China’s global conquest for oil: a research review of Chinese ODI

This section of the paper will discuss Chinese FDI in developing countries as opposed to the industrialized world, reviewed in the previous sections. Hence, we will turn to analyzing the article “China's Outward Direct Investment in Africa” by Yin- Wong Cheung, Jakob de Haan, XingWang Qian and Shu Yu [1]. In this article, the authors examine China--Africa relations and present data and empirical determinants of Chinese ODI in Africa, which we are not going to touch upon since a detailed economic analysis is not our goal.

The authors analyze China's ODI and find it relatively small in comparison with the world FDI. However, they note a substantial increase of China's ODI in developing countries, mainly Africa. They also talk about two academic opinions regarding Chinese ODI. The proponents of the first standpoint argue that Chinese investment in Africa has had a negative effect on the country's politics and economy, resulting in a setback of the political reform, crowding African industries, and worsening employment conditions. Advocates of the second point of view see a positive effect of China's growing engagement in Africa, including growth of African exports, development of infrastructure, increase in productivity, and improvement of the living standards of the Africans. In their investigation, the authors use both the officially approved ODI dataset (1991--2005) and a relatively new IMF format ODI dataset approved by the Ministry of Commerce of China.

The authors trace the establishment of China--Africa relations back to 1955, when China made its first contact with Egypt, offering its support to liberation movements and held the Bandung Asian-African conference in Indonesia. Subsequently, in the 1980s, China changed its role in Africa and began to cultivate economic ties and encourage business cooperation.

According to data offered by the authors, China held diplomatic relations with 49 out of 54 African countries, with direct subsidiaries in 48 countries out of the 49. Ever since the “Going Global” policy was adopted, China has been establishing special economic zones in African countries with the goal to promote its manufacturing sector and create employment in Africa. As for the financial sector, China has been working in two major directions: facilitating China's economic activities in Africa by providing trade credits and investment loans; and creating a private equity fund to finance China's ODI in Africa (the China--Africa Development Fund).

Analyzing trade relations between China and Africa, the authors mention that trade between the two had experienced a staggering growth in the new millennium, from $9.5 billion in 2000 to $79.8 billion in 2009. Other cooperation includes contracts engaging China in African infrastructure, from building highways to constructing dams and energy plants. Overall, the authors believe that since China increased its involvement in Africa in the 2000s, the continent has witnessed significant economic improvement. However, the authors mention that western investors have been expressing their dissatisfaction with China's tendency to separate business from politics, as they can no longer put development incentives on African countries, while China benefits economically at the expense of democracy and human rights.

In the data and empiric section, the authors use three econometric methodologies, which will not be discussed in this paper excluding the results. In terms of output, the authors highlight that China seeks large markets measured by the GDP to place its investments, and that most African countries which have contracts with China will probably receive funds.

As for the risk factor, the findings showed that Chinese investments are encouraged in countries with high corruption and criminality. Another ODI motive driving China to Africa is getting access to the continent's natural resources, especially oil and minerals; this is a relatively recent phenomenon, which became prominent after the adopted “Going Out” policy. In addition, according to the authors, this policy is the major, if not the sole, motive behind seeking resources in Africa. In general, the authors consider China--Africa relations to be based on equal partnership and call it a win-win strategy.

The strategy and execution of Chinese national oil companies (NOCS)

Chinese companies' major acquisitions

The last section of the review will deal with the M&A activities of Chinese oil companies. The article “Global Ambitions: Chinese Companies Spread Their Wings” by Margot Schьller and Anke Turner [7] will help us to gain some insight on the topic.

The article in question analyzes the development of China's overseas investment (which has already been discussed in great detail in our review), international merger and acquisition (M&A) policy, the role of the government in the “going out” policy, Chinese companies' quest to become global players, and, finally, the future of China's ODI. In the first section, the authors present their overview of Chinese ODI history. Briefly, they state that Chinese ODI is rapidly increasing due to policy liberalization, and China is becoming an important source of FDI, ranking second to the United States, although China's current ODI is still relatively small. Consequently, they explain how China's main interest shifted from securing their natural resources to obtaining cutting edge technology and going global. The second section of the article is of particular interest for the current review. Schьller and Turner mention that, according to the Ministry of Commerce in China, the share of M&A was only 18% of China's total overseas investment. The main strategy in Chinese M&A policy was purchasing well-known foreign companies. The authors put outward direct investments into two categories: investments in new assets and investments in existing assets.

Building the facilities from scratch, which is referred to as a “greenfield investment”, represents the first category; whereas M&A belongs to the second category of ODI. The authors note that M&A does not only have to deal with acquisitions, but also takeovers, buyouts, and consolidations. The main M&A target of China is in North America and Asia, with investments in natural resources having the highest priority. The authors conclude this section with a rather unoriginal statement that China's M&A (just like overall ODI) is still relatively small but is steadily increasing.

In the third section, Schьller and Turner look at the policies supporting the “going out” strategy, discussed earlier in this paper. Their review, like the previously analyzed articles, goes over the five stages of China's ODI development, from the 1980s to 2002. They also talk about the government's interest in offshore natural resources and the advantage of Chinese oil companies over their western counterparts, as they are not required to make any profit. Another reason for China's ODI growth is the necessity to explore new foreign markets due to China's expanding exports. Schьller and Turner delve into detailed explanation of the reasons why Chinese companies seek natural resources, the only legitimate reason being the government's involvement in the companies' decision making. china canada asia africa investing oil

The most significant M&A activity can be considered CNOOC's bidding for Unocal in 2005; the bid topped the one offered by American company Chevron (18.5 billion to 16.5 billion), which was possible due to CNOOC's access to cheap loans from state-owned banks; however, Unocal was eventually merged with Chevron. Another important M&A event is Haier's takeover of American company Maytag, which was seen by the Chinese as a way to penetrate the USA and EU's markets and to expand its product range. Besides Beijing's main M&A goal of expanding into new markets, China still seeks acquisition of new technologies and brands. As for the future of China's ODI, the authors' conclusion is concurrent with the ones drawn in the other articles; although, they do establish co-relation between the increase of M&A and that of the ODI.

Conclusion and remarks

In the articles reviewed, the discussion was centered around Chinese ODI policy reforms in the period from the 1980s to present, during which China changed its political regime from communist to capitalist.

All the authors, except Salidjanova, mark 2002 as the year when `going out' policy was launched, following years of economic and political liberalization.

The major motivating factor for initiating this policy was China's desperate need for energy and natural resources.

This need remains today and will remain in the future [5]. Subsequently, due to the liberalization of national enterprises, this need was fortified by seeking access to advanced technologies and western brands. `Going Global' had many positive effects on China's economy, as well as the economies of other nations, for example, China's ODI played a key role in improving living standards in Africa, which was possible due to China's policy of non-involvement into the host country's internal affairs, as China it did not impose any conditions of African countries, unlike its western counterparts.

In fact, African countries were more than willing to let China invest in their natural resources.

However, the fear of Communist China's growing power prompted the leaders of developed countries to try and limit China's influence on the world economy and politics. The Chinese are very eager to acquire American companies to access state-of-the-art technology and open new markets.

However, the United States, contrary to its democratic image, keeps attempting to slow the expansion of the Chinese oil market, as it did when U.S. Congress interfered in the bid of Unocal by CNOOC and did not allow the acquisition of the company by China.

This demonstrates Washington's fear for their national security. As far as other developed countries are concerned, they encourage Chinese investments. A good example would be Canada: in their article, Yuen Pau Woo and Kenny Zhang present enough evidence to prove and highlight the importance of Chinese capital for the Canadian economy.

Therefore, we can conclude that China's real competitor is not the developed world, but the global economic and political hegemony: United States and its main partners. Despite Chinese ODI still being relatively moderate, the articles reviewed show evidence that Chinese foreign investment will continue to grow and, eventually, change the distribution of power on the global arena.

References