Questions are being asked about what some see as a planned offensive

Zhang Chengliang / China Daily

China's overseas direct investment has enjoyed fast growth in recent years, accounting for 5.1 percent of global investment traffic in 2010. Now it ranks fifth in the world, first among developing countries, and has surpassed that of Japan and Britain. China has thus become a country with over $50 billion (38 billion euros) in ODI.

But that rapid growth has sparked a debate about what lies behind it. Skeptical, and even cynical, voices have been raised. So, what are the characteristics of China's ODI and the motives behind it?

First, the growth in China's ODI has not come about because of some carefully laid plan. Many researchers tend to interpret it as a design of the Chinese government and look at it in political terms. I think that is a misreading.

The rapid growth in China's ODI is in fact a product of the endogenous power of China's economic development. According to the "Two gaps model" theory of Professor H. B. Chenery of Harvard University, China faced "two gaps" - a shortage of savings and a shortage of foreign exchange - at the beginning of the country's reform and opening-up three decades ago, and overseas investment control could effectively prevent the expansion of these two gaps.

However, as China's economic development continues apace and overseas exchange reserves increase, the excess of domestic savings and foreign exchange reserves have transformed the two gaps into double surpluses. The government needed to make economic policy adjustments so that controls on ODI were loosened.

The rapid growth of China's ODI is due mainly to the relatively favorable external environment. Despite conflicts in certain countries and regions over the past 11 years, there have been no big wars, and the peaceful, stable international environment has helped create favorable conditions for ODI by Chinese companies. The financial crisis that swept the world in 2008 greatly promoted the development of China's overseas investment.

On the one hand, in response to the national economic downturn, many countries that suffered in the crisis lifted restrictions on overseas capital in a number of areas. On the other, many countries have gone for trade protection. With the international trade environment deteriorating, Chinese companies have to resort to ODI to get around such protectionism. China's ODI totaled $26.51 billion in 2007, and almost doubled, to more than $50 billion, the following year.

Seeking energy resources is not the main purpose of China's ODI.

In fact in 2010 China's ODI covered all sectors of the economy, among which investment in business services, financial services, mining, wholesaling and retailing, transport and manufacturing was each more than $10 billion. Total investment in these six industries totaled $280.2 billion, accounting for 88.3 percent of China's ODI.

The business service sector is the major target of China's ODI. In general, these industries are mainly consumer-oriented, so essentially they have nothing to do with national security.

Energy resources can only be ranked third on China's ODI list, which is mainly affected by the international energy resources market and China's position in the international division of labor. Global mineral resources are abundant but unevenly distributed, and no country can rely on its own resources to complete the production process.

With China's interaction with the world increasing rapidly, the country's economy has rapidly integrated into the regional or the global production network system to become a "world factory" producing a variety of products for consumption around the world. But China's own resources are not enough to cope with the demand as a world factory. It needs the world's energy and resources to maintain a stable supply of global products.

Global resource supply and pricing are decided by a relatively small number of companies. The tendency to politicize international energy resources is becoming more obvious. Financial speculation targeting energy resources has resulted in energy resource prices deviating from the basic relationship between supply and demand, and prices have fluctuated and become more unpredictable.

To reduce such volatility, Chinese companies have been forced into ODI such as overseas joint ventures, overseas acquisitions and equity investment in overseas energy and resource exploration, development and production.

As the main conductors of China's direct investment overseas, the country's State-owned companies should not be perceived as the embodiment of the government. Although the share of overseas investment of State-owned companies has fallen in recent years, they remain the main force of Chinese ODI. Central government enterprises now account for more than two-thirds of China's total ODI, and the trend is still upward. China's regional enterprises are relatively less capable of ODI.

The uneven development of Chinese companies is the main reason why overseas investment comes mostly from State-owned companies. After 30 years of reform and opening up, Chinese companies have grown in strength and competitiveness. A number of large international companies and groups have formed. The number of central enterprises with total assets over 100 billion yuan was only 11 in 2002, and that surged to 53 in 2009. Thirty Chinese central enterprises were listed in the Fortune top 500 enterprises worldwide in 2009.

It is a popular misconception that Chinese State-owned companies are totally controlled by the government, taking its orders and reflecting its intentions. China's State-owned companies are quite different from those of Western countries. The government does not directly take part in their management. In fact, the lesson from China's State-owned company reforms is not letting the government directly intervene in management and decision-making. Therefore, most Chinese State-owned companies have undergone shareholder reform, and property rights have been diversified. The purpose is to increase their independent business decision-making rights, and allow companies to become market players that no longer take their lead from administrative directives.

The geographical choice of China's foreign investment is closely in line with the country's current economic development. Developing countries' ODI tends to flow to developing countries at the same development level.

Asia and Latin America are the areas where China's investment is most concentrated, and investment in Africa has grown rapidly in recent years. In 2010 Chinese investment in Asia was $228.14 billion, accounting for 71.9 percent, and in Latin America $43.88 billion, accounting for 13.8 percent, so the two regions accounted for 85.7 percent of China's ODI. Direct investment in Australia and New Zealand was $8.61 billion, accounting for 2.7 percent, Europe $15.71 billion, accounting for 5 percent, Africa $13.04 billion, accounting for 4.1 percent, and North America $7.83 billion, accounting for 2.5 percent.

Chinese companies do not have the strength to collaborate with developed countries to realize proper division of labor, so they can only rely on low prices and cheap labor of the less developed regions to gain competitive advantage. Developing countries need China's money to help develop their economies. They have done a lot of work to attract investment from China, which is why China has large-scale investment in them.

However, many Chinese companies investing in Africa, Latin America and in developing countries elsewhere have encountered increasing political and social risks. With the growth and changes in China's overall economic strength and industrial structure, overseas investment by Chinese companies will gradually switch to developed countries. This trend has become increasingly evident in recent years.

Green-field investment takes up the biggest share of China's ODI, but the proportion of mergers and acquisitions on the international market is increasing year by year. In 2003 cross-border mergers and acquisitions accounted for 18 percent of overseas investment. In 2010 direct investment by acquisitions accounted for 43.2 percent, and the proportion of cross-border mergers and acquisitions is likely to continue rising.

What lies behind that is a push to improve company structures and gain competitive advantage. China has engaged in many cross-border production networks, but manufacturing and export companies in China still largely rely on OEM production and intermediary trade orders from regions such as Hong Kong. They do not have external sales channels and marketing networks, which raises the risks in expanding investment and production.

Such companies increasingly rely on investment risk control and profitability patterns, so they need to set up their own sales channels and marketing services networks.

The author is a researcher at China Center for International Economic Exchanges. The views do not necessarily reflect those of China Daily.