Thursday, February 28, 2013

China, Africa and Foreign Direct Investment

A number of us have struggled for years trying to determine the amount of China's foreign direct investment (FDI) in Africa. China's Ministry of Commerce regularly publishes a total cumulative figure for FDI in Africa. In 2012, Minister of Commerce, Chen Deming, stated that as of the end of 2011 China's cumulative FDI in Africa "exceeded $14.7 billion, up 60 percent from 2009." But the Ministry of Commerce (MOFCOM) also commented in 2012 that China's investment in Africa of "various kinds" exceeds $40 billion, among which $14.7 billion is direct investment. A number of Chinese academics use a variety of other numbers, a few exceeding $40 billion.

Some of the problem surrounds the issue of FDI definition. The OECD Benchmark Definition is the global standard. China specifically excludes investment in financial institutions. As a result, China's $5.5 billion investment in Standard Bank of South Africa, for example, is presumably not included in its FDI total, but presumably is included in the "various kinds" of investment. But the exclusion of investment in financial institutions does not come close to explaining the different totals.

Standard Bank South Africa. Flickr/keso
I recently ran across a couple of detailed studies that shed some light on this dilemma. Both of them are somewhat dated, but still useful even if they do not end the confusion.

The first is OECD Investment Policy Review: China 2008. Chapter 2: China's FDI Statistics comments that China's FDI statistics do not provide information on direct investment income and do not show separately the main components of FDI, equity financing and inter-company loans. Regarding basic definitions used by China there is no information available. Chapter 3: China's Outward Direct Investment also sheds some light on its FDI in Africa.

Chapter 14: China's Outward Foreign Direct Investment by Leonard K. Cheng, chair professor of economics and dean of business and management at the Hong Kong University of Science and Technology, and Zihui Ma, lecturer of international economics at Renmin University of China, contained in China's Growing Role in World Trade (2010) is also helpful. It notes that MOFCOM excluded investment projects not screened and approved by relevant government agencies and did not include investment after the projects' initial approval, such as the plough back of retained earnings. However, as part of China's policy of encouraging its firms to go overseas, from 2002 onward, MOFCOM's FDI statistics have been collected in accordance with OECD definitions (page 547).

Cheng and Zihui also note that during 2004-2006, between 78 and 87 percent of China's global FDI flows were made to three tax havens (Hong Kong, Cayman Islands and British Virgin Islands). Consequently, the true breakdown of the destination of China's FDI was largely unknown (page 559).

Let the confusion continue!

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