Forty Years Development of China's Outward Foreign Direct Investment: Retrospect and the Challenges Ahead

• Published date: 01 May 2019
• Date: 01 May 2019
• Author: Kailin Gao,Bijun Wang
• DOI: http://doi.org/10.1111/cwe.12278

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–24, Vol. 27, No. 3, 2019

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Forty Years Development of China’s Outward

Foreign Direct Investment: Retrospect and the

Challenges Ahead

Bijun Wang, Kailin Gao*

Abstract

Outward foreign direct investment (OFDI) has increasingly become an important method

for China to integrate into the world economy. This paper comprehensively reviews and

analyzes policy development and the changing pattern of China’s OFDI over the past 40

years. We divide the development into “restricted” (1978–1999), “relaxed” (2000–2016)

and “regulated” (2017 onwards) stages. This paper also reviews literature on the impact

of Chinese OFDI on China and host countries. Despite its generally positive effects,

large-scale and unbalanced OFDI activities have alarmed Chinese policymakers. Both

developing and developed host countries have expressed their concern over national

security and the misbehavior of some Chinese overseas enterprises. Therefore, greater

supervision and adjustment from quantity to quality growth is necessary for the future

development of China’s OFDI.

Key words: China, foreign exchange reserve, going out strategy, outward foreign direct

investment, reform and opening-up policy

JEL codes: E220, F210, F230

I. Introduction

Since the reform and opening up in 1978, China has become a staunch supporter

and active participant in economic globalization and is increasingly integrating into

the world economy through outward foreign direct investment (OFDI).1 Before

2000, capital shortages prompted China to restrict capital outflow and only invite

capital inow. In 1991, the Opinions on Strengthening the Management of Overseas

*Bijun Wang, Research Fellow, Institute of World Economics and Politics, Chinese Academy of Social

Sciences, China. Email: wangbijun@cass.org.cn; Kailin Gao, PhD Candidate, National School of

Development, Peking University, China. Email: kailingao@pku.edu.cn.

1In this paper, “China” refers to the “Chinese mainland” unless otherwise stated.

Bijun Wang, Kailin Gao / 1–24, Vol. 27, No. 3, 2019

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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Investment Projects submitted by the State Planning Commission2 to the State Council

claimed that China “does not possess the conditions to pursue large-scale outward

investment” (State Council, 1991). This document became the most inuential source

of policy guidance over the coming decade, setting “restriction” as the main tone of

China’s OFDI policy.

To prepare for World Trade Organization (WTO) accession, China embarked on a

new journey of liberalization and its overseas investment witnessed a sharp increase. The

“relaxed” policy drove the growth of China’s OFDI ow and the 2008 global nancial

crisis provided new opportunities for Chinese investors. In 2016, China became the

world’s second largest outward investor after the US, with US$196.2bn of OFDI.3

However, with large-scale and rapid growth, China’s OFDI has revealed weaknesses

in legal compliance, social responsibility, investment decisions and debt structure. Both

developing and developed host countries have expressed their concern over national

security and the misbehavior of some Chinese overseas enterprises. As a result, at

the end of 2016 China strengthened OFDI regulations to support eligible enterprises

investing abroad and to improve investment quality and efciency.

China’s OFDI has experienced three stages of development: “restricted” (1978–

1999), “relaxed” (2000–2016) and “regulated” (2017 onwards). Because China’s capital

account has not yet been fully liberalized, the changes at different stages of China’s

OFDI are closely related to policy shifts. Although policy shifts are affected by many

factors, one direct indicator is China’s foreign exchange reserves (Figure 1).4 Investing

abroad requires foreign exchange reserves, however China’s foreign exchange reserves

were limited before 2000, which was an important reason for China’s restrictions on

OFDI at that time. In 2015 and 2016, China spent nearly US$1tn of foreign exchange

reserves to stabilize the exchange rate. This was also an important trigger for China to

move from relaxed to strengthened supervision of OFDI.

This paper comprehensively reviews and analyzes the policy development and

the changing pattern of China’s OFDI over the past 40 years, discusses the impacts of

2The State Planning Commission was founded in 1952. It was renamed the State Development Planning

Commission (SDPC) in 1998. After merging with the State Council Ofce for Restructuring the Economic

System and part of the State Economic and Trade Commission in 2003, the SDPC was restructured into the

National Development and Reform Commission.

3All of the Chinese OFDI data in this article was obtained from the Statistical Bulletins of China’s Outward

Foreign Direct Investment, unless otherwise indicated. In 2016, in terms of OFDI stocks, China ranked sixth

in the world, with a total of US$1.357tn.

4The correlation coefcient between China’s foreign exchange reserves and its OFDI ow is as high as 0.91

(author’s calculation).