Going global: the risks and rewards of China's new international expansion.

• Author: Lo, Chi

China has been expanding its economic power through overseas investment in recent years in order to secure supply of raw materials, energy, and other commodities for its economic development. Others are beginning to grasp how China is shaping the world with its huge appetite for energy and natural resources. However, what is less understood is the way China is itself being shaped by the world as it integrates with the global system.

The recent Middle East-North Africa turmoil shows that China's "going global" policy does not come at a low cost, as Beijing might have thought. In other words, the time for China to quietly reap economic benefits with limited risk exposure to the global markets is past. Even the need to ensure the welfare of Chinese citizens, whose outflow follows the overseas investment expansion, means that China cannot stay away from geopolitical risk anymore. As China becomes more involved in world affairs, the United States will need to rethink its China engagement strategy because America's superpower leverage has diminished significantly after the subprime crisis. And China knows that.

CHINA'S GREAT INVESTMENT OUTFLOW

China's rapid economic growth has raised its confidence in looking outside its boundaries for investment opportunities. Increased competition and the drive to maximize profits have raised Chinese awareness of foreign market potentials. There is also a growing need to acquire raw materials from external sources. Hence, Chinese foreign investments have grown rapidly in recent years, though they are still small in absolute size, accounting for just about 1.5 percent of GDP. The sub-prime crisis will help speed up China's investment outflow trend in the coming years by lowering the cost of acquisition by Chinese companies, since global asset prices have dropped.

China's overseas direct investment is concentrated mainly in the developing countries, especially in Africa. In the 1980s, China's overseas direct investment was quite small and driven primarily by political rather than economic considerations. Before 1985, only state-owned and local government-owned enterprises were allowed to invest overseas. Private enterprises were allowed to apply for overseas direct investment projects after 1985, when Chinese authorities started designing and developing the necessary procedures and policies. Under the investment liberalization program, there was a flow of investment to Hong Kong in the 1990s. But most of the projects went bad due to lack of investment know-how, ignorance about the rule of law in overseas markets, and corruption among Chinese officials and corporates.

The Asian financial crisis in 1997 prompted Chinese authorities to rethink their overseas direct investment strategy. The regional crisis changed the global economic landscape by highlighting the strength of the overseas markets. These markets were growing strongly at that time and acted as an "economic savior" for the Asian economies by absorbing...