland.ac.nz/10.1057/s41267-016-0050-z
Sirowy, Larry and Inkeles Alex. “The Effects of Democracy on Economic Growth and
Inequality: A Review.” Studies in Comparative International Development 25, no.1. (1990):
126–156. doi: https://doi.org/10.1007/BF02716908
Su, Changhe. “China in the World and the World in China: Domestic Impacts of International
Institutions on China Politics,” in Zweig, David and Chen, Zhiming. China’s Reforms and
International Political Economy. London: Routledge, 2007.
Swedberg, Richard. “Theorizing in sociology and social science: turning to the context of
discovery.” Theory Soc 41, (2012):1-40. Doi:10.1007/s11186-011-9161-5.
Tan, Rosalina. “Foreign Direct Investment Flows to and From China.” Philippine APEC Study
Centre Network (PASCN), Discussion paper no. 99-21. (1999). Sourced at:
https://pascn.pids.gov.ph/files/Discussions%20Papers/1999/pascndp9921.pdf
The 13th Five-Year Plan: For Economic and Social Development of the People’s Republic of
China (2016-2020). Trans. Compilation and Translation Bureau, Committee of the Communist
Party of China. Beijing: Central Complication and Translation Press
http://en.ndrc.gov.cn/newsrelease/201612/P020161207645765233498.pdf
“China’s Twelfth Five Year Plan (2011-2015) – the Full English Version” China Direct. Trans.
EU, May 11, 2011. http://cbi.typepad.com/china_direct/2011/05/chinas-twelfth-five-new-plan-
the-full-english-version.html.
“MOFCOM Order No. 2 of 2015 Decision on Revising Certain Regulations and Regulated
Documents” Ministry of Commerce Peoples Republic of China. Trans. Hou Zuowei. November
5, 2015. Accessed June 12, 2017.
http://english.mofcom.gov.cn/article/policyrelease/announcement/201511/20151101158956.sht
ml
Van Wyk, Barry. “Chinese OFDI on the world stage.” Pambazuka News. September 17, 2009.
Accessed July, 10, 2017. https://www.pambazuka.org/global-south/chinese-ofdi-world-stage.
Vangeli, Anastas. “China’s Engagement with the Sixteen Countries of Central, East and
Southeast Europe under the Belt and Road Initiative.” China & World Economy 25, no. 5,
(2017): 101-124. doi: 10.1111/cwe.12216.
Veblen, Thorstein B. The Theory of the Leisure Class: An Economic Study in the Evolution of
Institutions. New York: Macmillan Press, 1899.
Voss, Hinrich, Buckley, Peter J., and Cross Adam R. “As assessment of the effects of
Institutional Change on Chinese Outward Direct Investment Activity.” In China Rules:
Globalization and political Transformation, edited by Ilan Alon, 135-172. New York: Pelgrave
Macmillan, 2009.
Wildau, Gabriel. “China announces plan for reform of state-owned enterprises.” Financial
Review. July 16, 2014. Accessed January 11, 2018. https://www.ft.com/content/07928638-
0c24-11e4-a096-00144feabdc0
118
Worstall, Tim. “Yes, China Is A Currency Manipulator And Their Owning US Debt Doesn’t
Matter.” Forbes. October 9, 2015. Accessed September 1, 2017.
https://www.forbes.com/sites/timworstall/2015/10/09/yes-china-is-a-currency-manipulator-and-
their-owning-us-debt-doesnt-matter/#1b2342e754e1
Xiao, Cai. “M&A deals reach record high in 2013.” China Daily. January 30, 2014. Accessed
January 10, 2018. http://www.chinadaily.com.cn/business/chinadata/2014-
01/30/content_17265829.htm.
Yan, Xuetong “From keeping a low profile to striving for achievement.” The Chinese Journal
of International Politics 7, no. 2, (2014): 153–184. doi: 10.1093/cjip/pou027.
Yao, Kevin and Glen, Elias. “China’s GDO growth accelerates for the first time in 7 years,”
Reuters. January 18, 2018. Accessed February 11, 2018. https://www.reuters.com/article/us-
china-economy-gdp/chinas-2017-gdp-growth-accelerates-for-first-time-in-seven-years-
idUSKBN1F70OJ.
Yao, Nian. “China’s private enterprises dominate ‘Go Global’ era 4.0.” March, 7, 2017,
https://news.cgtn.com/news/3d496a4d34676a4d/share_p.html?t=1488893979823
Yao, Shujie and Wang, Pan. China’s Outward Foreign Direct Investments and Impact on the
World Economy. London: Palgrave Macmillan, 2014.
Yelery, Aravind. “China’s ‘Going Out’ Policy: Sub-National Economic Trajectories.” Institute
of Chinese Studies 24, .o. 1 (2014): 1-7. http://www.icsin.org/publications/chinas-going-out-
policy-sub-national-economic-trajectories
Yongqi, Hu. “Central government targets to boost SOEs’ profitability.” China Daily. December
6, 2016. Accessed January 10, 2018.
You, Kefie. “What drives China’s Outward FDI? A regional Analysis.” BOFIT Discussion
Paper. May 8, 2015. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2983029.
Zhang, Yang. China’s Emerging Global Businesses: Political Economy and Institutional
Investigations. Basingstoke: Palgrave Macmillan:, 2003.
Zhong, Nan and Ren, Xiajin. “New rule on ODI is in the pipeline.” China Daily. March 22,
2017. Accessed January 10, 2017.
Zweig, David and Zhemin, Chen. China’s Reform and International Political Economy. New
York: Routledge, 2007.
119
Appendix
Table 1a – Proportional distribution of Chinese OFDI by region
Latin North Asia (Hong

Year Africa Europe America America Oceania Kong)
2007 4% 4% 21% 3% 2% 67(58) %
2008 4% 3% 18% 2% 2% 71(63) %
2009 4% 4% 12% 2% 3% 76(67) %
2010 4% 5% 14% 2% 3% 72(63) %
2011 4% 6% 13% 3% 3% 71(62) %
2012 4% 7% 13% 5% 3% 69(58) %
2013 4% 8% 13% 4% 3% 68(57) %
2014 4% 8% 12% 5% 3% 68(58) %
2015 3% 8% 12% 5% 3% 70(60) %
2016 3% 6% 15% 6% 3% 67(58) %
Table 1b – Directional change in Industrial distribution of Chinese OFDI – highest to lowest
2013 Change 2014 Change 2015 Change 2016

Leasing and « Leasing and « Leasing and « Leasing and
Business Services Business Services Business Services Business Services
¯
Wholesale and

Mining Retail trade Banking Manufacturing

Lodging and
Banking Mining Manufacturing Catering Services
Wholesale and
¯ ¯
Wholesale and
Transport,
Retail trade Banking Retail trade Storage and Post
¯
Manufacturing Manufacturing Mining Real estate
¯
Construction Real estate Real estate Banking
120
Information
transmission, Residents
Transport, Storage computer services Service, repair
Real estate and Post and software and other services
Transport, Storage
¯ « Health, Social
and Post Construction Construction Works
Agriculture, Information Scientific « Scientific
Forestry, animal transmission, Research and Research and
husbandry and computer services Technical Technical
fishery and software Services Services
¯ Agriculture, ¯
Scientific Forestry, animal Culture, Sports
Research and husbandry and Transport, and
Technical Services fishery Storage and Post Entertainment
Information Production and ¯ Agriculture, Production and
transmission, Supply of Forestry, animal Supply of
computer services Electricity, Gas husbandry and Electricity, Gas
and software and Water fishery and Water
¯ Scientific ¯ Production and ¯ Agriculture,
Residents Service, Research and Supply of Forestry, animal
repair and other Technical Electricity, Gas husbandry and
services Services and Water fishery
Production and ¯
Supply of Residents Service,
Electricity, Gas repair and other Culture, Sports
and Water services and Entertainment Education
Management of ¯ ¯
Water
Conservancy, Residents Service,
Culture, Sports environment and repair and other
and Entertainment Public Facilities services Mining
Management of ¯ ¯ Management of ¯
Water Water
Conservancy, Conservancy,
environment and Culture, Sports environment and Wholesale and
Public Facilities and Entertainment Public Facilities Retail trade
« « ¯ Information
transmission,
Lodging and Lodging and Lodging and computer services
Catering Services Catering Services Catering Services and software
« ¯ Management of
water
conservancy,
Health, social Health, social environment and
Education works works public facilities
¯ « ¯
Health, social
works Education Education Construction
121
Figure 1a – Foreign Direct Investment as a Percentage of GDP: Canada, Japan and China.
Foreign Direct Investment as a Percentage of GDP

90
80
70
60
50
40
30
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
CAN - OUT CAN - IN JAP - OUT JAP - IN CHINA - OUT CHINA - IN
Figure 1b – – Foreign Direct Investment as a Percentage of GDP: Australia, Canada and

the OECD
Foreign Direct Investment as a Percentage of

GDP
90
80
70
60
50
40
30
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Aus - Out Aus - IN CAN - OUT CAN - IN OECD - OUT OECD - IN
122
Figure 1c – FDI as a percentage of GDP: Japan and Korea
Foreign Direct Investment as a Percentage of

GDP
30
25
20
15
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
JAP - OUT JAP - IN KOREA - OUT KOREA - IN
Figure 1d – China’s OFDI Flows and Stock since the establishment of the Outward FDI
Statistical System
123
Figure 2a – Percentage change in FDI inflows vs outflows
Figure 2b – Chinese Instock vs Outstock of FDI
124
Figure 3a – Percentage Change in inward and outward FDI
Figure 3b – Proportions of SOEs and POEs in China’s Outward FDI Stock
125
Figure 3c – China’s Outward FDI Stock by Region
Figure 3d – Growth in OFDI by Region
126
Figure 3e – Regional Destination of OFDI in Asia (without HK and Macau)
Figure 3f – Percentage Growth in FDI from China to Asia in relation to Percentage Growth
in GDP from 2012-2015
Percentage Growth in FDI from China to Asia in

relation to Percentage Growth in GDP from 2012-
2015
140%
120%
100%
80%
60%
40%
20%
0%
HK/Macau Central Asia Middle East
IFDI from China GDP
127
Figure 4a - OFDI Stock Composition 2015-2016
OFDI Stock Composition 2015-2016

70000
60000
50000
40000
30000
20000
10000
0
r…
…
ed nd…
t o cal…
tru …
g
g S st
n,
t
an e
rta ks
oc tion
of
es
es
ng
Re tion
s S te
te
en
in
in
d
Po
io
or
ta
tra rvic
vic
an turi
g a ora l tra
a
ly
ice Wa
in
m
hn
i ss
c
ca
s
n
W
r
pp
M
er
e
ai
in
Ba
e
ec
ac
u
i
f
al
Su
ep
ial
ta
s
ns
T
uf
Re
n
ge
,r
es
rm erin
d
te
en
an
Co
an
,S
in
En
d
m
M
an
c R Bus
t
th
n
rv
Ca
ge
t
io
d
io
rc
,S
al
Se
an
e
at
na
ct
ea
nd
l
He
nt and
Lo port
sa
ts
u
rts
a
es
le
od
en
fo
po
g
ho
in
Pr
in
an
sid
In
,S
W
ifi
dg
as
Tr
Re
re
Le
ie
ltu
Sc
Cu
2015 2016
Figure 4b – Industry Investment Flow
INDUSTRY INVESTMENT FLOW

25000
Mining
20000
Production and Supply of
Electricity, Gas and Water
15000 Construction
Information transmission,
10000 computer services and
software
Scientific Research and
Technical Serive
5000
Management of Water
Conservancy, environment
and Public Facilities
0
2013 2014 2015 2016
128
Figure 4c – Return on Assets
Return on Assets
SOEs Private
100%
90%
80%
70%
60% 15.81 15.29 12.55 11.38 10.62
50%
40%
30%
20%
10% 5.14 4.55 4.16 3.09 2.9
0%
2013 2014 2015 2016 2017
Figure 5a – International Development Path Model: Source: adapted from Dunning
129
Figure 5b – China’s Net Outward Investment
130

Xi's Dilemma OFDI, Financial Sector Reform and The Limitations of Socialism With Chinese Characteristics

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Xi's Dilemma OFDI, Financial Sector Reform and The Limitations of Socialism With Chinese Characteristics

Uploaded by

Copyright:

Available Formats

Libraries and Learning Services

University of Auckland Research

General copyright and disclaimer

limitations of socialism with Chinese characteristics.

Laura Elizabeth Bunting

Date: February 26, 2018.

upon this journey in the first place.

whose strong grammatical views shortened every internal debate.

through the next stage of economic development to become a sophisticated, ‘innovative’

clashing forces of centralised power and decentralised economy.

Table of Contents ................................................................................................................ v

Table of Figures ............................................................................................................... viii

PART 1 – PRELUDE TO INVESTIGATION ................................................................... 1

A surprising decline ...................................................................................................... 3

Applied and theoretical significance .............................................................................. 6

What is OFDI and how is it measured? ........................................................................ 13

Data limitations ........................................................................................................... 15

Other important definitions.......................................................................................... 16

General models of OFDI – political economy .............................................................. 18

Institutional Theory ..................................................................................................... 22

Perspectives on Chinese OFDI .................................................................................... 24

PART 2 – PRODDING AND PROBING ......................................................................... 30

What motivates Chinese firms to invest abroad?.............................................................. 30

Government and business objectives ........................................................................... 30

Government objectives ................................................................................................ 32

Distinct firm objectives ............................................................................................... 35

How the government pursues and defines its objectives................................................... 36

Key administrative actors (who) .................................................................................. 36

State methods (how) .................................................................................................... 38

The Beginning ............................................................................................................ 41

Government capability and the market........................................................................ 44

Stops and Starts .......................................................................................................... 44

Government capability and the market........................................................................ 47

Government capability and the market........................................................................ 53

PART 3 – A CLOSER LOOK .......................................................................................... 57

Scrutinising 2013-2015 ................................................................................................... 57

Overview of the period ................................................................................................ 58

Key policies affecting investment ................................................................................ 60

Remaking ‘go global’ .................................................................................................. 62

Measuring the impact of ‘go global’ ............................................................................ 64

The formation of the Belt and Road Initiative .............................................................. 64

Measuring impact of the BRI....................................................................................... 66

China leads the way..................................................................................................... 68

‘Go global’ and industry activity ................................................................................. 70

BRI and locational investment ..................................................................................... 71

Government capability and the market ........................................................................ 72

Policy developments in 2013 ....................................................................................... 73

China's outward investment grows as global rates decline ........................................... 73

‘Go global’ and industry activity ................................................................................. 76

Government capability and the market ........................................................................ 78

Policy development in 2014 ........................................................................................ 79

A new era of investment? Positive net direct investment.............................................. 80

‘Go global’ and industry activity ................................................................................. 83

BRI and locational investment ..................................................................................... 84

Government capability and the market ........................................................................ 85

Policy development affecting 2016/17 ......................................................................... 86

PART 4 – FINDINGS AND CHALLENGES .................................................................. 89

Increased growth, growing debt and declining profitability.......................................... 89

‘Go global’ and industry activity ................................................................................. 93

BRI and locational investment ..................................................................................... 94

The Great Decline ....................................................................................................... 97

Formalising new regulation and going forward from 2017. .......................................... 99

Conclusion .................................................................................................................... 101