The Overseas Expansion of Chinese Capital: A Source of Anxiety for the United States

Ladies and gentlemen, the U.S. is incredibly nervous about Chinese companies’ overseas expansion, as if every step they take were a challenge to American global hegemony. But if you take a closer look at the official data, there’s really nothing to be afraid of. In 2017, our Chinese companies’ foreign direct investment (FDI) peaked, and they voluntarily put an end to the notion of so-called “irrational investment.” That said, the National Bureau of Economic Research (NBER) in the U.S. has released a major report claiming that China’s growing overseas investment isn’t driven by profit, but rather by using corporate ownership to have overseas research teams generate knowledge for China. We all know that the overseas footprint of Chinese capital is far greater than what appears on the books, but who really knows the exact figures? The report’s authors sifted through complex equity structures in vast databases to trace the sources of capital and found that from 2012 to 2021, foreign assets owned by China increased from $551 billion to $2.5 trillion, with an annual growth rate of 20 percent. Assets under control rose from $364 billion to $2.1 trillion. If we include Hong Kong and Macao, the foreign assets controlled by the Greater China region total as much as $3.3 trillion, second only to the United States’ $9.3 trillion. This truly defies common sense. While the general perception is that Chinese investment is concentrated in Asia, Africa, and Latin America, the data reveals that these assets are concentrated in developed economies—42% in Europe and 38% in North America. Meanwhile, the share of assets in Asia, Africa, South America, and Oceania has shown a downward trend over the past decade. More than a decade ago, China embarked on a massive wave of overseas investment, scaring the West into thinking it would buy up everything, and began emulating the “new rich” by going door-to-door to buy technology. But as you can see, the U.S. has CFIUS, which specializes in reviewing the risks of foreign investment, and the EU has its own FDI screening framework—so even with money in hand, China couldn’t smoothly complete mergers and acquisitions. So why, in 2021, did China’s holdings of Western assets continue to grow, while its balance sheets appeared increasingly robust? Tax havens are at work behind the scenes. Chinese capital first launders itself beyond recognition before acquiring assets from Western companies; this way, the transactions aren’t counted in FDI statistics and avoid triggering political alarms. The Cayman Islands, Bermuda, and the British Virgin Islands are all registration locations particularly favored by Chinese capital. In 2021, Chinese-controlled enterprises accounted for 58%, 41%, and 15% of the total assets in these three major tax havens, respectively, with the Cayman Islands having the highest concentration. In addition to these three, transit hubs also include Portugal and Singapore. Through this method, Chinese capital has made a massive inroads into European and American markets. While there are specialized databases that record ownership at this level—such as OBIS’s Global Economic Ownership 25 (GEO25) index, which tracks equity holdings above a 25% threshold—these cannot capture many of the actual dynamics occurring within corporate boards. Equity structures in European and American capital markets are often highly fragmented; a 10% stake—not 25%—is sufficient to participate in the management decisions of a target company and exert significant influence. When researchers used algorithms to reconstruct the database and lowered the threshold to 10% or more, they found that Chinese entities held ultimate ownership of 6,242 companies, 38% of which were structured through at least one tax haven. Take the British mining giant Rio Tinto, for example. Based on the 25% ownership threshold, it appears to have no connection to China, but when the threshold is lowered to 10%, it becomes evident that the Singapore-based company Shining Prospect holds a 14% stake, with China Aluminum Corporation as the ultimate owner. The same is true for the Danish consumer electronics company Bang & Olufsen: only by lowering the threshold can one uncover the Bermudian major shareholder holding a 15.1% stake—and the Chinese owner behind it. Chinese capital is quietly making its way into these markets—but what does it do once it gets there? First, a large portion of investment is concentrated in strategic industries in the target countries, such as advanced manufacturing, information and communications technology, and natural resources. Manufacturing ranks first in investment volume at $393 billion, followed by professional and scientific activities at $260 billion, and energy and utilities at $195 billion. Once in these sectors, Chinese capital does one thing with the acquired companies: it injects more money into research and development. On average, capital stock increases by 7.3%, and R&D spending rises by 6.6%; this trend is even more pronounced when the acquirer is a state-owned enterprise. Ironically, despite all the R&D efforts by local companies, they neither generate more patents nor earn more revenue; on the contrary, their return on capital actually decreases by 1.1%. Is this due to inefficient resource allocation, or are local companies simply spinning their wheels with the money? The report concludes that neither is the case. Local companies’ R&D teams work at full capacity to serve Chinese capital; while their own patent portfolios do not grow, the number of patent grants obtained by their parent companies in China surges dramatically. The net revenue from these patents is primarily attributed to China rather than the countries where the R&D teams are based—which is precisely why Chinese capital favors investing in developed nations. Only developed economies that possess advanced technology can generate what is known as the “spillover effect”—where innovation by downstream enterprises feeds back into the source of capital. The report found that Chinese enterprises prioritizing technology acquisition over profit generation are often state-owned enterprises (SOEs). These firms have clear strategic objectives and strict investment discipline, and are willing to accept short-term declines in profits. In reality, however, private enterprises remain the driving force behind China’s overseas corporate asset expansion. In addition to R&D, they primarily drive supply chain integration, transforming acquired overseas companies into suppliers for Chinese enterprises. This vertical supply chain integration is an area that SOEs tend to overlook; it is mainly carried out by private enterprises, while SOEs focus specifically on R&D. Consequently, the number of patent grants obtained by SOEs and private enterprises differs significantly. On average, in the year an acquisition is completed, private enterprises see their patent applications triple, while SOEs see a 4.4-fold increase—a truly explosive surge. But here’s another curious phenomenon: logically, given how much Chinese capital prioritizes R&D, one would expect it to skew the local market culture—after all, if you invest heavily, wouldn’t other companies have to follow suit? On the contrary, other local companies not only fail to increase their R&D spending but actually reduce it. The report found that the overall levels of innovation and profitability in local industries remained unchanged following Chinese investment, indicating that the intensity of innovation activities among individual firms had shifted: as one firm strengthens, another weakens; as one firm’s profits decline, another’s rise. The practical effect of this is that local firms—which were originally market-driven—have now realigned their R&D and innovation activities due to China’s state-led technology acquisition strategy. The report argues that this represents a new mechanism through which national industrial policy exerts influence abroad; by leveraging equity investments between companies, it reshapes global business networks, transforming them into tools for its own geo-economic strategy. In contrast to China’s investment strategy—which prioritizes long-term R&D at the expense of short-term profits—the approaches taken by the United States, Japan, and India are not unique. The United States tends to expand corporate scale and increase investment in fixed assets, which has a limited impact on R&D and patent output—this is simply standard market-oriented practice. Japan’s overseas investment is similar in nature to China’s, but first, it is on a smaller scale, and second, it is not state-driven but often the result of private enterprises’ own initiatives. India, on the other hand, takes a conservative approach, seeking only to maintain a market presence rather than pursuing technological upgrades or asset accumulation. So, ladies and gentlemen, China’s approach is actually not unique either. What truly frightens the United States is that a nation can execute such a strategy on such a massive scale, in such a covert manner, and with such strict discipline.