The Chinese Investment Paradox

ALEX HERKERT contrasts the Chinese government’s control of overseas investment in the entertainment sector and the technology sector.

Over the past decades, the inception and direction of Chinese outbound investment has become a topic of great significance with global ramifications. Total Chinese investment in the U.S. has grown from less than $2.5 billion between 1978 and 1999 to more than $178 billion from 2005 to the present. The extent to which the Chinese Communist Party (CCP) controls the outbound investment flows of Chinese domestic companies, both state-owned and private, has a large bearing on the potential political and economic implications of Chinese outbound foreign direct investment (OFDI). Observing and analyzing Chinese investment into the U.S. technology and entertainment sectors, two areas in which Chinese central investment strategy has differed greatly over the past five years, yields some interesting conclusions about the extent to which the Chinese state controls OFDI.

Looking at the entertainment sector, beginning in 2012 large Chinese companies  made many big-ticket acquisitions of U.S. entertainment entities, from Wanda’s acquisition of AMC for $2.6 billion in 2012 to Zhonghong Zhuoye Group’s acquisition of Sea World in 2017 for $430 million. While China’s expanding middle class provides a market explanation for heightened Chinese entertainment demand, acquisitions like these have received extensive press coverage. Much of these transactions highlight the fact that China is now capable of purchasing America’s most highly valued cultural and soft-power exports. However, as of 2016 there has been a large shift in OFDI away from entertainment, as the entire sector has been classified as “restricted” in the Foreign Investment Catalogue published by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM). The restriction is due to government worries about overextension of Chinese companies into expensive entertainment assets deemed non-strategic. Conglomerates active in entertainment acquisitions, including Wanda, Anbang, and Fosun, now face serious financial difficulties and repercussions from the central government.

The technology sector presents an interesting foil to the entertainment sector by comparing the two points to differences in effectiveness between the restriction and promotion of OFDI by the Chinese government. Chinese firms, both public and private, have made a large number of high-profile and high-value acquisition deals from 2012 to 2016 in technology as in the entertainment sector. However, in recent years investment activity in technology has been strongly supported rather than discouraged. Strategic technology assets have been classified as “encouraged”, not “restricted”, by the NDRC and MOFCOM, and as such receive substantial rhetorical and financial support from the central government. The Chinese government has signaled more support for growing OFDI in technology through prioritization of the Made in China 2025 framework and the development of special Integrated-Circuit (IC) technology funds.

Despite the vastly different central government approaches to Chinese investment in entertainment and technology, both sectors have seen an enormous decrease in investment value since the record-breaking examples of 2016. In the entertainment sector, this change can be largely explained through the promulgation of a number of state policies and statements meant to curtail investment. These include the Ministry of Commerce published Foreign Investment Catalogue, which details which sectors are encouraged, restricted, or prohibited, and if not listed, tacitly permitted. This is in addition to the Measures for Overseas Investment from the National Development and Reform Commission (NDRC) in 2018. Taken together, these regulations have changed the core nature of Chinese OFDI. In 2017 alone, more than $75 billion dollars worth of Chinese OFDI deals were cancelled due to the expansion of the “negative list” and restricted investments. In the wake of tightening control, the state re-emerged as the main contributor to OFDI flows because, as quoted by an unnamed SOE boss, “We have the channels to communicate with the regulators”.

Where these policies have been effective in restricting investment into entertainment assets, similar policies promulgated through the Ministry of Commerce, Ministry of Finance, NDRC, and the State Council have been unable to dramatically increase or sustain Chinese private and public investment into critical technology industries in the United States. More than one third of projects supported financially or rhetorically by the Chinese state in the technology sector failed in the time period from 2012 to the present, which supports the view that the government is not successful in dictating outcomes for investment in the technology sector. Higher government support and involvement in an acquisition appears to actually increase the rate of failure. China’s actions to reassert state power and the public acknowledgement of investment control create opposition for its own state supported acquisitions. Consequently, the government is working against itself, simultaneously encouraging strategic investment and ensuring that the U.S. will intensely scrutinize all proposals. Unfortunately for China, there is little it can do to solve the current conundrum—by publicly pushing private and public companies to make acquisitions in the name of improving the country’s technological power, the government is essentially exacerbating the Council on Foreign Investment in the United States (CFIUS) suspicions.

While the Chinese government has had divergent success in restricting outbound investment into the entertainment sector and encouraging investment into technology, the sectors are not entirely dissimilar. They share the context of a Chinese economy in which slowing growth and an anti-corruption campaign have created a strong impetus to move as much capital as possible into overseas assets. This, coupled with loosening outbound investment regulation through 2016, accounts for the sharp rise in investment for both sectors through the end of that year. Rising investment in technology through 2016 was a success for the Chinese government, as technological assets had already been designated as “encouraged” through the Foreign Investment Catalogue, and both the 13th Five Year Plan and the Made in China 2025 Initiative, which strongly support technological progress, were published in advance of 2016. In the entertainment sector, rising investment cannot be categorized as either a success or a failure for Chinese regulators, as they had not explicitly attempted to encourage or discourage investment in the sector until later on. The state played little role in coordinating investments during this time period, during which companies themselves took the lead in deciding where and how much to invest. What is clear from what followed is that the Chinese government was content with progress in technological investment, but not with the accumulation of entertainment assets.

In the following two years, despite differential policies, both sectors experienced a steep decline in outbound investment. The combination of Chinese success in cutting off investment into entertainment and concurrent inability to continue investment into strategic technology assets led to a 92% drop in Chinese FDI towards the United States year on year by 2018. For the CCP, where the government has maintained critical control over not just public but also private companies, curtailing investment proved significantly easier than promoting it, as no foreign entities could complicate or mitigate its ambitions. However, both the sector specificity and speed at which the complete reversal of Chinese investment into U.S. entertainment companies was achieved elucidate the impressive power and coordination amongst the various Chinese regulatory bodies. The CCP likewise put significant impetus behind accelerated technological investments but misread how this would be perceived globally, ultimately bringing an end to whatever success they previously had with acquisitions in that sector.

Regardless of whether it is playing a role in restricting or promoting outbound investment, the Party is reemerging as the preeminent force of change in the Chinese economy. Under Xi Jinping, Party cells have been instituted in more private businesses, even joint ventures funded with overseas partners. Moreover, the CCP has written itself into the articles of association of many of the country’s largest companies, making explicit long-held assumptions about the strength of Party influence in that sector. The net result of these actions impacts both the entertainment and technology sectors—the advance of the state, and the retreat of the private sector. The recentralization of economic decision-making power around Beijing puts the more liberal years between 2012 and 2016 in perspective—they stand out as the exception, rather than the beginning of a trend.

There are many important implications of this conclusion, as Chinese investment has become integral to the economies of countries around the globe. The fact that the government was able to quickly and effectively restrict investment into the U.S. entertainment sector should cause concern that China may wield the restriction of investment as a political tactic in negotiations with trading partners. While entertainment firms throughout the U.S. felt the sting of curtailed Chinese investment, the consequences could be markedly more extreme if a country’s energy, trade, or military development had become dependent upon Chinese investment—this has already happened in countries like Sri Lanka.

The case of Chinese investment in technology yields a different conclusion. As China continues to grow and transition from an industrial to modern and service-focused economy, the acquisition of foreign technology and experience are critical. The Chinese experience with investment in semiconductor, computer chip, integrated circuit, and other technology companies demonstrates that this task is not easily accomplished. No matter that Chinese firms, through preferential financing and state backing, are able to offer above market price for the firms in which they are interested, they are still often unable to successfully complete acquisitions. This also points to a weakness in China’s state dominated OFDI regime, as explicit government control of investment pushes countries such as the United States to block investments in critical technologies. Many European countries are now planning on installing government review mechanisms similar to CFIUS, in light of the Chinese investment spree.

The efficacy and success of Chinese regulation of investment is a particularly current phenomenon. Looking at the United States’ entertainment and technology sectors, some of the premier destinations for Chinese investment, presents a unique perspective into the differential outcomes between the restriction and promotion of outbound investment. Questions regarding Chinese OFDI regulation will continue to be important as China promotes investment through the Belt and Road Initiative and Made in China 2025, and both China and recipient countries must continually adjust policies to accommodate the changing priorities and consequences of Chinese OFDI.

Alex Herkert can be contacted at

Leave a Reply