US think tank warns continued ‘financial strain’ may put the brakes on Beijing’s global trade and infrastructure programme. Value of overseas investment and construction dropped to US$179.1 billion last year, down from US$279.8 billion in 2017. 

China’s outbound investment and construction plunged last year as the world’s second largest economy loses steam, and continued “financial strain” could put the brakes on its global trade and infrastructure plan, a US think tank warns.

Last year, the value of China’s overseas investment and construction projects dropped to US$179.1 billion – down from US$279.8 billion in 2017 and US$270.9 billion in 2016.

That’s according to the China Global Investment Tracker, which collects public data for the Washington-based American Enterprise Institute.

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Chinese investors continued to pull back from the United States investment there fell to US$10.6 billion last year, a 60 per cent drop from the US$24.9 billion in 2017. Chinese investment in America peaked in 2016 at US$54.1 billion, according to the report.

Germany, meanwhile, was the top destination for Chinese investment after carmaker Geely Group bought a US$9 billion stake in Daimler in February.

Germany and Chinese carmaker Geely.
Photo: Germany was the top destination for Chinese outbound investment last year after carmaker Geely bought a US$9 billion stake in Daimler.

It comes as Beijing and Washington are locked in an intensifying rivalry on fronts ranging from trade and technology to security, and as China seeks to tighten control of its capital outflows.

Washington has accused Beijing of using its global infrastructure and investment strategy, the “Belt and Road Initiative”, to expand its geopolitical influence, an allegation China has repeatedly denied.

The decline in outbound investment and construction was more evident in state-owned companies, which initiated fewer investments and signed fewer deals for power construction projects, report author Derek Scissors, a resident scholar with the AEI, said, citing pressures from home and abroad.

“Overseas, major investment partners such as Germany are joining the US in being more cautious about Chinese acquisitions,” Scissors said.

At home, pressure on capital outflows restricted Beijing’s financial support to state-owned companies for investments and construction projects overseas, the report said. Most of those projects were in less developed countries that were keen for funds to build new infrastructure and revive their economies.

“The source of funds for both SOE investment and the many not-for-profit construction projects in developing countries is official holdings of foreign currency,” the report said. “These holdings remain enormous but so are China’s demands on them, featuring the Belt and Road Initiative, and poor returns at home continue to create pressure for capital outflow. “These combine to cap the foreign currency available to SOEs.”

But President Xi Jinping’s ambitious belt and road programme continues to expand – it now involves 125 countries, almost double the number from when it first launched in 2013, according to the report. The AEI found that Chinese investment in those countries accounted for 40 percent of total outbound investment last year, more than double the proportion for 2017, as Chinese invested less in wealthier countries.

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Washington has responded with its own US$113 million infrastructure drive in the Asia-Pacific, as well as its “new Africa strategy” pledging more investment in the region, and although they do not match the scope of Beijing’s initiative, they pose a challenge to China at a time when many countries are questioning the intentions behind its investment and construction projects.

These concerns could be reflected in the growing number of setbacks facing belt and road projects in recent years, which the report said were “the result of bad Chinese practices” and “the inevitable result of local land disputes and political shifts”. Chinese engineers now face an annual average of US$8 billion in impaired or failed contracts, according to the report.

Malaysian Prime Minister Mahathir Mohamad
Photo: Malaysian Prime Minister Mahathir Mohamad called off the Chinese-backed East Coast Rail Link and a natural gas pipeline project.

A recent example was in Malaysia, where newly re-elected Prime Minister Mahathir Mohamad called off the Chinese-funded US$20 billion East Coast Rail Link project and a natural gas pipeline he said were “unfair deals” made by his predecessor.

“While the [belt and road] provides a political reason for more overseas construction, the economic reasons have faded,” the report said. “SOEs account for nearly all large overseas construction projects and they are subsidised – at home, in the host country or both – and financial strain will continue to prevent China from (re)building the world.”

According to the report, the Middle East was the top destination for new China-backed construction projects last year, led by Egypt and the United Arab Emirates. By sector, outbound investment went mainly into energy projects, particularly the oil industry, while agriculture and food outpaced technology investments.