As China’s government blew hot and cold about outward investment throughout 2017, it is possible that Chinese investors have become cautious. Fearing capital flight related to the frenzied pace of foreign acquisitions by Chinese companies, the National Development and Reform Commission drafted new rules on outward investment in September 2017. As the agency in charge of vetting outward investment projects, it promised increased oversight on investments by overseas subsidiaries of Chinese companies. Yet in November of the same year, 16 Chinese ministries publicly pledged support to private manufacturers seeking industrial upgrades through offshore growth.
This suggests a tussle in China between concerns about sustaining competitiveness and moving up the global value chain on the one hand, and concerns about capital flight on the other. In response, companies have become cautious. Data from China’s State Administration of Foreign Exchange indicate that total outward FDI from China decreased from US$261 billion in 2016 to US$116 billion in 2017. Data from the first quarter of 2018 suggest that this number continues to fall.
Still, data from BI contrast remarkably with those of Indonesia’s Capital Investment Coordination Board (BKPM). BKPM announced on 14 August that Chinese companies had invested US$1.3 billion in Indonesia during the first half of 2018 — less than the US$2.0 billion in the first half of 2017, but significantly more than BI reported.
Why are the FDI data from BI and BKPM so different? Essentially, BKPM records FDI by the home countries of parent companies. These are not necessarily the countries from where companies finance their projects in Indonesia. Alternatively, BI records financial inflows by their purpose and country of origin.
Many Chinese companies channel their investment through a third country — Hong Kong and Singapore being important way stations. Hong Kong is included in BI data with US$266 million of FDI in Indonesia during the first half of 2018, compared to US$181 during the first half 2017. It is also included in BKPM data with US$1.1 billion in the first half of 2018, compared to US$1.0 billion in the first half of 2017. So adding Hong Kong to China actually increases the FDI discrepancy between BI and BKPM.
Accounting for Chinese investment via Singapore is difficult. Many companies have established subsidiaries in Singapore to coordinate regional activity across Southeast Asia. And Singapore has long been the largest source of FDI in Indonesia. According to BI, during the first half of 2018 it was the source of US$4.6 billion of FDI. This includes FDI by Singapore-based subsidiaries of Chinese firms. Their banks in Singapore muster finance from various sources for the FDI projects in Indonesia of their parent companies in China and Hong Kong.
Consequently, part of the FDI flows into and out of Singapore relate to investment in Chinese subsidiary companies in Indonesia. But we don’t know how much investment Chinese companies channel through Singapore. Singapore’s published statistics are opaque on this issue and two years out of date.
If we assume that investment from China and Hong Kong into Singapore leaves in the same proportion as all of Singapore’s FDI into each of the ASEAN countries, then Indonesia’s share in investment from China and Hong Kong amounts to an average of US$1.8 billion per year during 2014–16. This compares with US$1.5 billion per year according to BI and US$2.6 billion according to BKPM. In other words, FDI flows via Singapore potentially make up the difference between the FDI data of BI and BKPM.
The activity of Chinese companies in Indonesia is also much more significant than the FDI data from BI and BKPM suggest. More investment from China arrives in Indonesia in the form of loans. These relate to a wide range of infrastructure projects carried out by Chinese companies and their subcontractors. Many of these companies establish subsidiaries in Indonesia, and these do not require a lot of FDI.
Imported capital goods like cranes and bulldozers are generally covered by project loans that Chinese banks extend to government agencies and private companies in Indonesia. Consequently, the construction sector accounting for only 1 per cent of FDI from China and Hong Kong during 2013–2018.
It is not clear what the total value of this portfolio investment from China into Indonesia is. An approximation is the annual turnover of Chinese construction companies involved in these projects. The most recent data from the Statistical Yearbook of China (2017) show that Chinese firms turned over US$4.1 billion for such projects in Indonesia in 2016. That is in addition to FDI inflows from China and Hong Kong of US$4.9 billion, according to BKPM.
Construction activity in China has slowed and overcapacity has mounted in China’s steel industry, forcing large state-owned construction companies and their suppliers to look for contracts overseas. And at the same time, Chinese President Xi Jinping continues to enthuse Chinese companies and foreign governments to engage with his Belt and Road Initiative.
Although Chinese firms wanting to invest or build in Indonesia may face challenges at home and in Indonesia, judgements that they are tiring of Indonesia seem premature.
Pierre van der Eng is Associate Professor in International Business at The Australian National University.