High overseas investment yields not nation’s priority

According to a recently released report from the Economic Observer, which cited a term sheet released by the State Administration of Foreign Exchange (SAFE), China incurred a $26.8 billion net loss on its overseas investments last year, the largest loss in almost 20 years.

As eye-catching as this loss might seem, there is more to China's current overseas investment situation than this report might suggest. It should be pointed out that the Economic Observer concluded that China's outbound investments suffered a net loss because of a negative figure in the term entitled "balance of returns on China's investment" on the balance sheet offered by SAFE.

However, that entry on the balance sheet merely equals the return of China's foreign investment minus the earnings from foreign companies' investments in China, and is meant to show only a comparison in gains of the two different investment bodies. A negative value, in this case, simply indicates that China earned less in its foreign investments than overseas firms gained from China. Actually, the return on the mainland's foreign investment totaled $128 billion last year, while foreign firms gained $154.9 billion from China, according to the data from SAFE.

At China's current stage of development, I think it is quite reasonable to expect outbound investment returns to lag behind earnings from overseas investment in China. One of the major reasons behind the earnings disparity is the fact that foreign capital holders primarily focus on direct investment opportunities which bring higher returns, while China's outbound investments have mainly been funneled into foreign exchange reserves with much lower yields.

China stands to gain a great deal from profitable direct investments from overseas firms, who often bring with them state-of-the-art technology and advanced management methods which can benefit the country's economy as a whole. Furthermore, it is in China's best interest to build up a large base of foreign exchange reserves, despite their low returns, in order to avoid plunging into an international payment crisis. With the yuan still lacking key currency status in the global market, a lack of foreign currency could destabilize of the nation's economy. For example, in 1978, China was forced to borrow foreign currency from the international financial market at an annual lending rate of 15 percent in order to pay for imported technology and equipment.

At this moment, China should not focus too heavily on trying to realize higher returns on its foreign investments. To do so would naturally require more capital to flow abroad, which would inevitably lead to a decline in domestic investment and stunt the development of the major industries that contribute to China's real economy.