Shipping containers are ready to be exported at a port in Nantong, East China's Jiangsu Province. Photo: CFP

Chinese companies are boosting their overseas investment and contracts as China's domestic economy slows down. However, a large portion of China's current investment abroad have failed to meet expectations, as they are either stalled, over schedule or suffering financial losses. Experts say a lack of experience abroad and political opposition in some countries and industries are the key causes.

In 1985, Hu Yaobang, then general secretary of the Communist Party of China Central Committee, was invited by then Australian prime minister Bob Hawke to visit Pilbara in West Australia, one of the biggest iron ore mines in the world.

Hawke could later clearly remember picking up a piece of red iron ore and giving it to Hu, who quietly put the ore into his pocket.

Two years later, the China Metallurgical Import and Export Company purchased a 40 percent stake in Channar, a company under British-Australian mining giant Rio Tinto, marking modern China's first major overseas investment project.

More than 20 years have passed since then, and the global investment scene has changed significantly.

Last year, China overtook the US for the first time as Australia's biggest source of approved foreign investment, with Chinese investors planning to spend $27.7 billion there, according to Australia's Foreign Investment Review Board's annual report. In the meantime, Australia has also become the second largest recipient of Chinese investment.

However, Chinese companies have also faced a high volume of "troubled transactions" in the country, leading to up to $46.8 billion in investments that have been unsuccessful for non-market reasons since 2005. Some estimate that over one-third of all China's foreign investments have been unsuccessful, and another one-third have just broken even. The high percentage of troubled investment overseas shows China still has many lessons to learn to be a successful global investor.

Growing investment

The economic slowdown in China is expected to spur a new momentum for Chinese companies to look abroad. On the first half of 2015, 30 countries have already signed contracts that are worth $100 million or more with Chinese firms, according to the China Global Investment Tracker. 

Since 2005, the combined value of Chinese investments and construction transactions around the world stands at $1.1 trillion.

Chinese companies are expected to increase their foreign investment. So far, China's foreign direct investment (FDI)  amounts for only 7 percent of its GDP. In comparison, the number is 38 percent in the US, 20 percent in Japan and 47 percent in Germany. In the next five years, China's direct investment abroad is expected to grow at 10 percent each year. US-based institute Asia Society estimates that by 2020, China's direct investment overseas will exceed $2 trillion.

An Earnest and Young report on the outlook for China's direct overseas investment says the focus of China's outward FDI is shifting from natural resources to high technology and consumption-oriented sectors, owing to the growth of Chinese companies, accelerated economic transformation and China's evolving overseas investment interests.

While the world certainly welcomes money from China, some countries balked at particular projects and were worried about the rapid expansion of Chinese investment.

Since 2005, more than $250 billion in overseas investment have failed, according to the China Global Investment Tracker.

Mexico's Transport Ministry, for example, says the country will compensate China Railway Construction Corporation $1.3 million for canceling a $3.75 billion high-speed railway contract. The Mexican government revoked the project last year, a Waterloo for China's overseas investment.

While the Mexican case at least resulted in compensation, the fate of another project in Sri Lanka is still undecided. The Sri Lankan authorities suspended the $1.4 billion, Chinese-backed Colombo Port City project this year, saying it lacked required approvals.

Research failures

Homegrown problems, including a lack of experience and capability with overseas investment, remain the key impediments for Chinese companies trying to expand abroad, said experts.

CITIC Pacific's mining project in Australia is one glaring example of how Chinese companies are rushing into international projects without careful planning or a clear strategy.

In 2006, when iron prices were soaring, CITIC Pacific paid Australian property tycoon Clive Palmer $415 million to mine 2 billion tons of magnetite ore from the latter's tenement. Sino Iron was the initial contractor to build the project and a port, with production slated to begin by 2009.

However, more than eight years later, the project is still under construction and its costs have ballooned from its initial budget of $3 billion to over $10 billion. Since it's significally over both budget and schedule, the Chinese company is facing a legal battle with its Australian partner.

"Sino Iron underestimated the cost and risks of doing infrastructure in Australia. They thought they could import cheap Chinese labor and copy the way they rushed projects in China," an unnamed China executive for an Australian auditing company told Phoenix Weekly. This is why, he said, Sina Iron had offered an extremely low bid, at $1.75 billion.

Sino Iron's plan was quashed by Australian labor law, which has strict and detailed requirements on minimum wage, work conditions and foreign labor. For example, the Australian government requires all Chinese workers to obtain a minimum score in the IELTS exam before they are allowed to work in Australia. This regulation prevented Sino Iron from importing uneducated workers from outside the country.

Under Australian law, CITIC also has to build an expensive dormitory complex for the workers, including 1,750 rooms, each over 10 square meters in area, equipped with furniture and home appliances, as well as gyms, swimming pools, entertainment rooms and even pubs. Compared with China's crowded migrant housing, where several workers cram into a small dorm room, this is almost luxury.

"In Australia, these equipment are standard. Based on our experiences, we set the budget of equipment at $30 million. The final cost was over $300 million," said Zhang Jijing, president of CITIC Pacific.

"While the appreciation of the Australian dollar is one reason for the rising costs, the main reason is the fact that we don't know how to develop mines in Australia, and we simply brought our experience in China here, underestimating the difficulties," Chang Zhenming, the Chairman of CITIC Group, said in an interview with the People's Daily.

Sino Iron's other iron ore project in West Australia has also been suspended due to over-budget spending, which was resulted from poor evaluation prior to the project. The project has recorded losses of over 1 billion yuan.

"Chinese companies lack the experience in investing in mining overseas, especially in developed countries. They don't know how to invest or manage mining projects. They should learn from the Japanese and invest through shares so as to lower risks," an unnamed former executive of BHP Billiton, an Australian mining company, told Phoenix Weekly.

Political uncertainties

One significant reason for Chinese companies' lack of clear strategy is that most Chinese companies have grown in an environment that doesn't follow the rule of the market. In China, State-owned companies usually have little market-oriented experience due to a political and business environment that skews in their favor. The private companies, on the other hand, are also accustomed to using guanxi (connections) and influence to achieve their goals. But once they go global, they have to compete in a real market.

"In the past 30 years, the global investment environment has gone from valuing shareholder interest to corporate social responsibility and the rule of law. When Chinese companies enter the global market, they have to follow the rules of the game, rather than doing whatever they want with their money," Wang Zhile, research fellow at the Ministry of Commerce, told Phoenix Weekly.

Due to a lack of investment strategy, Chinese companies often simply follow the speculations of others.

"There has been a clear pattern among Chinese firms, where high regional activity lasts 18 to 24 months before they move to new targets. This occurs because the best projects have been snatched up and host countries have become uncomfortable with the flood of Chinese money," Derek M. Scissors, a research fellow at the American Enterprise Institute, wrote in his report.

Political risks and oppositions within host countries is another reason that have hindered Chinese companies' going abroad. According to a report by the Beijing-based think tank Center For China And Globalization, which analyzed 120 cases of Chinese companies' failed attempts to invest abroad, political factors made up 25 percent of the reasons.

International sanctions against Iran, for example, pushed Chinese firms to pause activity there, and China's construction projects in Libya were halted by its civil war.

When it comes to projects concerning resources and technology, Chinese companies often face local oppositions. Chinese leading telecom solution provider  Huawei, for example, has been banned from bidding for US and Australian government contracts because of national security concerns.

Experts say that many countries are in a dilemma when dealing with Chinese investment.

On the one hand, foreign countries hope they could win China's investment to save them from their domestic recession; On the other hand, they are concerned about whether they should open critical infrastructure projects like ports and energy projects to China, Philippe Le Corre, visiting fellow in the Center on the United States and Europe at Brookings Institute, said.

Phoenix Weekly