Ethiopia is one of the important destinations for Chinese investment in Africa, especially in sub-Saharan Africa in the past 10 years. From 2006 to 2015, Chinese institutions lent more than US$13 billion to develop infrastructure and industrial parks in Africa. China's investment has effectively made Ethiopia the fastest growing country in sub-Saharan Africa.
However, China's investment enthusiasm for Ethiopia seems to be waning. According to an article published in the Financial Times, some business people, diplomats and bankers investing in the local areas stated that Chinese entities have now adopted a "more cautious approach" towards Ethiopia. One diplomat in Addis Ababa said, "[T]he Chinese have said they've reached their limit… 'We're way overextended here,' they told us openly."
To cite another example, Sinosure, China's main state-owned export and credit insurance company, is no longer willing to provide credit insurance for Chinese banks on Ethiopian projects . "There's a new reluctance to back investments in Ethiopia", said one of the investors. One view is that the backdrop to this reluctance is some flagship Chinese-funded projects, such as the operation of freight rail services from Addis Ababa to Djibouti, have not reached the expected capacity.
Anbound research team believes that the change in China's investment and financing attitude towards Ethiopia is alarming, as it indicates that China's foreign investment has felt "fatigue" after experiencing high growth in previous years. Chinese companies, both private and state-owned financial institutions, are rethinking the strategies and risks of overseas investment. As early as February 2017, Anbound predicted that China's foreign investment will experience "policy collapse". It turns out that China's foreign investment in the first half of 2017 dropped by 45.8% year-on-year, and direct foreign non-financial investment totaled US$120.08 billion in the year, a year-on-year decrease of 29.4%. This is the first time that China's foreign investment has experienced negative growth after years of rapid growth.
This trend is also reflected in China's investment in Africa. In 2015, the scale of international investment in Africa fell by 7% year-on-year to US$54.079 billion; in 2016, it further dropped by 5% year-on-year to US$51 billion. In 2016, China's direct investment in Africa was US$ 2.98 billion, a decrease of 7% year-on-year; by the end of 2015, China's investment stock in the African region was US$ 34.69 billion, accounting for 3.2% of China's stock of foreign investment. In 2017, the Chinese government announced plans to invest a total of US$ 60 billion in Africa for three years, prompting the recovery of investment growth there. However, the actual situation contradicts the will of the government. Chinese private and state-owned enterprise employees in Africa are gradually returning to China. In 2013, the number of Chinese in Africa was around 1 million. However, due to the fall in the prices of commodities such as oil and ore and the decline in the African economies, private entrepreneurs began to withdraw. With the rising wages of Chinese labor, low-skilled workers from China are less willing to work in Africa.
Why does China's foreign investment, including its investment in Africa begin to decline? What impact will this trend have on China's Belt & Road Initiative?
Anbound's researchers believe that there are many factors that contributed to the decline of China's foreign investment growth. First, foreign investment is limited due to policy reasons. Because of the fear of capital flight and financial risks, China has significantly tightened the supervision of private enterprises' foreign investment since 2017, and overseas investments such as Wanda Group, Hainan Airlines, and Anbang Insurance Group have been discontinued. It can be argued that policy factors are an important reason for the slowdown in foreign investment in 2017.
Second, the decline in China's foreign exchange reserves limits the available funds for foreign investment. From the end of 2014 to 2016, under the dual impact of RMB depreciation and capital outflows, China's foreign exchange reserves have been substantially reduced by US$1 trillion, which has alarmed China's financial regulatory authorities on foreign exchange outflows.
Third, China's investment in developed countries began to be affected by local policy, where investment review policies have become stricter. Fourth, with the increase in China's foreign investment, and as the investment goes more in-depth, the risks of Chinese companies' foreign investment are beginning to be shown, and concerns about financial security are continuously growing.
Having been tracking the "going out" of Chinese companies for long-term, Anbound's research team believes that China's outward investment slowing down is not an accidental annual fluctuations, but rather it is a trend.
The rapid growth of foreign investment before this was due to several forefront foreign investments, including external energy and resource investments by actual companies and state-owned enterprises under Belt & Road Initiative, the transfer of private capital and individuals' external assets, as well as foreign direct investment by Chinese companies for technology acquisition. However, since the start of 2017, the momentum supported by these factors no longer exists. The environment for China's foreign investment has changed significantly, and the risk of over expansion has begun to gradually reveal. All these factors have contributed to the significant decline in China's foreign investment. It is understood that one of the reasons for China's credit insurance to adjust its overseas insurance strategy is the fear of the debt situation and the foreign exchange crisis. This also reflects the current changes in China's overseas investment environment.
Anbound's scholars point out that the changing trend in China's foreign investment has resulted in the shrinkage of a considerable part of China's foreign investment, which may cause China's Belt & Road Initiative to face an embarrassing situation where only a few investments could remain. If China intends to continue to implement this initiative, it will need to maintain sustained foreign investment; if the investments are reduced due to risk concerns, many ongoing projects under the Belt & Road Initiative will face the risk of being in fatigue. Another unfavorable factor is that the current global trade mess initiated by the United States has significantly worsened the international investment environment and increased the risk of foreign investment.
What should China do next? This dilemma is placed right before China's Belt & Road Initiative. From the perspective of an independent think tank, Anbound believes that China's previous strategy of Belt & Road Initiative focusing on expansion should be adjusted in its implementation, either slowing down and reducing, or focusing in a single area either on the "Belt" (Silk Road Belt) or on the "Road" (Maritime Silk Road); China should not give equal strength to both of these two.
Anbound has always been advocating that China should primarily focus on the controllable "Belt" which is based on land rights, not on the "Road" which is based on conventional maritime rights. As a strategic think tank, Anbound also has the responsibility to remind that the United States considers China as its foremost strategic competitor and has established the Indo-Pacific Strategy framework with multiple countries, the maritime pressure felt by China is far from over and this may be just the beginning. From Obama to Trump's era, a number of American strategies and foreign policies have been abandoned, yet "Pivot to Asia" has been strengthened and becomes the Indo-Pacific Strategy.
Final Analysis Conclusion:
The slowdown in China's foreign investment reflects China's foreign economic expansion is experiencing "fatigue", and will affect its Belt & Road Initiative. Today's international economic environment is drastically changing; China must be aware of the changes in the development pattern it is facing. It is necessary for China to be confident, yet simultaneously more cautious, and maintain strategic patience.
