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Why almost a third of overseas Chinese investments fail

A woman holding an umbrella walks past a China Citic Bank, a subsidiary of Citic Group, in Wuhan, Hubei province March 27, 2014.
Reuters/Stringer
Not so sunny days for
By Lily Kuo
Published Last updated This article is more than 2 years old.

Chinese outbound direct investment reached a record $108 billion in 2013, a 22.8% rise from the year before, making China one of the world’s largest investors. But some 30% of those investments tend to fail, according to Edwin Lee, an investment consultant with Chadbourne & Parke. One major problem is that Chinese firms tend to rely heavily on interpersonal relationships to get things done—known in Chinese as guanxi, which in practice often means getting things done via bribery and gift-giving.

“They stick to the usual Chinese methods, relying on relationships and personalities,” Lee told the environmental nonprofit ChinaDialogue. “Too much focus on their own aims will create major problems for later cooperation.”

Chinese investment is increasingly coming from private firms encouraged by the government’s “going out” policy rather than deep-pocketed state-owned firms, and is flowing into industries like IT and telecommunications, consumer goods, and manufacturing, as well as energy and power. But all too often foreign investments have also given Chinese companies a bad reputation. In Africa, for example, Chinese companies are working to turning around an image of focusing solely on accessing resources, at the expense of the local environment and relations with the workers and community members of the host country.

Troubled deals have also caused not a few international scuffles: Earlier this year, Australian member of parliament Clive Palmer, who owns a Western Australia iron ore mine with a heavy investment from the Chinese company Citic Pacific, accused the company of not fully paying for resources. The project has been delayed and spending has gone four times over budget (paywall), and is likely to cost Citic Pacific hundreds of millions of dollars this year.

China’s natural resources deals in general have been a sore spot as Beijing rushed to buy up commodities over the past decade, with the head of the country’s mining association estimating that 80% of all overseas mining deals had failed.

 

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