Trends in Overseas Direct Investment by Chinese Companies in 2013

January 2015

China and North Asia Division Overseas Research Department Japan External Trade Organization

(JETRO)

Exclusion of liability clause Responsibility for decisions made based on the information provided in this report shall rest solely on readers. Though JETRO strives to provide accurate information, JETRO will not be responsible for any loss or damage incurred by readers through the use of the information. Unauthorized reproduction prohibited

Introduction

There is a trend among Chinese companies toward direct foreign investment (FDI) that is becoming more active each year. China’s 2013 FDI (net, flow) announced in September 2014 set a new record, at USD107, 843.71 million, a 22.8% increase year-on-year.

By region, Chinese FDI in Asia and Central and South America drove the increase, while FDI in Europe declined. By industry, mining and finance stood out as contributing to the increase, while manufacturing made a negative contribution.

In light of these circumstances, this report presents multifaceted verification of the situation in regions of China with regard to Chinese FDI and the situation in the countries and regions that receive FDI, and it describes the current state of overseas development by Chinese companies, which are expanding around the world.

This report appeared in JETRO Daily in November and December 2014, and it is based on the data available at the time of writing (September-October 2014).It is hoped that this report will serve as a reference in various quarters, including at Japanese companies.

January 2015 Overseas Research Department, Japan External Trade Organization (JETRO)

. < Contents >

1. CHINA ...... 4

1-(1) CHINA: SETS NEW RECORD FOR FDI BY MAINTAINING DOUBLE-DIGIT GROWTH FOR TWO CONSECUTIVE YEARS ...... 4

2. ASIA AND OCEANIA (EXCLUDING JAPAN AND CHINA) ...... 9

2-(1) HONG KONG: CLEARLY TOP AMONG COUNTRIES AND REGIONS; HAS SHARE OF TOTAL INVESTMENT JUST UNDER 60% ...... 9 2-(2) TAIWAN: RECORD-SETTING INVESTMENT AMOUNT, MAINLY IN LARGE TRANSACTIONS ...... 11 2-(3) SOUTH KOREA: CONTINUED FOCUS ON LEISURE AND TOURISM SECTOR ...... 15 2-(4) SINGAPORE: THE OBJECT IS DIVERSIFICATION THROUGH HI-TECH, ENERGY, AND REAL ESTATE .. 18 2-(5) THAILAND: CHINESE INVESTMENT CONTINUES TO STAGNATE, BUT SIGNIFICANT INCREASE MAINLY IN AUTOS IS CERTAIN ...... 21 2-(6) MALAYSIA: DIVERSIFIED INVESTMENT IN HI-TECH AND SERVICE INDUSTRIES ...... 24 2- (7) INDONESIA: MINING SECTOR RECEDES, EXPANDED NUMBER OF INDUSTRIES TARGETED FOR INVESTMENT ...... 28 2-(8) THE PHILIPPINES: POTENTIAL FOR EXPANSION OF AGRICULTURAL SECTOR HENCEFORTH ...... 32 2-(9) VIETNAM: LARGEST NEW INVESTMENT WAS CHINESE COMPANIES’ CONSTRUCTION OF A COAL-FIRED POWER PLANT ...... 34 2-(10) MYANMAR: CHANGE TO LABOR-INTENSIVE INDUSTRIES SUCH AS APPAREL AFTER TRANSITION TO CIVILIAN RULE ...... 37 2-(11) CAMBODIA: BRISK FORAY INTO GARMENT INDUSTRY; INVESTMENT EXPANDS SUDDENLY ...... 40 2-(12) INDIA: NO LARGE-SCALE PROJECTS; DECLINE OVER 40% YOY ...... 42 2-(13) SRI LANKA: CHINA IS TOP INVESTOR; FLOW OF FUNDS ENCOURAGES COMPANIES TO SET UP OPERATIONS ...... 44 2-(14) PAKISTAN: RAPID EXPANSION OF COMMUNICATION SECTOR; CHINA’S FIRST TIME IN TOP POSITION AS A COUNTRY ...... 47 2-(15) BANGLADESH: CHINA BECOMES LARGEST INVESTOR IN EPZS ...... 49 2-(16) AUSTRALIA: CONSPICUOUS INCREASE IN AGRIBUSINESS AND FARMLAND SECTOR ...... 52

3. NORTH AMERICA ...... 56

3-(1) UNITED STATES: LARGEST M&A EVER IN THE FOOD SECTOR ...... 56 3-(2) CANADA: REVISION OF INVESTMENT LAW PUTS BRAKES ON INVESTMENT; CASES SUDDEN DROP60

4. CENTRAL AND SOUTH AMERICA ...... 62

4-(1) BRAZIL: INVESTMENT IN AUTO INDUSTRY AND INFRASTRUCTURE SECTOR IS PROMINENT ...... 62

5. EUROPE AND RUSSIA ...... 64

5-(1) GREAT BRITAIN: ACTIVE LARGE-SCALE INVESTMENT; ADVANCES IN CLOSER ECONOMIC

. COOPERATION ...... 64 5-(2) GERMANY: INVESTMENT AMOUNT REMAINS LOW; UPTREND IN NUMBER OF CASES ...... 66 5-(3) FRANCE: MOVEMENT TOWARD EXPANDING OPERATIONS IN AFRICA BY ACQUIRING FRENCH COMPANIES ...... 69 5-(4) RUSSIA: FINANCE AND REAL ESTATE EXPAND WITH GROWTH JUST UNDER 20% ...... 72

6. MIDDLE EAST AND AFRICA...... 75

6-(1) IRAN: EXPANSION CENTERED AROUND INFRASTRUCTURE AND ENERGY ...... 75 6-(2) UNITED ARAB EMIRATES (UAE): ACTIVE MOVEMENT IN THE FINANCIAL AND REAL ESTATE SECTORS ...... 77 6-(3) ISRAEL: LARGE INVESTMENTS IN INFRASTRUCTURE PROJECTS AND FOOD CONTINUE ...... 80 6-(4) EGYPT: PROGRESS IN DIVERSIFICATION OF INVESTMENT SECTORS TO MANUFACTURING AND COMMUNICATIONS, ETC...... 82 6-(5) ALGERIA: ALGERIA IS THE SECOND-LARGEST PRESENCE IN CHINA’S INVESTMENT IN AFRICA ..... 86 6-(6) MOROCCO, TUNISIA, AND MAURITANIA: INVESTMENT AMOUNT IS SMALL, BUT INTEREST IS STRONG ...... 89 6-(7) REPUBLIC OF SOUTH AFRICA: INVESTMENT EXPANDS IN DIVERSE SECTORS SUCH AS CONSUMER APPLIANCES AND AUTOS ...... 93

7. JAPAN ...... 95

7-(1) JAPAN: LARGE RECOVERY IN DIRECT INVESTMENT TO JAPAN; BALANCE ALSO IN AN UPTREND ... 95

Copyright(C)2015 JETRO. All rights reserved. 3 1. China 1-(1) China: Sets New Record for FDI by Maintaining Double-Digit Growth for Two Consecutive Years

In 2013, China set a new record with USD107,843.71 million in FDI (non-financial sector, net, flow), a 22.8% increase. The figure has continued to increase ever since 2002 when collection of statistics began. By region, Asia and Central and South America drove the increase, while the share of FDI sent to Europe declined. By industry, mining and finance stood out as contributing to the increase, while manufacturing made a negative contribution. This paper reports on this trend at Chinese companies from China and from the countries and regions that receive the FDI.

-Among Top Three in the World for Two Consecutive Years- China’s Ministry of Commerce, the National Bureau of Statistics, and the State Administration of Foreign Exchange jointly released the 2013 Statistical Bulletin of China's Outward Foreign Direct Investment on September 9, 2014. China’s FDI (net, flow) in 2013 was USD107,843.71 million, representing a 22.8% increase YOY. It has continually increased ever since statistical collection began in 2002, and the figure for 2013 set another new record. The official statistics report mentioned the following eight characteristics of the FDI in 2013.

(1) While global FDI in 2013 increased 1.4% YOY, Chinese FDI increased by 22.8% YOY, setting a new record at USD107.8 billion and putting it among the top three countries in the world for two consecutive years. (2) At the end of 2013, 15,300 investors in China had established 25,400 companies in foreign countries, with an increase of five locations compared to the previous year, to 184 countries and regions. At the end of 2013, China’s FDI (stock) was USD660.5 billion, and its global rank rose from 13th to 11th. (3) While investment in Europe in 2013 declined 15.4% to USD6.0 billion, there was steady expansion in Central and South America (increase of 2.3 times), Oceania (up 51.6%), Africa (up 33.9%), and Asia (up 16.7%). FDI in North America rose slightly, by 0.4%. (4) While Chinese FDI at the end of 2013 extended to all industries, investment stock in the five major industries of leasing and business services, finance, mining, wholesale/retail, and manufacturing reached USD548.6 billion, accounting for 83.0% of all foreign investment stock and exceeding 80% of the 2013 investment flow. (5) There were 424 cases of M&A by Chinese companies in 2013 amounting to USD52.9 billion, and of these, direct investment accounted for 63.9%, at USD33.8 billion, and finance accounted for 36.1%, at USD19.1 billion. The M&As were in 16 major industry sectors, including mining, manufacturing, and real estate. The largest M&A outside China by a Chinese company was by the China National Offshore Oil Corporation (CNOOC), which acquired 100% of the stock of the major Canadian oil development firm Nexen. (6) The 2013 FDI (flow) to non-financial sectors by regional companies increased 6.5% to USD36.4 billion, accounting for a 39.3% share of the total. Of the regions, the top three were Guangdong Province, Shandong Province, and Beijing. The FDI (stock) to non-financial sectors by regional companies at the end

4

of 2013 was USD164.9 billion, exceeding 30% for the time to reach 30.3% of the total. (7) At the end of 2013, of the USD543.4 billion in FDI (stock) in non-financial sectors, state-owned enterprises accounted for 55.2% and non-state-owned enterprises accounted for 44.8%, an expansion of 4.6 points compared to the previous year for non-state-owned enterprises. Of the USD92.7 billion in FDI (flow) in non-financial sectors in 2013, shares were as follow: state-owned enterprises 43.9%, limited liability companies 42.2%, limited-liability joint-stock companies 6.2%, stock sharing cooperatives 2.2%, privately operated companies 2.0%, foreign-invested enterprises 1.3%, and other 2.2%. (8) Sales revenues of overseas non-financial sector Chinese companies (called jingwaiqiye in Chinese) in 2013 increased 14.5% to USD1,426.8 billion, and the tax paid to the investment destinations increased 67.0%, to USD37.0 billion. Employees of overseas companies at the end of the year numbered 1.967 million persons. Of these, in addition to 967,000 foreigners who were directly hired, 102,000 persons were hired in advanced countries.

-FDI in Central and South America Expands by 2.3 Times- Looking at FDI (flow) by major regions, investment in Asia, which receives the largest share, has maintained double-digit growth since 2012 (up 42.4% YOY), but its share was 70.1%, down 3.7 points compared to the previous year (refer to Figure 1-(1)-1).

In addition, FDI to Central and South America increased 2.3 times, and its share was 13.3%, up 6.3 points. Increases were also seen in Africa (33.9%), Oceania (51.6%), and North America (0.4%). Meanwhile, only Europe declined, by 15.4%, and its share shrank by 2.5 points.

Looking at contributors to 2013 growth (up 22.8% YOY), Asia (12.3 points) and Central and South America (9.3 points) were prominent. On the other hand, Europe, which was down 1.2 points, was the only depressing factor.

Figure 1-(1)-1: China’s FDI by Region (units: USD10,000, %) 2011 2012 2013 Compon Component Component Amount ent YOY Amount YOY Amount YOY Ratio Ratio Ratio Asia 4,549,445 60.9 1.3 6,478,494 73.8 42.4 7,560,426 70.1 16.7 Africa 317,314 4.3 50.2 251,666 2.9 − 20.7 337,064 3.1 33.9 Europe 825,108 11.1 22.1 703,509 8.0 − 14.7 594,853 5.5 − 15.4 Central and South 1,193,582 16.0 13.3 616,974 7.0 − 48.3 1,435,895 13.3 132.7 America North 248,132 3.3 − 5.3 488,200 5.6 96.8 490,101 4.5 0.4 America Oceania 331,823 4.4 75.7 241,510 2.8 − 27.2 366,032 3.4 51.6 Total 7,465,404 100.0 8.5 8,780,353 100.0 17.6 10,784,371 100.0 22.8 Source: 2013 Statistical Bulletin of China's Outward Foreign Direct Investment, China’s Ministry of Commerce, National Bureau of Statistics, and State Administration of Foreign Exchange.

5

-Manufacturing Industry Became the Largest Depressing Factor- Looking at FDI (flow) by industry, leasing and business services still had the largest component ratio in 2013, at 25.1%; however, its 1.2% growth YOY was below the overall growth, and its share continues to decline (refer to Figure 1-(1)-2). The leasing and business services industry was followed by mining (23.0%), finance (14.0%), and wholesale/retail (13.6%). Looking at contributors to 2013 growth (up 22.8%), the mining industry made the greatest contribution, at 12.8 points, followed by finance (5.7 points), real estate (2.2 points), and wholesale/retail (1.8 points). The largest depressing factor was the manufacturing industry, which was down 1.7 points.

Figure 1-(1)-2: China’s FDI by Industry (units: USD10,000, %) 2011 2012 2013 Component Component Component Amount YOY Amount YOY Amount YOY Ratio Ratio Ratio Agriculture, forestry, 79,775 1.1 49.4 146,138 1.7 83.2 181,313 1.7 24.1 livestock, and fishing Mining 1,444,595 19.4 152.8 1,354,380 15.4 − 6.2 2,480,779 23.0 83.2 Manufacturing 704,118 9.4 51.0 866,741 9.9 23.1 719,715 6.7 − 17.0 Electric power, gas, 187,543 2.5 86.3 193,534 2.2 3.2 68,043 0.6 − 64.8 water Construction 164,817 2.2 1.2 324,536 3.7 96.9 436,430 4.0 34.5 Wholesale/retail 1,032,412 13.8 53.4 1,304,854 14.9 26.4 1,464,682 13.6 12.2 Transport, storage, 256,392 3.4 − 54.7 298,814 3.4 16.5 330,723 3.1 10.7 postal service Hotels, dining 11,693 0.2 − 46.4 13,663 0.2 16.8 8,216 0.1 − 39.9 Information, 59.7 computer services, 77,646 1.0 53.4 124,014 1.4 140,088 1.3 13.0 software Finance 607,050 8.1 − 29.6 1,007,084 11.5 65.9 1,510,532 14.0 50.0 Real estate 197,442 2.6 22.4 201,813 2.3 2.2 395,251 3.7 95.9 Leasing and business 2,559,726 34.3 − 15.5 2,674,080 30.5 4.5 2,705,617 25.1 1.2 services Scientific research, technological 70,658 0.9 − 30.6 147,850 1.7 109.2 179,221 1.7 21.2 services, geological exploration Water usage, environment, and 25,529 0.3 254.7 3,357 0.0 − 86.9 14,489 0.1 331.6 public facilities management Resident services, 32,863 0.4 2.4 89,040 1.0 170.9 112,918 1.0 26.8 other services Education 2,008 0.0 904.0 10,283 0.1 412.1 3,566 0.0 − 65.3 Health, social security, social 639 0.0 − 80.9 538 0.0 − 15.8 1,703 0.0 216.5 welfare Culture, physical education, 10,498 0.1 − 43.7 19,634 0.2 87.0 31,085 0.3 58.3 entertainment Total 7,465,404 100.0 8.5 8,780,353 100.0 17.6 10,784,371 100.0 22.8 (Reference) 6,858,354 91.9 14.0 7,773,269 88.5 13.3 9,273,839 86.0 19.3 Non-financial sector 6

Source: Same as Figure 1-(1)-1.

-Presence of Central State-owned Enterprises Still Overwhelming- Looking at investment amounts (non-financial sector) by region, the “central total,” at USD56,324.49 million, exceeded the “regional total” of USD36,414.89 million (refer to Figure 1-(1)-3). Of course, it has long been the central, and not the regional, investment that has made up the majority of China’s foreign investment.

Figure 1-(1)-3: China’s Non-Financial Sector FDI (central and regional) (units: USD10,000, %) 2011 2012 2013

Component Component Component Amount YOY Amount YOY Amount YOY Ratio Ratio Ratio Central 4,502,314 65.6 6.1 4,352,693 56.0 − 3.3 5,632,449 60.7 29.4 Total 2,356,036 34.4 32.8 3,420,576 44.0 45.2 3,641,489 39.3 6.5 Beijing 117,503 1.7 53.4 168,855 2.2 43.7 413,010 4.5 144.6 Tianjin 40,706 0.6 19.3 67,495 0.9 65.8 112,020 1.2 66.0 Hebei Province 46,363 0.7 − 12.9 57,809 0.7 24.7 92,757 1.0 60.5 Shanxi Province 18,319 0.3 131.1 30,966 0.4 69.0 56,483 0.6 82.4 Inner Mongolia 12,825 0.2 59.5 51,845 0.7 304.2 40,880 0.4 − 21.1 Liaoning Province 114,384 1.7 − 40.9 276,260 3.6 141.5 129,499 1.4 − 53.1 Jilin Province 20,493 0.3 − 4.0 29,641 0.4 44.6 75,240 0.8 153.8 Heilongjiang Province 23,834 0.3 0.2 72,405 0.9 203.8 77,338 0.8 6.8 Shanghai 183,802 2.7 16.0 331,618 4.3 80.4 267,524 2.9 − 19.3 Jiangsu Province 225,383 3.3 64.4 313,050 4.0 38.9 302,001 3.3 − 3.5 Zhejiang Province 185,287 2.7 − 30.8 236,023 3.0 27.4 255,276 2.8 8.2 Anhui Province 53,089 0.8 − 34.8 71,043 0.9 33.8 91,055 1.0 28.2 Fujian Province 53,028 0.8 − 0.9 85,705 1.1 61.6 95,249 1.0 11.1 Jiangxi Province 18,833 0.3 98.9 37,316 0.5 98.1 38,091 0.4 2.1 Shandong Province 247,339 3.6 30.9 345,621 4.4 39.7 426,472 4.6 23.4 Henan Province 28,251 0.4 138.1 34,117 0.4 20.8 58,971 0.6 72.8

Hubei Province 70,903 1.0 779.6 49,687 0.6 − 29.9 52,011 0.6 4.7 Hunan Province 117,628 1.7 328.1 99,499 1.3 − 15.4 56,970 0.6 − 42.7 Guangdong Province 363,350 5.3 127.1 528,821 6.8 45.5 594,288 6.4 12.4

Regional Total Regional Guangxi Province 16,714 0.2 − 10.5 27,240 0.4 63.0 8,134 0.1 − 70.1 Hainan Province 121,999 1.8 450.1 32,012 0.4 − 73.8 81,731 0.9 155.3 Chongqing 40,125 0.6 11.1 52,960 0.7 32.0 34,655 0.4 −34.6 Sichuan Province 56,341 0.8 − 18.5 59,509 0.8 5.6 58,447 0.6 − 1.8 Guizhou Province 2,033 0.0 603.5 2,025 0.0 − 0.4 20,815 0.2 927.9 Yunnan Province 24,845 0.4 − 51.6 104,046 1.3 318.8 83,036 0.9 − 20.2 Tibet Autonomous 216 0.0 644.8 2 0.0 − 99.1 22 0.0 1,000.0 Region Shaanxi Province 44,816 0.7 72.0 60,784 0.8 35.6 30,789 0.3 − 49.3 Gansu Province 64,917 0.9 537.9 138,209 1.8 112.9 43,182 0.5 − 68.8 Chinghai Province 173 0.0 25.4 1,280 0.0 639.9 3,596 0.0 180.9 Ningxia Hui 1,295 0.0 82.1 6,421 0.1 395.8 8,626 0.1 34.3 Autonomous Region Xinjiang Uyghur 31,474 0.5 559.0 43,123 0.6 37.0 31,579 0.3 − 26.8 Autonomous Region Xinjiang Production and Construction 9,768 0.1 − 19.3 5,189 0.1 − 46.9 1,742 0.0 − 66.4

Corps Total 6,858,350 100.0 14.0 7,773,269 100.0 13.3 9,273,938 100.0 19.3 Source: Same as Figure 1-(1)-1. 7

Looking at the long-term trend, the “central total” increased by approximately 13 times between 2004 when it was USD4,525.17 million and 2013 when it was USD56,324.49 million; however, its share of total direct investment has been in a downtrend since it peaked in 2006, at 86.4% of the total.

In addition, the region making the highest investment in 2013 was Guangdong Province, at USD5,942.88 million, an increase of 12.4% YOY. Shandong Province was in second place with USD4,264.72 million, a 23.4% increase, and Beijing was in third place with USD4,130.10 million, an increase of just over 2.4 times.

For FDI by individual companies, only the ranking by stock figures has been released, and central state-owned enterprises are ranked at the top. Note that “central state-owned enterprises” refers to state-owned enterprises that report to the State-owned Assets Supervision and Administration Commission of the State Council (hereinafter SASAC) or other organizations under the State Council, such as the China Banking Regulatory Commission, and the China Insurance Regulatory Commission. Of the central state-owned enterprises, 113 are directly under SASAC. Looking at the top 100 companies in terms of FDI (non-financial sector, 2013 year-end stock base), 53 were central state-owned enterprises directly under SASAC. Of the top 20, they were all central state-owned enterprises directly under SASAC except for twelfth-place Huawei Technologies Co., Ltd., a communication equipment manufacturer headquartered in Shenzhen, Guangdong Province, (Huawei was 24th in 2013) and fifteenth-place CITIC Limited (CITIC is also a central state-owned enterprise, but it reports to the Ministry of Finance). Thus, the presence of central state-owned enterprises in foreign investment can be called overwhelming.

Furthermore, in addition to central state-owned enterprises, in 23rd place is Guangdong Holdings Limited (main business: infrastructure construction), a state-owned enterprise under the direct control of Guangdong Province. In 27th place is the HNA Group Co., Ltd., which is involved in a broad range of activities from aviation to travel and distribution, etc. In 28th place is Yanzhou Coal Mining Company Limited, a holding company of the Yankuang Group, a major coal company that is a state-owned enterprise directly under the government of Shandong Province.

8

2. Asia and Oceania (excluding Japan and China) 2-(1) Hong Kong: Clearly Top Among Countries and Regions; Has Share of Total Investment Just Under 60%

Chinese direct investment in Hong Kong in 2013 was USD62,824 million, a 22.6% increase YOY, or 58.3% of China’s total FDI, making Hong Kong the top country/region. By industry, at the top was leasing and business services (component ratio 28.1%), second was the financial industry (20.2%), and third was wholesale/retail (17.3%).

-Direct Investment Increases Two Years in a Row- According to the National Bureau of Statistics of China, direct investment from China to Hong Kong in 2013 was USD62,824 million, an increase of 22.6% YOY, making two consecutive years of increase. The amount of increase was smaller than in 2012 (43.7%), but Hong Kong’s share of China’s total FDI was 58.3%, far above second-place EU (4.2%), making it the top country/region in continuation from 2012. The top industries were, in order, the leasing and business services; financial industry; wholesale/retail; mining; and transport, storage, postal service, etc. (refer to Figure 2-(1)-1).

Figure 2-(1)-1: Top 7 Industries for Investment in Hong Kong (2013) (units: million USD, %)

Component Amount YOY Ratio

Leasing and business services 17,676 28.1 −19.0

Financial industry 12,677 20.2 54.1

Wholesale/retail 10,881 17.3 7.6

Mining 10,788 17.2 264.0

Transport, storage, postal service 2,880 4.6 122.2

Real estate 2,292 3.7 44.8

Manufacturing 1,484 2.4 −40.6

Total 62,824 100.0 22.6

Source: 2013 Statistical Bulletin of China's Outward Foreign Direct Investment.

The cumulative total number of companies set up in Hong Kong through direct investment by Chinese companies as of the end of 2013 exceeded 7,000 companies. According to InvestHK, of the companies listed on Hong Kong Exchanges and Clearing Limited as of January 2014, Chinese companies constituted approximately 50%, or 810 companies.

-Utilization of the Superior Fund Procurement Capabilities of Hong Kong- It is said that the purpose of most of the investment from China to Hong Kong is to pass through Hong Kong and ultimately be invested in another country or region. The reasons why Chinese companies invest overseas via Hong Kong are because Hong Kong has extremely convenient fund procurement capabilities, and in 9 addition, it is the region with the third lowest tax rate in the world following Qatar and United Arab Emirates (UAE), enabling lower tax costs.

The main examples of investment via Hong Kong into a third country in 2013 are the purchase of 100% of the stock of Nexen, a Canadian energy company, by China National Offshore Oil Corporation (CNOOC), asset acquisition of some of the Egyptian oilfields owned by Apache Corporation, a major US oil and gas company, by China Petrochemical Corporation (Sinopec Group), and the purchase of TIP Trailer Services, a Dutch company, by HNA Group Co., Ltd. The world recognizes Hong Kong as the financial hub of Asia. The amount of the IPOs by the Hong Kong Exchanges and Clearing Limited in 2013 ranked second in the world, and it is utilized not only by Chinese companies but also by companies from advanced countries as a market where it is possible to raise large amounts of funds for M&A. For this reason, many Chinese companies have offices in Hong Kong to conduct fund procurement. They are motivated by the fact that the procedures are simple, and at the same time, the cost of fund procurement is low compared to mainland China. Examples of Chinese companies that were newly listed on the Hong Kong Exchanges in 2013 are as shown in Figure 2-(1)-2.

Figure 2-(1)-2: Examples of Companies Newly Listed on the Hong Kong Exchanges and Clearing Limited through IPO by Mainland Chinese Companies (2013) (unit: 100 million Hong Kong dollars)

Funds Company Name Date Procured

Sinopec Engineering (Group) Co. Ltd. 139 May 10

China Huishan Dairy Holdings Company 116 Sept 13 Limited

Huishang Bank 106 Oct 31

China Cinda Asset Management Co., Ltd. 219 Nov 28

China Everbright Bank Co., Ltd, 233 Dec 10

Note: 1 Hong Kong dollar = approximately JPY15. Source: Hong Kong Exchanges and Clearing Limited

Meanwhile, there are also Chinese companies that purchase companies already listed on the Hong Kong Exchanges for the purpose of fund procurement. One example is the purchase of Hengli Commercial Properties (Group) Limited by Wanda Commercial Properties Co., Ltd., part of the Wanda Group in 2013, which then became listed on the Hong Kong Exchanges. Applying for an IPO requires time and money because a securities company must be hired as the listing advisor and the application must undergo a strict examination by the exchange. On the other hand, the purchase of an already-listed company greatly reduces such burden. It is anticipated that Chinese companies will utilize Hong Kong’s highly convenient financial capabilities even more in the future.

10

2-(2) Taiwan: Record-setting Investment Amount, Mainly in Large Transactions

Chinese direct investment in Taiwan set a record in 2013, at USD349.48 million, up 5.4% YOY. The investment was mainly through large transactions such as stock investment by the Chinese manufacturing industry and the setting up of bank branches. The amount of direct investment during January-August 2014 was USD319.31 million, and so China’s investment in Taiwan continues to be firm.

-Top Four Investments Constituted 65% of the Amount- According to the Invest Commission in Taiwan’s Ministry of Economic Affairs, the amount of China’s direct investment in Taiwan in 2013 (approval basis, see Note below) was USD349,4.80,000, up 5.4% YOY, the highest amount since the lift of prohibition against investment by mainland Chinese companies in Taiwan in June 2009. An outstanding characteristic of 2013 was the fact that the top four investments constituted approximately 65% of the total investment amount.

However, the 2013 growth rate slowed significantly compared to the growth of 6.4 times in 2012. According to the analysis of Taiwan’s Department of Investment Services, Ministry of Economic Affairs, the reason was that because “the Cross-Strait Agreement on Trade in Services (hereinafter “Services Agreement”) sparked a large debate and so is not yet in effect, state-owned enterprises in China have been postponing the Taiwan investment” (Commercial Times, December 30, 2013).

The Services Agreement is one of the agreements that succeeds the Economic Cooperation Framework Agreement (ECFA), and it was signed in June 2013. Taiwan agreed to 64 market-opening measures, and China agreed to 80 market-opening measures. It covers a wide variety of fields, including insurance, banking, communications, construction, tourism, and healthcare. However, there were large-scale protests in Taiwan by students who opposed the agreement due to concerns that jobs would be lost, and it is not known when the Legislative Yuan will approve it. If the Services Agreement comes into effect, it is expected that investment from China will increase, particularly in where prohibitions against investment are lifted, and so activity in that regard is being noted.

-Top Investment in LED Sector Which Has Been Deregulated- Looking at cases of investment in 2013, the largest investment was an M&A in which Xiamen San'an Optoelectronics Technology Co., Ltd, a major Chinese LED lighting company in Amoi City, became the largest shareholder of Formosa Epitaxy Incorporation by acquiring 19.9% of the stock shares (2,352 million new Taiwan dollars (TWD), approximately JPY8.9 billion at TWD1 = JPY3.8). This was the first investment in the LED sector following the Taiwanese government’s acceptance and significant deregulation of direct investment from China in 2012 when Taiwan accepted the lifting of investment bans on 161 sectors including solar cells and LED. The amount of this investment was the second largest following the acquisition of stock (TWD4.0 billion) of Kao Ming Container Terminal Corp. (KMCT) from Yang Ming Marine Transport Corporation by Cheer Dragon Investment Limited in 2012 which was the first investment in Taiwan’s public construction sector. The investment set a record when limited to manufacturing industry. Furthermore, it was the first M&A of a

11 listed Taiwanese company by a Chinese company, and it aims to promote mutually complimentary product sales areas and rationalization of sales offices in the Chinese and Taiwanese markets (Xiamen Daily, June 26,2014).

The second-largest investment amount in 2013 was the TWD1,762 million paid by Hong Kong Metal Packaging Products Co., Ltd. of Dingsheng Group, which manufacturers canned drinks such as Pepsi-Cola in China, to acquire all the stock (23.00 million shares) of Dingxin Metal Packaging Co., Ltd., which is owned by CMP Investment Group Limited. In third place was China Construction Bank’s opening of its Taiwan Branch (TWD1.4 billion).

The investment amount during January-August 2014 was USD319.31 million. The largest investment was a capital increase of TWD1.8 billion by the Bank of China as operating funds for a branch it established in 2012. In addition, we can mention Zhejiang nice investment Co., Ltd.’s acquisition of stock of Magic Amah Household (Taiwan) Co., Ltd., which manufactures cleaning products, and the indirect investment of Colorful Group, a major Chinese video card company, in Chaintech Technology Corporation in continuation from the previous year.

-Largest Investment Sector is Wholesale/Retail- Looking at the cases of direct investment according to industry in Taiwan by 569 Chinese companies approved between July 2009 and August 2014 by the Invest Commission in Taiwan’s Ministry of Economic Affairs, the industry with the largest number of cases and amount was the wholesale/retail industry, with 343 cases and USD269.10 million. Of the top ten companies in terms of investment amount in 2013 (11 cases), four were in wholesale/retail. Among the individual cases, we can mention the indirect investment of TWD200,007,400 million in which the above-mentioned Colorful Group acquired all 7.50 million shares of Zhongjie industrial enterprise Co., Ltd., which owns approximately 10% of Chaintech Technology Corporation, and the capital increase in Taichung Zhongling Motors Limited so that Mok’s Wagen Automobile Co., Ltd., can conduct operations such as selling cars wholesale.

In second place among investments by industry is banking, with three cases totaling USD198.26 million. Furthermore, according to the memorandum of understanding on cooperation in financial supervision signed by China and Taiwan in 2009, the ban was lifted on establishment of mutual branches by Chinese and Taiwanese financial institutions. Subsequently, in the early harvest of trade in services in the ECFA signed in 2013, regulations were relaxed so that Chinese banks could apply to set up a branch one year after opening an office in Taiwan. In response, in 2012 the Bank of Communications and the Bank of China opened branches in Taiwan, and then in 2013 the China Construction Bank opened a branch.

12

Figure 2-(2)-1: Chinese Companies’ Investments by Industry (units: cases, USD10,000, %) Rank Industry Cases Amount Component Ratio 1 Wholesale/retail 343 26,910 24.4 2 Banking 3 19,826 18.0 3 Ports and harbors 1 13,911 12.6 4 Electronic parts manufacturing 38 11,508 10.4 5 Lodging services 3 7,423 6.7 6 Metal products manufacturing 5 7,322 6.6 7 Computers, electronic products, and optic products manufacturing 19 5,733 5.2 8 IT software services 26 4,033 3.7 9 Machinery manufacturing 25 2,816 2.6 10 Textile manufacturing 1 1,778 1.6 11 Waste removal, processing, and resource collection 4 1,739 1.6 12 Food manufacturing 2 1,378 1.2 13 Restaurants 24 1,192 1.1 14 Chemical materials manufacturing 4 966 0.9 15 Auto and auto parts manufacturing 1 669 0.6 16 Electric power facilities manufacturing 4 654 0.6 17 Industrial machinery maintenance and installment 3 403 0.4 18 Plastic products manufacturing 7 370 0.3 19 Conference services 16 369 0.3 20 Apparel and accessories manufacturing 2 292 0.3 21 Technical inspection and analysis services 3 250 0.2 22 Venture capital 1 199 0.2 23 Transport and storage 17 194 0.2 24 Research and development services 3 164 0.1 25 Specialized design services 6 145 0.1 26 Other transportation tools and parts manufacturing 1 65 0.1 27 Rubber products manufacturing 1 32 0.0 28 Wastewater and sewage treatment 4 8 0.0 29 Furniture manufacturing 1 4 0.0 30 Advertising 1 1 0.0 Total 569 110,351 100.0 Note: Transactions approved from July 2009 to August 2014. One capital increase is also counted. Investments are listed in order of investment amount. Source: Prepared using materials released by the Invest Commission, Ministry of Economic Affairs, Taiwan.

-Relaxation of Investment Regulations Advances Multilaterally-

In order to attract investment from abroad, Taiwan is deploying a policy to promote liberalization and internationalization in advance, starting in regions designated as special zones, with an eye on constructing a multinational free trade agreement (FTA) network. Since August 2013, six ports including Taipei Port (New Taipei) and Keelung Harbor (Keelung) as well as Taoyuan Airport (Taoyuan City) and Pingtung Agricultural Biotechnology Park (Pingtung) have been designated as free economic pilot zones, and Taiwan has come up with a Free Economic Pilot Zone Plan to carry out tax incentives and market-opening measures. The first stage of the plan started in August 2013, and it has promoted liberalization of the fields of smart logistics, international healthcare, value-added agriculture, and education innovation.

The second stage of liberalization is scheduled to take place after the special bylaw for the Free Economic 13

Pilot Zone is approved by the Legislative Yuan. If it is approved, it is expected that establishment of special zones proposed by local governments in various regions will be approved, in addition to the ones in the above regions.

If this plan is fully launched, restrictions on employment of foreign nationals (including mainland Chinese) will be relaxed. Moreover, if investments in the region are approved as pilot projects, it is expected that investment restrictions will be eliminated in the special zones. Through this, it is anticipated that investment in Taiwan by Chinese companies will increase even more in the future.

Note: Not only direct investments by China, but also indirect investments via the tax havens of Hong Kong and the British Virgin Islands, etc., are included in investments by China.

14

2-(3) South Korea: Continued Focus on Leisure and Tourism Sector

Chinese direct investment in South Korea (declaration basis) in 2013 declined significantly by 33.8% YOY, to USD481.19 million. The industry that was the largest target of investment was the leisure and tourism sector, and regionally, investment was focused in Jeju Special Autonomous Province (Jeju Province). There is growing concern in South Korea concerning the intensive investment in this sector and this region.

-Share of Real Estate/Leasing and Dining/Lodging at 64.0%- According to an announcement by the Ministry of Trade, Industry and Energy of the Republic of Korea (MOTIE, equivalent to Japan’s Ministry of Economy, Trade and Industry), direct investment by China in 2013 was USD481.19 million, down 33.8% YOY. A factor in the decline was the fact that there was no large-scale investment project in 2013 as had been seen in previous years. China’s share of all direct investment in South Korea in 2013 was low, at 3.3%.

By industry, investment was in a slump, with the manufacturing industry at USD45.21 million, a drop of 73.0% YOY, and the service industry at USD432.90 million, down 21.7% (refer to Figure 2-(3)-1). In the manufacturing industry, metals which had claimed the top position in 2012 declined 88.1%, machinery was down 91.1%, and fibers, textiles, and apparel dropped 87.3%. In the service industry, real estate and leasing, the leading sector, was off 24.1%, and dining and lodging was down 27.2%. These two sectors accounted for 64.0% of all direct investment from China, and their overall decline had a serious impact.

-Concern over Concentration of Speculative Funds in Jeju Province- Chinese direct investment is concentrated on the leisure and tourism sector. An outstanding characteristic is that the destination is mainly Jeju Province (Note 1).

Because MOTIE does not release foreign investment in domestic regions by country, the geographical distribution is not accurately known, but according to media reports, Chinese investment appears to be concentrated in Jeju Province. For instance, in the August 31, 2014, edition of the the Jeju Herald, under the headline “Chinese Share of Ownership Surges to Half the Foreign-owned Land in Jeju Province,” it was reported, “As of the end of June, foreigners owned 13.738 million square meters, equivalent to 0.6% of the entire area of Jeju Province. Of this, 5.922 million square meters, or 43.1%, was owned by Chinese. Moreover, the newspaper reported on the momentum of land acquisition by Chinese in Jeju Province, stating, “In the first half of 2014, the Chinese acquired 2.773 million square meters of land in Jeju Province, more than double the 1.22 million square meters acquired during the whole of 2013.”

Due to this increase, concerns are being voiced in South Korea about the rapid influx of Chinese funds into Jeju Province. The concerns are focused on the fact that, among the recent real estate investments, there has been an influx of speculative funds aimed at short-term profit from real estate prices and the fact that the influx of Chinese tourists to hotels and vacations homes in which Chinese have invested will destroy the existing

15 commercial areas and culture (Note 2). Moreover, visits by Chinese tourists are booming along with the current influx of Chinese capital, but because the scale is so large, some are concerned about hollowing out of the economy in the future if the Chinese withdraw from or reduce their numbers in South Korea as they follow the latest management trends in China.

Such concerns have also affected the policy of Jeju. In particular, Governor Won Hee-ryong who assumed office in July 2014 made it clear that he would make a searching inquiring into the concentrated inflow of Chinese funds to Jeju Province. He is adopting a stance favoring moderation of excessive investments of Chinese capital, as shown by his declaration that he will reexamine projects approved during the term of the previous governor, in addition to promising specific countermeasures in the provincial assembly.

Figure 2-(3)-1: Direct Investment Received from China (declaration basis) (units: USD1,000, %) 2011 2012 2013 Jan-Jun 2014 Industry Component Component Component Component Amount Amount Amount Amount Ratio Ratio Ratio Ratio Agriculture, livestock, 54,193 8.3 4,004 0.6 577 0.1 1,047 0.1 fishing, and mining Mining 3,150 0.5 3,726 0.5 0 0.0 0 0.0 Agriculture, 903 0.1 89 0.0 331 0.1 898 0.1 livestock, forestry Fishing 50,140 7.7 189 0.0 247 0.1 149 0.0 Manufacturing 132,619 20.4 167,680 23.1 45,211 9.4 51,483 6.6 Metals 61,767 9.5 74,406 10.2 8,887 1.8 198 0.0 Machinery 373 0.1 46,973 6.5 4,180 0.9 315 0.0 Other manufacturing 1,050 0.2 542 0.1 14,470 3.0 198 0.0 Non-metal minerals 500 0.1 175 0.0 91 0.0 0 0.0 Fibers, textiles, 892 0.1 24,893 3.4 3,171 0.7 100 0.0 apparel Food 2,689 0.4 358 0.0 200 0.0 5,087 0.7 Transport equipment 51,095 7.9 2,070 0.3 100 0.0 30,000 3.9 Medicines 79 0.0 0 0.0 0 0.0 0 0.0 Electrical and 9,563 1.5 16,567 2.3 10,570 2.2 12,693 1.6 electronic Paper and lumber 0 0.0 275 0.0 0 0.0 0 0.0 Chemical industry 4,611 0.7 1,421 0.2 3,543 0.7 2,892 0.4 Services 463,062 71.1 552,934 76.1 432,902 90.0 718,311 92.6 Public and other 95 0.0 411 0.1 3,808 0.8 0 0.0 services Finance, insurance 0 0.0 75,132 10.3 0 0.0 0 0.0 Wholesale, retail 35,834 5.5 32,986 4.5 38,363 8.0 23,870 3.1 Culture, 6,037 0.9 1,762 0.2 471 0.1 482 0.1 entertainment Real estate leasing 289,069 44.4 283,111 38.9 214,792 44.6 646,423 83.3 Business service 20,984 3.2 11,806 1.6 43,558 9.1 12,262 1.6 Transport, storage 7,621 1.2 19,737 2.7 38,740 8.1 2,742 0.4 Dining, lodging 103,421 15.9 127,901 17.6 93,171 19.4 32,532 4.2 Communications 0 0.0 88 0.0 0 0.0 0 0.0 Electricity, gas, water, 980 0.2 2,335 0.3 2,495 0.5 5,000 0.6 construction Total 650,853 100.0 726,952 100.0 481,186 100.0 775,841 100.0 Source: Prepared based on the database of the Ministry of Trade, Industry, and Energy of South Korea. 16

-Chinese Investment in FH2014 Approximately Five Times That of FH2013- Despite these concerns, Chinese investment in the leisure and tourism sector in Jeju Province appears likely to continue for the time being. Looking at Chinese direct investment during FH2014 in South Korea, over USD775.84 million was invested, around five times that of FH2013 (refer to Figure 2-(3)-1). It already far exceeds the actual investment during the whole of 2013, and of this, investment in real estate and leasing accounts for 83.3% of the whole.

The South Korean government is making enticement of Chinese direct investment a major policy issue, and it plans to strengthen cooperation with the Chinese government, build a system of cooperation for the private sector, and hold large-scale informational sessions to entice investment. In the future, it will be necessary to find a balance between enticement of investment and the concerns that have been expressed.

Note 1: Since 2008, Chinese people have been able to enter Jeju Special Autonomous Province without a visa if they are entering for the purpose of tourism promotion, etc. Note 2: Many Chinese investments in Jeju Province serve other Chinese people, such as hotels, vacation homes, and “healthcare towns” that attract medical tourists, etc. It is said that these same types of businesses that serve South Koreans are also being impacted.

17

2-(4) Singapore: The Object is Diversification through Hi-Tech, Energy, and Real Estate

In recent years, an increasing number of Chinese companies have been establishing offices in Singapore as a base for entering Southeastern Asia and international markets. Approximately 5,200 Chinese companies have bases in Singapore. Direct investment by China including Hong Kong in Singapore has increased annually at a double-digit rate since 2005. Much of the Chinese investment is in the financial sector, but recently the Chinese have been diversifying into hi-tech companies, energy, and real estate.

-Base for over 5,200 Chinese Companies- In his keynote address on September 16, 2014, at the 11th China-ASEAN Expo (CAEXPO) held in Nanning, Guangxi Province, Lee Hsien Loong, prime minister of the Republic of Singapore, emphasized the deep economic relationship between the two countries, pointing out, “In 2013, Singapore was the largest destination for Chinese investments, and in 2012, Singapore was the fifth largest destination for Chinese investments.” According to Prime Minister Lee, over 5,200 Chinese companies currently have bases in Singapore.

According to the latest figures of the Department of Statistics Singapore, the balance of direct investment from China (excluding Hong Kong) in 2012 was 14,217.20 million Singapore dollars (SGD) (approximately JPY1,279.5 billion yen at SGD1= approximately JPY90), representing a 4.6% increase YOY. Moreover, direct investment from Hong Kong was SGD27,664.10 million, a 17.9% increase YOY. The balance of the direct investment from China including Hong Kong has increased significantly by double digits every year since 2005 (refer to Figure 2-(4)-1; direct investment figures for 2013 had not yet been released as of October 14, 2014).

Figure 2-(4)-1: Trends in Balance of Direct Investment from China and Hong Kong

30,000

China 25,000 Hong Kong 20,000

(SGD1 million) (SGD1 15,000

10,000

5,000

0 2002 03 04 05 06 07 08 09 10 11 12

Note: As of April 30, 2014. Source: Department of Statistics Singapore

-Presence as Chinese Yuan (renminbi (RMB)) Offshore Center- Just as Prime Minister Lee appealed in the above-mentioned speech for Chinese companies to locate their bases for advancing in Southeast Asia and international markets in Singapore, an increasing number of Chinese

18 companies have been opening bases in Singapore for expansion in recent years. In September 2013, Alibaba Group, a major Chinese leader in e-commerce, opened an office for a shopping site called Taobao for ordinary consumers. In May 2014, Alibaba announced an investment of SGD312.50 million in the Singapore Post Limited (SingPost), emerging as the second-largest shareholder. With the distribution network of SingPost as a foothold, Alibaba’s idea is to expand its e-commerce business in Southeast Asia. Moreover, Bin Lin, who is the co-founder of Xiaomi, a Chinese communications equipment manufacturer, revealed in an interview with a Singaporean English language newspaper (February 20, 2014) that the company plans to set up a world head office in Singapore.

According to the Department of Statistics Singapore, in the breakdown of direct investment from China including Hong Kong, 60% is finance and insurance. In February 2014, Singapore became the second RMB offshore settlement center following Hong Kong. According to a report released on April 28, 2014, by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the renminbi settlement amount in Singapore in March 2014 was 4.7 times that of the previous year. Since February 2013 when the People’s Bank of China (PBC) designated the Singapore Branch of the Industrial and Commercial Bank of China Limited (ICBC) as the first RMB settlement bank outside of China, Hong Kong, and Taiwan, RMB settlements have surged. Seven Chinese banks have branches in Singapore, including ICBC, PBC, and China Merchants Bank Co., Ltd., which opened a branch there in March 2014.

Moreover, issues of RMB-demoninated bonds by financial institutions in Singapore are increasing, and in May 2014, Hainan Airlines Co., Ltd., was the first non-financial institution to issue the first RMB-denominated corporate bonds, in the amount of RMB1.7 billion (approximately JPY32.3 billion, at RMB1 = approximately JPY19). With this as the icebreaker, it is anticipated that Chinese companies will more actively engage in this kind of fund procurement.

-Momentum of Private Sector Housing Development- Meanwhile, investment by Chinese companies is becoming more diverse. In addition to hi-tech Chinese companies such as Alibaba and Xiaomi, investment by energy and resource-related companies became brisk, such as the opening of a lubrication oil plant (investment amount: RMB650.00 million) with an annual production capacity of 100,000-ton by China Petrochemical Corporation (Sinopec Group) in July 2013 as the first outside of China by the company on its own. In September 2013, China National Chemical Corporation (ChemChina) set up an office in Singapore to strengthen its crude oil procurement.

In addition, more momentum has been seen recently is the advance of Chinese developers who are primarily in private sector housing development. MCC Land (Singapore) Pte Ltd of China Metallurgical Group Corporation bid successfully on government-owned land for commercial and residential mixed-use development near Potong Pasir MRT Station in the suburbs of Singapore in bidding that closed in August 2014 (winning bid: SGD471.60 million). Fifteen companies submitted bids, and the four companies with the highest bids, led by MCC Land which submitted the highest bid, were Chinese developers. In addition, the Nanshan Group was successful in the bidding which closed in October 2014 for government-owned residential land in

19 the northern suburbs (winning bid: SGD173.57 million). In addition to the above two companies, the Ziangjian Group and Kingsford Development Pte. Ltd. are boosting their presence in residential development, particularly on the outskirts of Singapore.

20

2-(5) Thailand: Chinese Investment Continues to Stagnate, but Significant Increase Mainly in Autos is Certain

Chinese direct investment in Thailand in 2013 significantly declined in continuation from 2012, and the share also shriveled to a trifle. Direct investment by Chinese companies continues to stagnate, but in 2013, movement became apparent in which companies were expanding into Thailand as a regional base for aiming at the ASEAN market overall. In 2014, large-scale investment was seen aiming mainly at the auto industry in the Thai and ASEAN markets, and significant increases in the investment amounts became certain.

-2013 Investment Amount Significantly Dropped, Share Down to Trifling 1.0%- According to the Board of Investment of Thailand (BOI), the country/region with the top share in inward direct investment in 2013 (approval basis) was Japan, with 290,491.00 million baht (THB) (approximately JPY1045.8 billion at THB1 = approximately JPY3.6), accounting for 60.7% of the whole. Meanwhile, China invested THB4,991.00 million, a decline of nearly 40% from the previous year’s THB7,901.10 million, and China’s share is less than 1.0% (refer to Figure 2-(5)-1 and Figure 2-(5)-2).

Figure 2-(5)-1: Component Ratio by Country/Region of Inward Direct Investment (2013)

India 0.3% Others 16.4% Australia 0.3% China 1.0% South Korea Japan 0.8% 60.7% U.S. 2.0% ASEAN countries Europe 9.0% 9.6%

Note: Approval basis. Source: Board of Investment of Thailand (BOI).

21

Figure 2-(5)-2: Trends in Chinese Direct Investment (units: cases, million THB, %)

Year Cases Amount YOY 2005 15 2,285.6 -48.4 2006 16 2,455.7 7.4 2007 26 15,855.9 545.7 2008 27 3,473.8 -78.1 2009 15 7,008.7 101.8 2010 28 17,311.5 147.0 2011 36 16,922.1 -2.2 2012 38 7,901.1 -53.3 2013 30 4,990.8 -36.8 Note: Approval basis.

Source: Same as Figure 2-(5)-1.

Ever since Chinese investment reached a peak of THB17, 311.50 million in 2010, it has continued in a downtrend.

Looking at Chinese companies’ direct investment in Thailand by industry according to BOI statistics, on a monetary base the largest is metal products and machinery, at THB1,840.00 million, followed by chemicals and paper products at THB1,820.00 million. In metal products and machinery, there was large-scale investment in auto parts such as transmissions and in construction and drilling machinery parts, etc. In addition, in chemicals and paper products, there were companies that conducted large-sum investment in chemical fertilizer manufacturing and plastic products, etc. Looking at the number of cases, metal products and machinery were the most numerous with 13 cases, followed by chemicals and paper products with six cases.

-High Wages and High Raw Materials are Factors in the Slump- In 2013, China replaced Japan as Thailand’s largest trading partner. However, China’s presence as a direct investor in Thailand is weak, and conversely, China’s direct investment in Thailand has been in a downtrend recently. a researcher on China, Sompop Manarungsan, president of the Panyapiwat Institute of Management, offers the following as factors for the slump in Chinese companies’ investment in Thailand: (1) high wages and high worker turnover, (2) high cost of raw materials and parts (because of the low production volume and few industrial agglomerations compared to China), (3) tough price competition in the domestic market, and (4) weak relationship between local Thai companies and state-owned enterprises that contribute to particularly massive investment.

-Advances Aimed at the ASEAN Market- Fast Auto Drive Group, a major Chinese auto transmission manufacturer, established a local subsidiary in 22

Thailand. The company decided to build a transmission plant in the Rayong area where there is an agglomeration of the auto industry, and in September 2013, it held the groundbreaking ceremony. This plant plans to produce 70,000 transmissions annually for Volvo commercial vehicles aimed at the ASEAN market. Attending the groundbreaking ceremony were former Deputy Prime Minister Pongthep and officials from the BOI, reflecting the closeness of the relationship between the two countries. At the ceremony, Li Dakai, chairperson of the company, stated that the new Thai subsidiary would serve as “2 bases and 3 centers” in the future, meaning that while it will be a base in the ASEAN region, it will also be an export base as well as a regional center for after-sales service, management, and sales promotion.

Most cases of Chinese companies expanding to Thailand involve small and medium companies that process raw materials (natural rubber, etc.) procured in Thailand and export it to China. Only a few large companies expand into Thailand, and most of them do so through joint ventures with their sights set on advanced countries’ markets (with infrastructure and home appliances). The amount of investment in the concerned projects was THB480.00 million (Chinese companies’ 2013 investment in Thailand; second highest of any country), but compared to Japanese companies, it was still small in scale. However, attention is being paid to trends at Chinese companies that produce high added value products such as transmissions as they grow beyond original equipment manufacturing (OEM) and exporting and instead advance into Thailand to access ASEAN markets.

-Investment in 2014 Already Exceeds Previous Year- According to BOI statistics, there were already 24 cases of investment by Chinese companies during January-August 2014 (approval basis) amounting to THB21,590.00 million, greatly exceeding the previous year’s investment. SAIC Motor Corporation Limited, a joint venture by Shanghai Automotive Industry Corporation (Group), China’s largest auto manufacturer, and Charoen Pokphand (CP), Thailand’s largest conglomerate, received approval for THB9.2 billion for construction of an auto and auto parts production plant. Moreover, large auto-related investments are conspicuous, such as that by LLIT, a local subsidiary of Shandong Linglong Tire Co., Ltd., a major tire manufacturer, which constructed a tire plant in Hemaraj Eastern Seaboard Industrial Estate in eastern Chonburi Province (THB18,860.00 million; annual production capacity 11.20 million units).

SAIC Motor Corporation Limited will produce the British MG (Morris Garages) brand vehicles with which it is affiliated in the domestic Thai market, and it will venture in earnest into the domestic market where Japanese companies account for 90% of local production. The company also said it may establish R&D facilities and revealed its concept for making Thailand a production base for Indonesia and Malaysia in the future.

23

2-(6) Malaysia: Diversified Investment in Hi-Tech and Service Industries

Looking just at the amount of investment heretofore, China’s presence in Malaysia is certainly not large. However, Chinese companies’ direct investment in 2013 set a record on an approval basis in the manufacturing industry, revealing the strength of Chinese companies’ interest in Malaysia. The majority of industries targeted for investment are industries given priority by the Malaysian government, and investment targets have expanded to include not only the manufacturing industry but also the service industry. In Malaysia, many welcome the increased investment by Chinese companies, but some are uneasy about whether Chinese companies’ investment will contribute to the advancement of domestic human resources.

-Highest-Ever Amount of Investment Approved for Manufacturing Industry- Currently, China has a small presence in terms of investment in Malaysia. The balance of China’s direct investment in Malaysia heretofore is approximately 1.1 billion ringgit (MYR) as of the end of 2013 (approximately JPY38.5 billion at MYR1 = approximately JPY35), amounting to only 0.2% of the total foreign direct investment (refer to Figure 2-(6)-1). An outstanding characteristic is that many investments are withdrawn, and so the balance does not steadily increase.

Figure 2-(6)-1: Balance of Direct Investment from China in Malaysia

1,400 1,170 1,200 1,090 1,079 1,003 1,000

752 800 685 600

400

(million MYR) 200

0 2008 09 10 11 12 13

Source: Prepared based on “Balance of Payments,” Bank Negara Malaysia.

The country with the largest direct investment in Malaysia is Singapore (MYR80.7 billion, component ratio18.1%), followed by Japan (MYR65.4 billion, 14.7%) and the US (MYR38.2 billion, 8.6%). Among the main countries and regions published by Bank Negara Malaysia, China ranked only 17th.

On a balance of payments (BOP) basis, Malaysia does not publish the amount of direct investment in each industry by country/region. The Malaysian Investment Development Authority (MIDA) publishes the direct investment in the manufacturing industry on an approval basis (refer to Figure 2-(6)-2). According to MIDA data, the amount of direct investment by China in the manufacturing industry in 2013 was MYR3.0 billion (with 22 cases), setting a new record for Chinese investment in Malaysia. The level of the investment balance is not

24 high, but Chinese companies are enthusiastic about investment in Malaysia.

Figure 2-(6)-2: Inward Direct Investment by Country/Region in Malaysia’s Manufacturing Industry (approval basis) (units: million MYR, %)

2012 2013 Rank Country/Region Amount Country/Region Amount Component Ratio YOY

1 Japan 2,793 US 6,321 20.7 2,036.9

2 Saudi Arabia 2,648 South Korea 5,479 17.9 234.7

3 Singapore 2,215 Singapore 4,522 14.8 104.2

4 China 1,978 Japan 3,592 11.8 28.6

5 South Korea 1,637 China 3,018 9.9 52.6

6 France 1,436 Netherlands 2,382 7.8 185.4

7 Norway 1,142 Germany 1,717 5.6 147.6

8 India 903 UK 490 1.6 − 19.9

9 Netherland 835 Hong Kong 453 1.5 398.9

10 Germany 693 Belgium 299 1.0 348.2

Total 20,919 Total 30,536 100.0 46.0

Source: Prepared based on materials provided by the Malaysian Investment Development Authority (MIDA).

Looking at direct investment by business type in the manufacturing industry, investment in the electrical and electronic sector was MYR1.2 billion, accounting for the largest share at 39.8%. This was followed by primary metal products (MYR859.29 million) and textiles and textile products (MYR525.46 million).

-Conspicuous Investment in Pioneering Industries- On the other hand, looking at specific new investment projects based on private sector reports rather than MIDA publications, there were eight in 2011, four in 2012, and seven in 2013, and the amounts were USD800.00 million, USD200.00 million, and USD600.00 million, respectively (Note).

Among the large-sum projects in the new investments in 2013, Comtec Solar International (M) Sdn Bhd, a manufacturer of solar power products, built a plant for solar cell wafers in the Sama Jaya Free Industrial Zone (SJFIZ) in Kuching, Sarawak, for USD372.00 million (refer to Figure 2-(6)-3). This was followed by an investment of USD155.20 million by Huawei Technologies Co., Ltd., a major communications equipment manufacturer, to open a data and logistics center in the state of Johor and an investment of USD33.10 million by Xiamen University/University of Amoy in Fujien Province, China, to establish a campus in the state of Selangor.

There was only one case of Chinese investment in Malaysia through M&A. Comfort Enterprise (Hong Kong) Co., Limited, the Hong Kong subsidiary of Xiamen Comfort Science & Technology Group, a Chinese company that manufactures and sells massage equipment, purchased Ogawa World Berhad, a health equipment sales 25 company, for USD20.02 million in December. Most of this investment by Chinese companies is green field investment, and the investments in 2013 in solar cells, a data center, and the educational sector, etc., were investments in pioneering industries that are given priority by the Malaysian government.

Figure 2-(6)-3: Chinese Companies’ Main Inward Direct Investment Projects in Malaysia (2013) (unit: million USD) Date Industry Company Name Investment Summary Amount June Solar power Comtec Solar 372 Announced plans to establish a plant for solar products International (M) Sdn Bhd cell wafers in the Sama Jaya Free Industrial Zone of Kuching, Sarawak. October Communications Huawei Technologies Co., 155 Announced the opening of its data and logistics Ltd. center in the Iskandar area of Nusajaya, Johor in order to respond to the company's regional customers. Assisted by the government investment fund Khazanah Nasional. January Education Xiamen University 33 Announced the opening of a campus near Sepang, Selangor. This is the first time the Chinese government permitted the establishment of a campus of a Chinese university in a foreign country. December Electric goods Comfort Enterprise (Hong 20 This is the Hong Kong subsidiary of Xiamen

Kong) Co., Limited Comfort Science & Technology Group, a Chinese company that manufactures and sells massage equipment. It acquired Ogawa World Bhd. December Chemicals China National Bluestar 10 This company, a core company of the China (Group) Co,Ltd. National Chemical Corporation Group, announced it will construct a carbon electrode plant in Sarawak through its subsidiary Elkem headquartered in Norway Source: Prepared based on fDi Markets, an online database provided by the Financial Times, Thomson Reuters, and materials released by the companies.

-Anxiety over Realization of Human Resource Upgrading- The Malaysian government is aggressively working to attract investment from China. Since China is Malaysia’s largest trading partner, Malaysia also has expectations of China regarding investment. At a dinner in celebration of the 40th anniversary of diplomatic relations with China held on August 20, 2014, Prime Minister Najib Razak of Malaysia encouraged further investment in Malaysia by China and drew attention to Malaysia’s attractive points, including its status as a gateway to ASEAN, the multilingual abilities of its people, and the ease of conducting business in Malaysia.

According to the New Straits Times (June 19, 2014), Malaysia’s Minister for International Trade and Industry, Mustapa Mohamed, anticipates MYR6.4 billion in Chinese investment in the next several years and expects that the Chinese will invest in advanced manufacturing and the service industry. As a motivating force to attract Chinese direct investment, Minister Mustapa emphasized the activities of the Malaysia-China Kuantan Industrial Park (MCKIP) in Pahang, which is a symbol of bilateral economic cooperation.

26

In the analysis of Dr. Shankaran Nambiar, a senior research fellow at the Malaysian Institute of Economic Research (MIER), China is focusing on boosting its presence in ASEAN and is considering utilizing Malaysia as one means of doing that, and the Malaysian government, which is intent on promoting economic growth of the country, welcomes China’s policy of putting priority on Malaysia. At the same time, Dr. Nambiar is wary of Chinese investment. He mentioned the possibility that sustainable growth in Malaysia may be inhibited if Chinese companies’ investment does not contribute to the development of human resources in Malaysia. This differs from conditions in the 1970s when the Japanese electric and electronics industry began operations in Malaysia and hired massive numbers of unskilled Malaysians, which was welcomed because it offered employment opportunities. Moreover, he touched on the fact that the increase in Chinese investment may cause a decline in the willingness of other countries to make high added-value investments in Malaysia. He explained that while Malaysia considers Chinese investment important, it must consider its overall national interest.

Note: Data on greenfield investment is based on fDi Markets, an online database provided by the Financial Times. This data is based on various news reports and includes projects that were not completed within the year when the data was reported and projects for which the Financial Times itself estimated the investment amount (as of September 12, 2014). Moreover, the M&A data are from Thomson Reuters (as of September 12, 2014). Amounts for each project are the amounts at the completion of purchase. Because these figures are on a reported basis and completion basis, it is necessary to note that they may deviate from the approved investment amounts released by MIDA.

27

2- (7) Indonesia: Mining Sector Recedes, Expanded Number of Industries Targeted for Investment

Trade is a larger part of Indonesian and Chinese economic relations than direct investment is; however, in recent years, both the number of cases and the amount of direct investment from China have increased together with the expansion of inward direct investment in Indonesia, and China’s share also increased slightly. By industry, the mining industry, which had been on top in recent years, fell to third place when it was surpassed by rubber/plastics and metals, machinery, and electrical appliances, which shows that investment is diversifying to a variety of sectors. As a result of the new mining law, Chinese companies have plans to construct refineries, etc., and if this occurs, the relative weight of the mining sector may again increase.

-Bilateral Economic Relations Anchored by Trade- According to the statistics of the Indonesia Investment Coordinating Board (BKPM), Chinese direct investment from 1998 to the first half of 2014 was USD12,761.63 million (1,144 cases), amounting to only 2.4% of the total and putting China in 16th place. The advance of Chinese companies into Indonesia lags behind the advance of companies from Singapore, Japan, US, South Korea, and UK, etc.

Trade is a larger part of Indonesian and Chinese economic relations than direct investment. Indonesian exports to China in 2013 amounted to USD22,601.50 million, putting it in second place behind Japan by country/region (China’s share of total Indonesian exports is 12.4%), and imports from China were USD29,849.50 million (16.0%), the highest of any country. Of Indonesia’s exports to China, 36.5% is mineral fuel and 16.2% is mineral ore, slag and ash. Of Indonesia’s imports from China, the top items are machinery and parts, electrical appliances and parts, and steel. There is a continued increase in imports of electrical appliances and parts from China, boosted by the ASEAN-China Free Trade Agreement (ACFTA) that went into effect in 2010.

Meanwhile in recent years, as Indonesia’s inward direct investment has risen steadily, the amount and number of cases of direct investment from China has also grown. The cases increased, with 113 in 2010, 137 in 2011, 190 in 2012, and 329 in 2013, and in the first half of 2014 alone, there were 259 cases (refer to Figure 2-(7)-1). Moreover, the amount doubled from USD141.00 million in 2012 to USD296.90 million in 2013, and in the first half of 2014 alone, the amount was USD231.10 million, displaying a momentum that will lead to doubling of the amount year-on-year for the year as a whole. China’s percentage of the total investment had been around 1% at most, but it rose to 1.6% in the first half of 2014.

28

Figure 2-(7)-1: Inward Direct Investment by Country/Region (implementation basis) (units: cases, million USD) Rank 2012 2013 FH2014 Country/Region Cases Amount Country/Region Cases Amount Country/Region Cases Amount 1 Singapore 805 4,856.4 Japan 958 4,712.9 Singapore 1,013 3,393.9 2 Japan 405 2,456.9 Singapore 1,592 4,670.8 Japan 635 1,541.7 3 South Korea 421 1,949.7 US 210 2,435.8 Malaysia 323 717.3 4 US 97 1,238.3 South Korea 807 2,205.5 US 113 663.1 5 Mauritius 23 1,058.8 UK 231 1,075.8 South Korea 589 654.7 6 Netherlands 131 966.5 Netherlands 233 927.8 UK 128 646.1 British Virgin 7 UK 97 934.4 307 785.7 Netherlands 119 604.7 Islands British Virgin 8 168 855.9 Mauritius 55 780.0 Australia 144 449.7 Islands 9 Australia 137 743.6 Malaysia 574 711.3 Mauritius 32 430.6 British Virgin 10 Taiwan 85 646.9 Taiwan 158 402.6 161 368.1 Islands China China China － 190 141.0 329 296.9 259 231.1 (15th) (12th) (11th) Total 4,579 24,564.7 9,612 28,617.5 5,909 14,287.8 Note: Totals include “other”. Source: Indonesia Investment Coordinating Board (BKPM).

Looking at Chinese direct investment in Indonesia during the first half of 2014 (implementation basis) by industry, rubber and plastic was the highest (component Ratio 26.4%), followed by metal, machinery, and electrical appliances (24.5%) (refer to Figure 2-(7)-2). Looking at growth by industry, increases are prominent in commerce and repair and in non-metal minerals. Investment in the mining industry which had accounted for approximately half of total investment in 2011 declined to 15.3% in the first half of 2014, dropping to third place.

29

Figure 2-(7)-2: Chinese Investment by Sector (implementation basis) (units: cases, USD1,000) 2012 2013 FH2014 Cases Amount Cases Amount Cases Amount Mining 50 42,878.8 67 66,642.0 60 35,321.3 Agriculture 6 11,993.1 6 4,523.3 2 1,991.0 Livestock 1

Primary Industry Fisheries 5 1,031.3 4 547.1 Total 57 54,871.9 78 72,196.6 66 37,859.4 Paper pulp 3 101.1 5 2,097.2 2 1,433.8 Chemicals, Pharmaceuticals 4 7,140.0 6 10,511.5 2 8,250.0 Food 6 9,654.4 15 12,308.9 9 4,009.5

Textiles 2 800.0 2 800.0 3 824.0 Metals, Machinery, Electrical 25 32,013.1 44 53,736.0 24 56,665.1 Appliances Rubber, Plastic 4 450.2 6 35,134.9 2 61,063.4 Transport equipment 1 0.0 3 31.0 Leather, Shoemaking 2 888.9 4 1,199.2 2 530.0 Secondary Industry Lumber processing 1 0.0 6 1,999.4 2 2,041.7 Non-metal minerals 6 6,197.8 7 32,232.5 9 19,732.4 Other 3 0.0 8 2,155.9 5 3,533.5 Total 57 57,245.5 106 152,206.5 60 158,083.4 Commerce, Repair 61 14,394.1 107 29,302.3 96 13,752.2 Other services 4 0.0 13 1,298.1 13 785.7

Transport, Storage, 4 2,250.0 4 625.0 4 600.0 Communications Electricity, Gas, Water 4 12,190.1 4 24,412.0 3 128.9 Construction 1 0.0 9 13,393.9 5 9,800.0 Hotels, Restaurants 2 17.5 6 222.1 6 100.1

Tertiary Industry Real estate, Industrial parks, 2 3,226.4 6 10,005.3 Office-related Total 76 28,851.7 145 72,479.8 133 35,172.2 Total 190 140,969.1 329 296,882.9 259 231,115.0 Source: Same as Figure 2-(7)-1.

-Will the Amount Invested in Refinery Construction Expand? Although the feasibility and timing are unclear, multiple investment plans are being announced by Chinese companies that plan to set up operations in Malaysia, as reported in local news reports, etc.

In the mining sector, plans for construction of refineries are being put forward in response to an embargo on unprocessed minerals introduced in January 2014 and an obligation to refine them. Among these, there are some plans put forward by Chinese companies, for example eight Chinese companies announced plans to construct a nickel processing plant in southern Bantaen Regency, South Sulawesi Province which will produce ferronickel and stainless steel. In addition, construction of refineries by Chinese companies is expected to accelerated, such as the possible construction of a ferronickel refinery as a joint venture between a local mining company, Pt. Cakra Mineral, Tbk., and Zhejiang Baoli Mining Co., Ltd. Massive investment is required for refinery construction, and so if it takes place, it is likely to contribute significantly to the expansion of direct investment from China.

30

In the manufacturing industry where there have been few cases and the amount of investment has been small heretofore, new investment and expansion investment are planned by Chinese companies that are aiming at the expanding middle class and the vigorous consumer market. For instance, the Chinese household electrical appliance manufacturer Haier Group took over the home appliances operations of Sanyo Electric Co., Ltd., and manufactures and sells them, and it also newly built a manufacturing base for smart phones which it had been importing and selling. Similarly, the Chinese home appliance company Guangdong BBK Electronic Industry, which imports and sells OPPO brand smart phones, also plans to have a manufacturing base set up by 2015. Others in the home appliance sector include the major company Changhong Electric Co., Ltd., which will construct a new air-conditioner plant and raise production capacity by 3.5 times. In the automotive sector, Geely Automobile Holdings Limited started operation of a finished auto plant in the city of Bogor in West Java Province in November 2013, and it began selling mid-priced passenger cars such as “Emgrand”. In the construction equipment sector, the major company Sany Heavy Industry Co., Ltd., plans to start operation of a heavy machinery manufacturing plant by the end of 2015.

31

2-(8) The Philippines: Potential for Expansion of Agricultural Sector Henceforth

Chinese investment in the Philippines in 2013 was 1,241.00 million Philippine pesos (PHP) (approximately JPY3, 226.60 million at PHP1 = approximately JPY2.6), and by country/region, China receded from 11th to 13th place. In particular, there was a conspicuous drop in the real estate, finance and insurance, and hotel and dining sectors. Meanwhile, communications rose by 3.1 times YOY to PHP77.70 million. Mining, where there was no investment the previous year, showed an investment of PHP201.70 million. Bernardo M. Villegas, professor at the University of Asia and the Pacific in Manila, stated, “If Chinese investment in the agricultural sector is directed toward Southeast Asia in the future, the Philippines is likely to be one of the recipients.”

-Amount is Small, but Sectors are Diversified- According to the National Statistical Coordination Board (NSCB), Chinese direct investment in 2013 (approval basis) declined 37.5% YOY to PHP1,241.00 million, sliding from 11th place in 2012 to 13th in 2013 with a component ratio of 0.5% of total direct investment. It is necessary to take into consideration investment through tax havens such as the British Virgin Islands, but Chinese investment in the Philippines certainly does not have a large presence.

Looking at Chinese investment by industry, investment in telecommunications was PHP77.70 million, an increase of 3.1 times (refer to Figure 2- (8)-1). Mining, which had no Chinese investment in the previous year, received PHP201.70 million, and other sectors with no track record the previous year were as follow: wholesale, retail, and vehicle repair, PHP28.80 million (component ratio 2.3%); transport and storage, PHP16.80 million (1.4%); electric power and gas-related, PHP15.30 million (1.2%); and art investment, PHP1.60 million (0.1%). Meanwhile, declines were seen across the board in manufacturing, at PHP789.30 million (down 6.5% YOY, component ratio 63.6%); real estate, PHP34.30 million (down 95.2%, 2.8%); finance and insurance, PHP12.40 million (down 70.7%, 1.0%); and hotels and dining, PHP200,000 (down 99.9%, 0.02%).

The total amount of Chinese investment declined from the previous year, but an outstanding characteristic of 2013 is that the investment was spread across diverse sectors.

Of the foreigners travelling to the Philippines, an overwhelming number were from South Korea, but the Chinese also had a large presence. Looking at the 2012-2013 work permit recipients’ nationalities released by the Philippines’ Bureau of Immigration, South Korea was in first place with 7,156 people, followed by China in second place with 4,729, India in third place with 2,455, and Japan in fourth place with 1,836. According to data released by the Philippines’ Department of Tourism, , in terms of the number of people who visited the Philippines in 2013 with short-term visas (tourist visas), China (mainland) was fourth, with 426,352 people. In first place was South Korea with 1,165,789 people, followed by the US with 674,564 people, and Japan with 433,705 people.

32

Figure 2- (8)-1: Chinese Direct Investment by Industry (approval basis) (unit: PHP million, %) 2012 2013 Component Amount Amount YOY Ratio Manufacturing 844.0 789.3 63.6 − 6.5 Mining － 201.7 16.3 － Telecommunication 25.0 77.7 6.3 210.8 Management and Support Services 37.8 61.7 5.0 63.2 Real Estate 717.7 34.3 2.8 − 95.2 Wholesale, Retail, and Vehicle Repair － 28.8 2.3 － Transport and Storage － 16.8 1.4 － Electric Power and Gas-related － 15.3 1.2 － Finance and Insurance 42.3 12.4 1.0 − 70.7 Art － 1.6 0.1 － Water, Sewer, and Waste Treatment-related 0.0 1.2 0.1 － Hotels and Dining 281.0 0.2 0.0 − 99.9 Construction 37.8 － － － Total 1,985.6 1,241.0 100.0 − 37.5 Source: National Statistical Coordination Board (NSCB).

-Territorial Waters Conflict Casts a Shadow- We discussed (on October 10, 2014) recent investments by China in the Philippines with Bernardo M. Villegas, professor at the University of Asia and the Pacific. According to him, Chinese investment in the Philippines has gradually declined since the days of the Arroyo Administration. The deterioration in the relations between the two countries triggered by recent territorial waters issues involving the Spratly Islands made Chinese companies more hesitant to invest in the Philippines. The only recent Chinese large-scale investment in the Philippines was the investment in the National Grid Corporation of the Philippines in 2011.

However, given that China has a population of 1.3 billion persons, it will look anew toward Southeast Asian countries in the future as sites for investment in the agricultural sector for the sake of China’s future food security, and it will consider investment in the Philippines’ agricultural sector. In particular, the likely targets are tropical crops such as coconuts, bananas, and pineapple, etc., which are primary products with high commercial value. China is poor in agricultural resources and relies on imports from Central and South America and Africa, but since these places are far from China, the Philippines may become a new site of food procurement. Professor Villegas noted, “China must also see the launch of the ASEAN Economic Community (AEC) in 2015 as an opportunity.”

33

2-(9) Vietnam: Largest New Investment was Chinese Companies’ Construction of a Coal-fired Power Plant

Chinese direct investment in Vietnam in 2013 grew significantly, by six times YOY. Contributing to this is Chinese companies’ construction project to build a coal-fired power plant, which was the largest new investment. The anti-Chinese demonstrations that occurred in May 2014 had a limited impact on investment, and so actual investment has continued in an uptrend since the beginning of 2014.

-China Ranks Third in New Investment after South Korea and Singapore- According to the Foreign Investment Agency (FIA), cumulative Chinese direct investment in Vietnam from 1988 to September 20,2014, (approval basis, the total of new and extensive) amounted to USD7,893.00 million with 1,065 cases, which ranked ninth globally (refer to Figure 2-(9)-1). By region, Binh Thuan Province (south) was in first place with USD2,027.00 million, accounting for one-fourth of total investment. A significant contributor to this was the Vinh Tan 1 Bot Coal-Fired Power Plant construction project in southern Binh Thuan Province (USD2,018.33 million) carried out by China Southern Power Grid, China Power International Development Limited, and Vietnam National Coal-Mineral Industries Group (Vinacomin). Next, in second place and lower were Lao Cai Province (north), Tay Ninh Province (south), Quang Ninh Province (north), and Binh Duong Province (south), and so investment was concentrated around the Chinese-Vietnamese border and Ho Chi Minh City.

Figure 2-(9)-1: Cumulative Inward Direct Investment by Country/Region (1988-September 20, 2014) (units: cases, USD million, %) Component Rank Country/Region Cases Amount Ratio 1 Japan 2,410 36,310 15.0 2 South Korea 3,983 33,430 13.8 3 Singapore 1,310 31,033 12.8 4 Taiwan 2,334 28,019 11.6 5 British Virgin Islands 543 17,873 7.4 6 Hong Kong 847 13,981 5.8 7 US 706 10,902 4.5 8 Malaysia 472 10,665 4.4 9 China 1,065 7,893 3.3 10 Thailand 365 6,637 2.7 Total (including “Other”) 17,072 241,657 100.0 Note: In order by amount. Figures are 2014 preliminary figures.

Source: Prepared based on Foreign Investment Agency (FIA) data.

In 2013, there were 123 cases of inward direct investment from China amounting to USD2,339.00 million. This amount represented significant growth from the previous year of 6.3 times YOY and significantly raised China’s rank among countries and regions to fourth (from ninth in 2012) (refer to Figure 2-(9)-2). In terms of new investment, China ranked third following South Korea and Singapore. This was due largely to the approval of the above-mentioned Vinh Tan 1 Bot Coal-Fired Power Plant construction project, which was the largest new

34 direct investment in 2013.

Figure 2-(9)-2: Inward Direct Investment by Country/Region (approval basis) (units: cases, USD million, %) 2013 Jan-Sep 2014

Rank Country/Region Cases Amount Country/Region Cases Amount Component YOY Ratio 1 Japan 500 5,875 South Korea 493 3,558 31.8 35.0 2 Singapore 179 4,769 Hong Kong 96 1,521 13.6 133.4 3 South Korea 586 4,466 Japan 325 1,440 12.9 − 69.6 4 China 123 2,339 Singapore 89 1,076 9.6 − 72.8 5 Russia 14 1,032 Taiwan 94 818 7.3 114.0 6 Hong Kong 96 730 British Virgin Islands 40 423 3.8 622.0 7 Taiwan 138 637 China 95 358 3.2 59.3 8 The Netherlands 34 399 Canada 9 276 2.5 6,222.4 9 Cayman Islands 6 373 US 28 224 2.0 127.8 10 British Virgin Island 30 309 Malaysia 29 213 1.9 528.4 Total (including Total (including “Other”) 2,120 22,352 “Other”)) 1,569 11,183 100.0 − 25.5 Note: In order by amount. Figures are preliminary figures up to September 20, 2014. Source: Same as Figure 2-(9)-1.

-Cultivation of Supporting Industries is the Highest Priority- By industry, entry into textiles and garment-related businesses is conspicuous in expectation of the signing of the Trans-Pacific Partnership (TPP). In May 2014, the major Chinese textile company Texhong Textile Group Limited (Texhong) announced that it will construct a textile and garment-related industrial park in the Hai Ha Industrial Park in Quang Ninh Province with investment via Hong Kong (USD215.00 million). In September, it announced that it had acquired permission to invest in construction of a textile and garment complex (USD300.00 million) in the above-mentioned industrial park. In addition, it has also been reported that preparations are underway for a thermal power plant construction project to supply electricity to the industrial park.

A local government official pointed out, “Aside from a few large-scale projects (like the above), most are small-scale projects overall, focused on entering labor-intensive manufacturing and processing industries such as spinning, mainly by small and medium companies in the South China region.” The same official listed three main problem points related to investment from China: a) the technology and equipment brought in from China are old, and few of them contribute to energy saving and environmental protection, b) because salary levels are generally low and administrators do not manage adequately, there are many cases of labor disputes, and c) there are many illegal workers without work permits.

Experts have also pointed out that investment expansion by Chinese companies is a factor in the expansion of the trade deficit with China. This is because almost all of the introduction of machinery and facilities and the procurement of raw materials are from mainland China. Vietnam’s actual trade deficit with China in 2013 was 35

USD23,695.00 million, up 44.5% YOY. This trend did not change in 2014, and in order to break free of this situation, the Vietnamese government setting cultivation of supporting industries as one of its highest priorities.

- Effect of Tension between Vietnam and China on Investment is Limited- As a result of anti-Chinese demonstrations in May 2014 in protest of China’s drilling in the South China Sea, Chinese companies suffered significant damage including arson and looting, and some Chinese died. Naturally, plants were forced to close temporarily, and Chinese people were forced to return to China or seek refuge in neighboring countries. Subsequently, tensions were heightened in Vietnamese-Chinese relations, with the Chinese government announcing the halting of some exchange activities with Vietnam and a moratorium on new investment by state-owned enterprises.

However, a government official stated, “Since the scale of investment from China is not large, the effect on foreign direct investment overall is limited. Instead, the impact is larger on the tourism industry and service industry because there are fewer Chinese tourists.” Investment from China during January through September 2014, including Hong Kong and Taiwan which are the main routes for detour investment, was in an uptrend YOY.

36

2-(10) Myanmar: Change to Labor-Intensive Industries Such as Apparel after Transition to Civilian Rule

Foreign direct investment in Myanmar rose to USD4, 107.10 million (123 cases of investment) in FY2013 (April 1, 2013-March 31, 2014), an increase of approximately three times on a monetary basis compared to FY2012’s USD1,419.50 million (94 cases). During the era of military government, Chinese investment was concentrated mainly in the resource development and energy development sectors, and it also displayed a large presence in terms of amount. However, after the promulgation of a new foreign investment law in November 2012 following the transition to civilian rule, large projects dropped into the shadows, and recently there has been an uptrend in small-scale investment in labor-intensive industries such as apparel and shoemaking.

-China’s Presence Declines Relatively- In cumulative foreign investment from FY1989 through FY2013, China was in first place with 31.2% of the total investment, but since the launch of the Thein Sein Administration in March 2011, there has been an upswing in direct investment from Japan, South Korea, US, Europe, and neighboring ASEAN countries, etc. China’s formerly overwhelming percentage has declined relative to the total (refer to Figure 2-(10)-1). A major reason is the decrease in large-scale projects in the resource and energy sectors, which caused China to lose momentum and slump to eighth place by country/region in FY2013.

Meanwhile, in response to rising manufacturing costs due to skyrocketing labor costs in China, Chinese companies have been investing in Myanmar as a site to relocate their production bases, attracted by the cheap, abundant labor. Investment in the labor-intensive apparel and shoemaking industries is especially active.

According to the Survey of Investment Related Costs in Asia and Oceania released by JETRO in May 2014 as a basis for reference values for statistical parameters, the monthly base wages of workers (general engineers) at a Japanese company in Myanmar was USD71 versus roughly 20% of that amount, at USD375, in China. It is necessary to take into consideration labor productivity and other costs, but for labor-intensive manufacturing, Myanmar’s labor costs seem to be increasingly attractive to Chinese companies.

-Of 16 Projects, 12 Are Garment-related- Of the USD4,107.10 million in FDI in Myanmar in FY2013 (approval basis), China’s investment was USD57.00 million, a mere 1.4% of the total (refer to Figure 2-(10)-2). This was a significant decline of 86.0% from the previous year. Of the 16 cases of Chinese investment projects in FY2013, 12 cases were garment-related (apparel and shoemaking) with a small impact in monetary terms, but it is expected that China will continue to invest in labor-intensive industries in the future as well. Henceforth, there is likely to be a further increase in Chinese companies that choose Myanmar as one of their investment destinations, in pursuit of Myanmar’s cheap, abundant labor as China’s labor costs rise.

37

Figure 2-(10)-1: Cumulative Inward Direct Investment by Country/Region (approval basis) (units: cases, USD million, %)

Rank Cases Amount Component Ratio 1 China 65 14,426 31.2 2 Thailand 73 10,857 23.5 3 Hong Kong 69 6,508 14.1 4 Singapore 107 4,342 9.4 5 South Korea 91 3,624 7.8 6 UK (Note 2) 66 2,350 5.1 7 Malaysia 47 1,088 2.4 8 Vietnam 7 513 1.1 9 France 4 476 1.0 10 Japan 47 341 0.7 11 India 14 330 0.7 12 Netherlands 7 249 0.5 13 US 15 244 0.5 14 Indonesia 12 242 0.5 15 Philippines 2 147 0.3 16 Russia 4 131 0.3 17 Australia 15 83 0.2 18 Austria 2 73 0.2 19 Panama 3 55 0.1 20 United Arab Emirates (UAE) 2 46 0.1 21 Canada 15 41 0.1 22 Germany 2 18 0.0 23 Denmark 1 13 0.0 24 Cyprus 1 5 0.0 25 Other 13 26 0.1 Total 684 46,226 100.0

Note 1: Cumulative total from 1989 to March 31, 2014. Note 2: UK figures include investment from tax havens (British Virgin Islands, Bermuda, and Cayman Islands). Source: Central Statistical Organization of Myanmar

38

Figure 2-(10)-2: Inward Direct Investment by Country/Region (approval basis) (units: cases, USD million, %) FY2012 FY2013

Rank Cases Amount Cases Amount Component Ratio YOY 1 Singapore 14 247.8 25 2,340 57.0 844.3 2 South Korea 28 37.9 13 641 15.6 1,589.2 3 Thailand 2 1.3 9 489 11.9 37,520.9 4 UK 5 232.7 10 157 3.8 − 32.6 5 Vietnam 3 329.4 1 142 3.5 − 56.9 6 Hong Kong 9 80.8 24 119 2.9 47.4 7 Japan 11 54.1 11 61 1.5 12.6 8 China 14 407.3 16 57 1.4 − 86.0 9 Malaysia 2 4.3 3 56 1.4 1,204.3 10 India 2 11.5 4 26 0.6 126.4 11 France － － 1 5 0.1 New item 12 Luxembourg － － 1 5 0.1 New item 13 UAE － － 1 5 0.1 New item 14 Brunei 1 1.0 2 2 0.1 127.3 15 Laos － － 1 1 0.0 New item 16 Australia － － 1 1 0.0 New item Total 94 1,419.5 123 4,107.1 100.0 189.3 Note: The fiscal years runs from April to the following March.

Source: Same as Figure 2-(10)-1.

39

2-(11) Cambodia: Brisk Foray into Garment Industry; Investment Expands Suddenly

China continues direct investment on an overwhelming scale in Cambodia, and within that, entry into the garment industry is brisk. In response to rising wages in China, Chinese investment in Cambodia is expanding suddenly.

-China’s CIB Investment Amount Up 70%- There are mainly two kinds of statistics on foreign direct investment in Cambodia. One is the Qualified Investment Projects (QIP) released by the Cambodia Investment Board (CIB), and the other is projects (like QIP) to set up operations in special economic zones (SEZ) released by the Cambodian Special Economic Zone Board (CSEZB).

According to the CIB, FDI in 2013 (approval basis) was USD1,233.80 million, a 10.0% drop compared to the previous year (refer to Figure 2-(11)-1). However, Chinese investment was USD448.05 million, an increase of 70.0%, putting China in first place in terms of amount in 2013. Incidentally, Japanese investment was USD24.59 million, approximately one-twentieth of China’s. Meanwhile, looking at the amount of approved investments in SEZ released by CSEZB, Japan was in first place with USD64.38 million, while China stood at USD50.90 million.

Figure 2-(11)-1: Trend in Chinese Direct Investment in Cambodia (units: USD million, %) 2012 2013 Component Component China Overall China Overall Ratio Ratio CIB Approved Amount 264 1,371 19.2 448 1,234 36.3 CSEZB Approved Amount 26 192 13.4 51 251 20.3 Total 289 1,563 18.5 499 1,485 33.6 Source: Cambodia Investment Board (CIB) and Cambodian Special Economic Zone Board (CSEZB).

Of Chinese investment in Cambodia from 1994 to 2011, the real estate and energy sectors, including resort development and hydroelectric power generation facilities accounted for approximately 80%. In 2013, there was no new investment in either of these sectors, but infrastructure development such as bridge construction and hydroelectric power generation facilities are currently underway using preferential loans from the Chinese government.

-Two Large-Scale Projects in the Agricultural Sector in 2013- In recent years, companies have entered the apparel- and shoemaking-related industries one after the other. In 2010, Chinese investment in the garment industry was USD15.99 million, with seven cases, and in 2013, it was USD167.10 million with 39 cases, an increase in the investment amount of 10 times in three years. According to the Garment Manufacturers Association in Cambodia (GMAC), there were 660 member companies as of

40

October 2014 including garment (clothing) plants and shoe factories, and of those, 184 were Chinese.

The industry with the next largest investment amount after the garment industry is the agricultural sector. In 2013, there were only four cases, but of those, two were cases of large-scale investment in excess of USD50 .00million, and the total investment in the sector was USD141.23 million.

The World Bank’s report Cambodia Economic Update (October 2014 edition) cited the four sectors of garments, tourism, agriculture, and constructions as the growth engines of Cambodia. It stated, however, that the agricultural sector no longer has the same impact that it formerly did. Meanwhile, the report pointed out that the minimum monthly wage in the garment industry (base salary) rose from USD80 to USD100 in February 2014 but that it could be a leading industry that will boost the Cambodian economy in the future. The investment per case is small in the garment industry compared to the real estate, infrastructure, or agricultural industries, and the capital of companies entering the industry is often around 100.00 million yen. It shows the sign that the economic relationship between China and Cambodia is not only between the governments but also appears to be expanding to the medium-size private company level.

41

2-(12) India: No Large-Scale Projects; Decline Over 40% YOY

Chinese direct investment in India is extremely small compared to the amount of trade between the countries. In 2013, there were no large-scale projects, and investment plummeted 43.0% YOY. India is further strengthening its posture of actively receiving investment from China as a means of balancing the trade deficit with China. At the India-China Summit Meeting in mid-September, China announced USD20 billion in investments in India over the next five years.

-Manufacturing Industry Is Just Under 50% of Top Investment Projects- According to India’s Department of Industrial Policy & Promotion (DIPP), cumulative Chinese direct investment from January 2000 through December 2013 was USD313.05 million, representing a share of only 0.164% of total inward direct investment (in 30th place among countries) (refer to Figure 2-(12)-1). Even taking into account detour investment via places such as Singapore and Mauritius, China’s presence is extremely small. One outstanding feature is that investment since 2012 makes up 70% of China’s total investment since April 2000.

Figure 2-(12)-1: Direct Investment from China (units: USD million, %) China’s Share of Total Inward Period Amount Direct Investment 2000 to 2010 48.51 0.043

2011 45.58 0.149

2012 139.45 0.602

2013 79.51 0.322

Total 313.05 0.164

Source: Prepared based on SIA News Letter published by India’s Department of Industrial Policy & Promotion (DIPP).

Looking at the details of direct investment by China, in 2013 it was USD79.51 million, down 43.0% YOY, which was a significant decline from the previous year when it set a new record. In 2012, there was a project in which Foton Motor Inc., the largest commercial vehicle manufacturer in the world, invested USD93.86 million in a local company, but there were no such large-scale projects in 2013.

The largest investment in 2013 was additional investment of USD32.84 million in Xindia Steels Ltd, whose main business is palletization of low-quality iron ore powder. This company is a joint venture by four Chinese companies, two Indian companies, and one US company, and it is headquartered in Bangalore. The investment in 2013 was by the Chinese investment companies China Minmetals and Hongda Iron & Steel Group, etc. The next largest investment was USD13.61 million invested by Shanghai Hitachi Electrical Appliances Co., Ltd., (SHEC) (a joint venture financed 25% by Hitachi Appliances Inc. and 75% by Shanghai Highly (Group) Co., Ltd.) in a local company in the state of Gujarat. The company manufactures compressors for air conditioners. Next was additional investment (USD8.59 million) in a local subsidiary by YAPP Automotive Parts. The

42 company manufactures fuel tanks for motor vehicles at its plant in Chennai. When one analyzes the industries represented in the top investment projects including those above, the manufacturing industry including iron and auto parts is the largest, at just under 50% of the total, followed by the wholesale industry (medical equipment, fertilizer, etc.,) and finance. Infrastructure-related investment was less than 1% of the total.

Meanwhile, looking at India’s trade relationship with China in 2013, the total amount of trade including exports and imports was USD66,041.00 million (down 3.8% YOY), and so China surpassed the United Arab Emirates (UAE) to become India’s largest trading partner. Looking at the details of trade with China, exports amounted to USD14.5 billion (down 2.6%) and were centered on cotton yarn, non-ferrous metals, and iron ore. Imports were USD51.5 billion (down 2.5%) and consisted mainly of electronic equipment and general machinery. India’s trade deficit was USD37.0 billion (down 6.2%).

-China Announces USD20 Billion in Investment over 5 Years- Xi Jinping, president of the PRC, visited India during September 17-19. He announced that China would develop two industrial parks exclusively for Chinese companies and would invest USD20.0 billion over the next five years in India. One hundred companies accompanied Xi Jinping to Indian, and 24 of them signed memorandums of understanding (MOU) with Indian companies. Narendra Modi, prime minister of India, released the following comments after the summit meeting with Xi Jinping, “Considering the potential capabilities that India and China have, it cannot be said that the economic relationship heretofore has been mutually fair. I have appealed to Xi Jinping concerning India’s trade deficit with China, and I have requested improved access and creation of investment opportunities for Indian companies in the Chinese market. Xi Jinping is aware of our concerns and pledged the necessary support. I am already encouraging investment in infrastructure and manufacturing by Chinese companies.”

As a way to balance trade with China, India is considering reduction of imports by attracting Chinese investment in the manufacturing industry to improve its current account deficit. In the first place, tensions have continued between India and China over border issues ever since the border dispute in 1962. Because there were security concerns due to this, India has been reluctant to accept investment from China. Even during Xi Jinping’s visit to India, there was an incident in which a Chinese People's Liberation Army force of several hundred people invaded India at Ladakh on the Indian-Chinese border. However, given the increasing tension in Indian-Chinese economic relations and particularly in trade relations, India cannot be without a policy for reducing its trade deficit with China, and on the other hand, it would be unrealistic to expect China to suddenly expand exports from India, and so India must choose the path of expanding its acceptance of Chinese investment. It is difficult to imagine that China will expand its investment all at once, but looking at investment trends since 2012, it may be possible to say that we are at the stage where the momentum of Chinese companies’ investment in India is increasing.

43

2-(13) Sri Lanka: China is Top Investor; Flow of Funds Encourages Companies to Set Up Operations

Chinese direct investment in Sri Lanka set a new record in 2013, and by country, China came out in first place. The flow of funds from China which has been promoted by the government is creating a structure that encourages Chinese companies to set up operations in Sri Lanka. Thus, the diplomatic and economic relations between China and Sri Lanka are growing increasingly close.

-Top Place for Fifth Consecutive Year- According to the annual report of the Ministry of Finance and Planning of Sri Lanka, the monetary amount of China’s commitment to Sri Lanka in 2013 decreased sharply to USD518.00 million from USD1,057.00 million in the previous year, but it accounted for 20.7% of the total foreign commitment, including multinational funds from the Asian Development Bank, etc. So, China maintained its top position for the fifth consecutive year since 2009.

The main development projects in China were development of the Matara-Beliatta section of the Matara– Kataragama Railway Extension Project (USD283.00 million) and ancillary work and equipment supply for the Hambantota Port Development Project Phase 1 (USD147.00 million). Japan remained at almost the same level as the previous year as the amount of commitments from China, India, and Europe declined. Japan was in second place among bilateral donors (commitment amount 19.9%) and has maintained a steady presence as a long-established donor since the 1960s.

-In First Place in Private-Sector Direct Investment, Too- China’s presence is growing in private-sector investment, too. Chinese direct investment in 2012 was USD185.00 million, more than 17 times the previous year’s investment. By country, it leapt from 15th place to 3rd place. China’s investment further expanded in 2013, to USD240.00 million, putting it in first place among the countries.

The focus of investment for the past few years has been the container terminal construction project at the Port of Colombo by Colombo International Container Terminal (CICT). The construction which began in December 2011 was completed in April 2014, and the investment exceeded USD500.00 million. The container processing capability is 2.40 million TEU (based on 20-foot containers), and container ships with an 18,000 TEU capacity, the largest in the world, can also dock in this port.

In addition to this, China’s communications equipment giant ZTE Corporation (ZTE) developed and built base stations and communications facilities for a fourth-generation mobile communications system that is handled by Mobitel, the cell phone subsidiary of Sri Lanka Telecom (SLT), Sri Lanka’s largest communication business. The investment, at USD40.00 million, was the largest in the communications sector in 2013. Accompanying economic growth, development of the infrastructure sector by Chinese companies is progressing smoothly.

44

-Deepening Relationship between Sri Lanka and China- During September 16-17, 2014, Xi Jinping, president of the PRC, visited Sri Lanka as the first Chinese head of state to do so in 28 years. After a summit meeting with Mahinda Rajapaksa, president of Sri Lanka, he announced, “the action plan on deepening the strategic cooperative partnership between the two countries,” and 27 agreements were signed. Among them, the main agreements related to direct investment in the private sector were as follow.

 Framework agreement for concessional lending to Sri Lanka in the Hambantota Base Development Plan  Framework agreement for concessional lending to Sri Lanka for the southern highway extension (4th segment of Matara-Hambantota section)  Memorandum of Understanding for technical cooperation on the Norochcholai Coal Power Plant  Preferred buyer's credit loan agreement for the construction of the Colombo Outer Circular Highway Phase 3  Agreement on terms and provisions for Colombo Port City Project Phase 1

Infrastructure development often involves development of roads and electric power, but the Colombo Port City Project is a new type of urban development project. As Sri Lanka develops economically, it is expected that its largest city, Colombo, will become a business hub for logistics, commerce, and tourism in southern Asia, and there will be a need for land not only for facilities but also for residences for people who work there. However, it is difficult to obtain the large tracts of land necessary for large-scale urban development in Colombo.

In order to overcome this situation, the Colombo Port City Project plans to fill in and reclaim land offshore to create an artificial island of 233 hectares, or slightly larger than Monaco, and to build a large resort facility like in Dubai. China Communications Construction Company Limited (CCCC), a state-owned enterprise, will undertake the construction and will complete the offshore landfill in the first two years. After that, it will construct high-rise condominiums, recreation facilities, shopping mall, a golf course, and business center, etc. The scheduled completion date is 2022. China’s total investment is USD1.4 billion, making it Sri Lanka’s largest foreign investment project. The ownership of the artificial island will be divided with 125 hectares owned by the Sri Lankan government, and of the remaining 108 hectares, 20 hectares will be owned by CCCC while 88 hectares will be leased to CCCC on a 99-year lease. Some are voicing concern about the increasing influence of China in terms of territory and sovereignty given the fact that the scale of investment is massive; however, in view of the deepening diplomatic and economic relations between Sri Lanka and China, this project should be a milestone similar to the Hambantota Port and Colombo Port container terminals which were built with Chinese assistance.

At a summit meeting, Xi Jinping, president of the PRC, asked Sri Lanka to become a founding member of the Asian Infrastructure Investment Bank, and President Rajapaksa indicated his agreement. They also agreed to accelerate negotiations on the signing of a free trade agreement (FTA) between the two countries. Local media coverage on October 28, 2014, reported that the FTA between the two countries is scheduled to be signed in

45

June 2015, according to a statement by a deputy secretary at Sri Lanka’s Ministry of Finance and Planning. When the FTA is signed, it is expected to increase the speed of trade expansion, further broaden the scope of activities of Chinese companies, and lead to direct investment from China.

46

2-(14) Pakistan: Rapid Expansion of Communication Sector; China’s First Time in Top Position as a Country

For China, Pakistan is in an important geopolitical position. China has worked to strengthen not only political relations but also economic relations. China’s direct investment in Pakistan in FY2013/2014 (July 2013-June 2014) (State Bank of Pakistan’s statistics on balance of international payments) exceeded USD700.00 million, making China the top investor among countries. The investment was directed toward the communications sector. Chinese smart phones are available in Pakistan’s market through local Chinese-owned companies, and the smart phones are expected to become even more widely available.

-Direct Investment in Pakistan Had Been Driven by the US and Britain Heretofore- Direct investment in Pakistan up to now had been led by the US and Britain for the most part, followed by United Arab Emirates and Switzerland. The investment was directed mainly toward crude oil and gas, communications, and finance.

Prior to FY2005/2006 (July 2005-June 2006), China was almost never at the top in direct investment in Pakistan. China began to make its presence felt in FY2006/2007 when it placed third among countries and regions with USD712.00 million (14.61% of total investment in Pakistan).

Still, investment from China continued in a slump after that. The relationship between the two countries developed as an FTA was signed in 2007, Chinese household appliance manufacturers and automakers set up operations in Pakistan, and a swap agreement for renminbi was signed in 2011. Starting in FY2010/2011, a recovery trend became visible, but in FY2012/2013 Chinese investment was only USD90.62 million, less than 6.3% of total investment in Pakistan, placing China fifth among countries and regions (Hong Kong, with USD242.60 million, was in second place).

However, in FY2013/2014, total inward direct investment in Pakistan was USD1,631.30 million, and of that, China’s investment was USD700.30 million, or 42.9% of the total, an expansion of 7.7 times compared to the previous year, putting China in first place (refer to Figure 2-(14)-1).

All of this investment was directed toward communications. The above-mentioned direct investment from China in FY2006/2007 was also directed toward communications. Due in part to the effect of this investment, Pakistan’s number of cell phone contracts during the past five years increased 45% to 136.00 million connections.

47

Figure 2-(14)-1: Inward Direct Investment in Pakistan by Country/Region (units: USD million, %)

Component

FY2011/12 FY2012/13 FY2013/14 Ratio YOY

China 120.9 90.6 700.3 42.9 672.8

Hong Kong 80.3 242.6 226.9 13.9 −6.5

Switzerland 127.1 149.0 226.3 13.9 51.9

US 233.0 227.1 206.8 12.7 −9.0

Britain 142.8 632.3 116.2 7.1 −81.6

Total 820.7 1,456.4 1,631.3 100.0 12.0 Note: The fiscal year is from July to June. Source: State Bank of Pakistan

Of the USD700.30 million invested in the communications sector in FY2013/2014, USD516.00 million was spent on acquisition of 3G and 4G mobile communications licenses. Usage of smart phones including Chinese-made phones is expected to spread even more in Pakistan from here forward.

In FY2013/2014, an unprecedented result occurred in the ranking by country/region. Until then, the US and Britain were followed by the UAE and Switzerland, but due to the rise of China and Hong Kong and the growth of Switzerland, the ranking changed to China (component ratio 42.93%), Hong Kong (13.91%), and Switzerland (13.87%) at the top, and the US, Britain, and the UAE did not even appear in the top three. One of the main reasons was Pakistan’s oil and gas. Previously, it was mainly the US and Britain that invested in this field, but starting in FY2011/2012, Hong Kong also focused on this industry, and in FY2012/2013 and FY2013/2014, almost all of the investment in this sector was from Hong Kong. Another factor is that since FY2005/2006, Switzerland has consistently continued to invest in the finance sector, and it has been pointed out that Switzerland has been steadily increasing the amount of its investment since FY2011/2012.

-Outlook for Spread of Investment to Infrastructure Sector- Together with the launch of a new administration in Pakistan in June 2013, the two countries announced the Pakistan-China Economic Corridor Plan. In August 2014, the second China-Pakistan Joint Cooperation Committee met and discussed promotion of an infrastructure development project of roads, railways, and ports, etc., as a project related to the above-mentioned corridor.

Currently, there are 45 Chinese companies in Pakistan, and over 400 foreigners of Chinese nationality are registered as corporate directors. Henceforth, Chinese investment is expected to broaden to include not only communications but also the infrastructure sector.

48

2-(15) Bangladesh: China Becomes Largest Investor in EPZs

In FY2013/2014 (July 2013-June 2014), Chinese investment in Bangladesh’s manufacturing industry accelerated, and China became the largest investor in the export processing zones (EPZs). In cumulative investment in EPZs, China was third after South Korea and local companies, and thus made its presence felt. Amidst the activation of private sector investment, Sheikh Hasina, prime minister of Bangladesh, met with Xi Jinping, president of the PRC on her visit to China in May 2014, and they agreed to strengthen economic relations between the two countries. Moreover, they reconfirmed their economic cooperation on infrastructure development and development of the economic corridor to connect Bangladesh, China, India, and Myanmar. This is a sign that trade, investment, and exchanges of people between the two countries will deepen in the future.

-China’s Labor-Intensive Industries Shift Production Bases- According to statistics on direct investment in EPZs released by the Bangladesh Export Processing Zones Authority (BEPZA), FY2013/2014 investment by China (including Hong Kong) (implementation basis, including investment from local companies) was USD83.88 million, double the previous year’s amount (refer to Figure 2- (15)-1). By country, China surpassed local capital and South Korea to become the largest.

Figure 2- (15)-1: Investment Trends in Export Processing Zones (EPZs) 120,000 China 100,000 Bangladesh

South Korea Japan 80,000

(USD1,000) 60,000

40,000

20,000

0 2006/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14

(FY)

Source: Bangladesh Export Processing Zones Authority (BEPZA).

In cumulative investment, China had a large presence, placing third (USD453.27 million, component ratio 14.2%) followed by South Korea (USD644.72 million, 20.2%) and local capital (USD627.77 million, 19.7%). Japan was fourth (USD297.40 million, 9.3%), and in investment in EPZ manufacturing, China’s investment exceeded Japan’s.

There are investments in EPZs by 87 companies (51 from China and 36 from Hong Kong), and by industry, 53 companies, or approximately 60%, are in apparel (sewing of fabric (Note) or knit products and secondary

49 materials, accessories, and hats, etc.). Next largest is shoes and leather products. The numbers are small, but there is also investment in electronic components and toys, etc.

Due to soaring labor costs and labor shortages in China, Chinese labor-intensive apparel-related companies are beginning to shift their production bases to Bangladesh. If increases in labor costs and labor shortages become more serious in China in the future, it is anticipated that there will be an increase in Chinese labor-intensive manufacturers going to Bangladesh in search of alternative production sites.

-Correction of Trade Deficit Is an Issue- Currently, China is Bangladesh’s largest import partner. According to Bangladesh Bank (the central bank of Bangladesh), the amount imported from China in FY2012/2013 was USD6,324.05 million. On the other hand, according to Bangladesh’s Export Promotion Bureau, the amount of exports to China was USD458.11 million, resulting in a trade deficit of USD5,865.93 million.

The Bangladeshi government is calling on the Chinese government to correct Bangladesh’s enormous trade deficit with China. Currently, Bangladesh enjoys duty-free access for 4,788 items exported to China under the Asia Pacific Trade Agreement (APTA) in which the six countries of Bangladesh, China, India, South Korea, Sri Lanka, and Laos participate. Still, Bangladesh is demanding duty-free access for even more items.

However, aside from apparel, Bangladesh’s supporting industries are not well established, necessitating reliance on imports from China for raw materials and parts that are not locally procurable, and so correction of the trade deficit is likely to require time.

-Increasing Closeness- China is intent on gaining a land route to the Indian Ocean, and so Bangladesh is in an important position geopolitically. Moreover, Bangladesh also has hopes that China will economically develop its infrastructure sector, and so the two countries are growing increasingly close.

Immediately after her visit to Japan in June 2014, Bangladeshi Prime Minister Sheikh Hasina visited China and met with Xi Jinping, president of the PRC. The joint statement issued by Xi Jinping and Hasina mentioned the fact that 2015 is the 40th anniversary of the establishment of bilateral diplomatic relations, stated that they expected to further strengthen economic relations in the future, and stressed comprehensive cooperation including in trade and investment, science and technology, media, education, culture, and human exchanges.

-Progress in Cooperative Projects for Infrastructure Development and the Economic Corridor- As part of the economic cooperation between the two countries, China agreed to implement five infrastructure projects in Bangladesh. Specifically, they are projects for development of IT infrastructure, a surface water treatment facility in the Rajshahi Division, construction of a railway and overpass across the Karnaphuli River, construction of a new railway between Chittagong and Cox's Bazar, and development of an offshore oil refinery using the single-point mooring system.

50

Moreover, they reconfirmed the importance of the development of the Bangladesh-China-India-Myanmar Economic Corridor (BCIM EC) which connects these countries as the most important item on the agenda. The aim is to build open investment and production markets to enhance the connectivity of the countries. China is welcoming Bangladesh’s holding of the 2nd Joint Study Group (JSG) to encourage cooperation among the four countries.

Note: “Fabric” is used as an inclusive term for textile products such as broadcloth and sheeting that is made from thread of cotton, hemp, or silk (or a combination thereof).

51

2-(16) Australia: Conspicuous Increase in Agribusiness and Farmland Sector

Chinese direct investment in Australia in 2013 (net, flow) increased 43.5% YOY to AUD4,897.00 million (approximately JPY489,700 million at AUD1 = approximately JPY100). This was the first time that China surpassed Japan, placing third behind the US and Britain. China’s investment balance increased from AUD550.00 million in 2006 to AUD20,832.00 million in 2013, growth of nearly 40 times in seven years. China’s percentage of total investment also increased from 0.1% in 2006 to 3.3% in 2013. China has made a conspicuous increase in investment in the agribusiness and farmland sector from the standpoint of food security, in addition to increases due to the sense that companies dealing in natural resources have been undervalued since the drop in resource prices.

-Chinese Investment Increases by 40 times in 7 Years- The amount of inward direct investment in 2013 (net, flow) released by the Australian Bureau of Statistics (ABS) was AUD52,667.00 million, a decrease of 5.3% YOY (refer to Figure 2- (16)-1). By country/region, the US was the top investor, with AUD23,927.00 million, up 58.2%, followed by Britain with AUD11,399.00 million, up 9.6%. Japan invested AUD4,575.00 million, down 55.6%. Chinese investment, which had been growing in recent years, was AUD4,897.00 million, up 43.5%, and it surpassed Japan for the first time to place third following the US and Britain in terms of investment share. Moreover, China’s investment balance rose sharply to AUD20,832.00 million in 2013, an increase of approximately 40 times from 2006 when it was AUD550.00 million. China’s share of the total also grew from 0.1% in 2006 to 3.3% in 2013, and so the increase in China’s presence is also conspicuous in the investment sector.

Figure 2- (16)-1: Inward Direct Investment in Australia by Country (calendar year, international balance of payment basis) (units: AUD million, %)

Flow Balance

Component 2011 2012 2013 2013 Ratio YOY

US 11,669 15,126 23,927 149,479 23.7 13.3

Britain 19,416 10,398 11,399 86,663 13.8 9.9

Japan 12,417 10,315 4,575 63,257 10.0 2.0

China (excluding Hong Kong) 3,269 3,413 4,897 20,832 3.3 29.0

Hong Kong 1,308 − 361 483 7,378 1.2 1.3

Total 57,932 55,596 52,667 629,941 100.0 6.5

Source: Australian Bureau of Statistics (ABS).

-Further Expansion of Investment in Real Estate and Agribusiness- According to the annual report of Foreign Investment Review Board (FIRB), Chinese inward direct investment by industry (approval basis) in FY2013 (July 2013-June 2014) overall was AUD15,803.00 million, down 2.4% YOY (refer to Figure 2- (16)-2). Mineral exploration and development had a large impact, at AUD8,273.00 52 million, down 21.2%. Meanwhile, investment expanded significantly in agribusiness and farmland as well as real estate. In real estate, the reinvigoration of the Australian market due to low market interest rates is attracting Chinese real estate investors, while investment in Australian agribusiness and farmland is growing from the perspective of food security due to the diversification of the Chinese diet as the population increases and the middle class expands.

Figure 2- (16)-2: Chinese Inward Direct Investment in Australia by Industry (units: AUD million, %)

FY2010 FY2011 FY2013 Component YOY Ratio Number of Cases 5,033 4,752 6,102 - 28.4 Amount 14,976 16,190 15,803 100.0 − 2.4 Agriculture, forestry, and fisheries 4 27 328 2.1 1,137.6 Finance and insurance 558 60 23 0.1 − 62.1 Manufacturing 416 538 957 6.1 77.9 Mineral exploration and development 9,758 10,505 8,273 52.3 − 21.2 Real estate 4,093 4,187 5,932 37.5 41.7 Natural resource processing 132 240 - 0.0 － Service 16 634 291 1.8 − 54.2 Note: Australia’s fiscal year is July to June. Source: Annual Report of Foreign Investment Review Board (FIRB).

Reporting on China’s investment in the agricultural sector, The Australian stated on September 16 that “an investment boom has arrived in the agricultural sector.” It reported that, as one part of the boom, Beijing Agricultural Investment Fund revealed that it will invest AUD3.0 billion in Australia’s dairy, beef, mutton, and aquaculture sectors through the Beijing Australia Agricultural Resource Cooperative Development Fund, a joint venture established by the Beijing Agricultural Investment Fund and Yuhu Agriculture Investment. The Australian Minister for Trade and Investment, Andrew Robb, explained, “They are focused on investment in local dairies, dairy product processing, and export to China particularly of milk powder for infants.”

The Australian also reported that a private Chinese company paid AUD12 million for a 205,000 hectare farm in Elizabeth Downs, approximately two hours by car southwest of Darwin in northern Australia and AUD7 million for 9,000 head of cattle. The newspaper takes the view that this first investment by China in a farm in northern Australia was timed to coincide with the opening of an AUD91.00 million slaughterhouse in Darwin that is counting on future expansion of the Asian market, and since the purchasers of the farm are already engaged in management of golf courses and hotels in Australia, it is anticipated that they will stimulate development in the area by attracting tourism facilities to the area around the farm.

Australian Minister for Agriculture Barnaby Joyce, on September 15 during his visit to China, indicated that even if an FTA is signed (Note), the two countries will not compete in the agricultural sector because of limits on Australian agricultural production, saying, “Even if the two countries conclude an FTA by the end of 2014, 53 the FTA will not cause concern among Australian farmers. Considering the population of countries in Asia, Australia cannot become the supplier of food to Asia. We do not feel threatened by China, and we will provide high-quality food to China. Currently, Australia can supply food for only 60 million people, including exports, and so it is not possible for us even to supply the population of Australia and Harbin (in Heilongjiang Province, China). Even if Australia could double its production to provide food for 120 million people, that would be less than the population of our neighboring country Indonesia.”

-In FH2014, Two Large Mining Sector Projects Led- According to Trends in M&A: China Outbound Deals released in September 2014 by PricewaterhouseCoopers Co., Ltd. (PwC), China’s M&A in Australia grew to USD2.4 billion, up 42% in the first half of 2014, from USD1.7 billion in the second half of 2013. Of this, 88% was due to two projects, one of which was the acquisition for USD1,055.00 million of 77.2% of the remaining stock of the resource company PanAust Limited that mines copper and gold mainly in southeast Asia by Guangdong Rising Assets Management Co., Ltd. The other was the acquisition for USD1,041.00 million of 80.2% of the stock of the resource company Aquila Resources Ltd., which conducts coal and iron ore mining jointly with Baosteel Group Corporation and Aurizon Holdings Limited, an Australian rail freight transport company.

Andrew Parker, a partner at PwC, commented to The Australian (on September 17, 2014) that “Even if interest remains as strong as ever in the mining sector, in addition to growing Chinese investment in real estate and infrastructure, Australia's agricultural, health and consumer sectors are likely to be increasingly in play too,” indicating his view that Chinese investment will continue not only in mining but will spread to a wide variety of sectors such as real estate and agriculture, etc. Moreover, he said, “Many analysts predict that the Australia-China FTA, which is expected to be signed during the G20 in November when Xi Jinping, president of the PRC, visits Australia, will boost the investment amount screened by FIRB to AUD1,078.00 million, nearly the same amount as Japan and South Korea, for both privately owned and state-owned enterprises. According to Beijing sources, China is looking to spend some USD550 billion on foreign M&A in the next five years. The industrial modernization and urbanization that will take place in China during the same period will amount to USD11 trillion as estimated by PwC, or about six time the value of the Australian economy.” Moreover, he said, “China's ambassador to Australia described this as a goldmine for Australia. This is true in a sense, and by leading Australia’s stance toward foreign investment in the correct direction, we can enjoy the benefits of investment on a scale that rivals or exceeds that of the commodity price boom seen in the past 10 years.” Thus, he indicated his view that the Chinese direct investment that is expected to be forthcoming will bring significant benefits to Australia.

China’s Ningbo Dairy Group invested AUD15.00 million in the state of Victoria to purchase and renovate three farms. Currently, the group is exporting 10,000 liters of fresh milk per day from Melbourne and Sydney to China. In the future, the group wants to send workers from China to construct new dairy processing facilities, but deregulation is necessary to do that (i.e., relaxation of criteria for admitting workers).

54

In the negotiations on the FTA between China and Australia, the Chinese government is seeking the raising (relaxation) of the minimum foreign investment amount under the screening criteria, regardless of whether the company is privately-owned or state-owned. It is also seeking the relaxation of criteria for admitting Chinese workers. So, the Australian government must make some difficult decisions.

Note: On November 17, 2014, broad agreement was reached on the Australia-China FTA.

55

3. North America 3-(1) United States: Largest M&A Ever in the Food Sector

While Chinese direct investment in 2013 in the US declined statistically, it expanded significantly from the previous year when looking at individual cases. A Chinese company purchased a US company in the food sector for approximately USD7.0 billion, the highest price ever paid for a US company. The other large transactions were in the energy sector, but growth in the real estate sector also stood out. However, looking forward, there is a possibility that China’s investment fever will temporarily subside as those in political circles take a hardline stance toward China prior to the 2016 US presidential election. It is being pointed out that this stance will postpone until 2017 the signing of investment agreements which are being negotiated by the US and China to expand two-way investment.

-No Change in Trend toward Increased Investment in the US- According to statistics of the US Department of Commerce, Chinese direct investment in the US in 2013 (international balance of payment basis, net, flow) was USD2,419.00 million, down 30.7% YOY. The direct investment balance based on the idea of ultimate beneficial owner (UBO), which traces the source of the investment, was USD8,023.00 million. The US’s share of total inward direct investment was very small, at 1.0% of the flow and 0.3% of the balance (Note 1).

The China Investment Monitor published by the Rhodium Group (RHG), a private US research firm, is a useful reference for understanding the rapidly expanding investment by Chinese firms in the US (Note 2). According to it, Chinese companies’ investment in the US (not including withdrawals) has set new records every year since 2010 (refer to Figure 3-(1)-1). Moreover, investment in 2013 rose to USD14.0 billion, roughly doubling year-on-year.

In an interview with JETRO, Derek M. Scissors, a researcher with expertise in US-Chinese economics at the American Enterprise Institute, spoke about the long-term outlook, saying “The scale of Chinese investment in the US is very small compared to the scale of the US economy. Conversely, this means that there is room for investment to grow, and so China will probably continue to set new records each year in the future.” He points out, however, that there is real concern that the US-Chinese political relations could be a drag on that momentum. Scissors sees 2016 as a milestone year. He said, “It is expected that US politicians will take a hardline stance toward China in 2016 when the US presidential election will be held. If the Chinese misjudge the changes in US politics, failures may occur, such as when China National Offshore Oil Corporation (CNOOC) attempted to purchase Unocal Corporation in 2005 and when Huawei Technologies Co., Ltd., attempted to purchase the communications company, 3Leaf Systems, Inc. in 2011.

56 (cases)

Figure 3-(1)-1: Chinese Direct Investment in the US

16,000 140 123 金額（左目盛り） 14,000 14,000 Amount（left axis） 120 件数（右目盛り）Cases (right axis) 107 107 12,000 100 10,000 82 86 80 8,000 63 7,300

(USD million)(USD 60 6,000 55 4,800 37 41 4,600 40 4,000 35 21 23 11 15 2,000 1,700 2,000 20 747 179 178 345 58 37 98 67 0 0 2000 01 02 03 04 05 06 07 08 09 10 11 12 13

(Year）

Note: Withdrawals are not included.

Source: Rhodium Group (RHG)

-Wary of Chinese Investment While Still Welcoming It- In recent years, there has been a trend toward expansion of the scale of investments from China, and the sectors have also diversified. This trend became more pronounced in 2013. According to the above-mentioned China Investment Monitor, Chinese direct investment in the US in 2013 included 61 cases of green field investments totaling USD844.00 million and 46 cases of M&A totaling USD13,182.00 million. By sector, energy continues to claim a large share in terms of both cases and amount, the same as it has in the past, but entertainment and real estate have grown to match energy in the number of cases and are getting close in terms of amount.

In the food sector, the purchase of Smithfield Foods, Inc., the US’s largest processor of meat, by Shuanghui International Holdings Limited, set a record for Chinese M&As of US companies, at approximately USD7.0 billion.

In response to the Smithfield Foods deal, some US federal lawmakers insisted that the Committee on Foreign Investments in the United States (CFIUS) should include food safety in its review standards. The CFIUS is part of the Department of the Treasury, and it reviews whether or not foreign companies’ acquisition of US companies or assets pose a threat to US security. Although this case did not ultimately lead to a broadening of the standards, it will be necessary to keep an eye on protectionist trends in the US government in the future.

In Derek Scissors’ analysis of US sectors in which Chinese companies are interested, “The US has everything that Chinese companies want. What they are particularly interested in are technology and land.” When it comes to technology, it is not necessarily limited to hi-tech; any technology in any industry that Chinese companies do

57 not possess may be a target, and he points out that the Chinese are interested in technology for drilling shale oil and gas, a technology that the US has used for successful commercial production. In fact, there have been conspicuous cases in the last few years in which Chinese energy companies have purchased part of the interests in US shale resources. Regarding land, the US has an abundant supply of land that can be used for commercial and agricultural purposes, and when it comes to agriculture in particular, China has a history of contaminating its own land.

Scissors continued, “If we were to add another sector, the financial sector is also of interest to Chinese companies.” Generally, when a foreign company buys a financial company, it causes a big backlash, but because the US financial system is enormous, deals that are not so large are easily overlooked. He forecasts, “For some time in the future, Chinese companies will probably focus on these three sectors for investment.”

Meanwhile, Chinese investment which is surging in the US recalls memories of large investments by Japan in the 1980s, and some view it as a threat. In particular, the US Congress often opposes large foreign investments. Scissors analyzes this tendency, taking the purchase of Smithfield Foods as an example, “Members of Congress made a ruckus partly to boost their own political popularity and partly to warn the Chinese that it is a mistake to think they can have everything they want.” However, he noted that Chinese companies’ investment in the US can also be a positive factor for the US economy that creates domestic employment, and he offered the view that “if there is no problem security-wise, permission should be granted right away, and instead we should look closely at how Chinese companies operate US companies after they purchase them.”

-View That the Negotiating Environment Will Not Be Right until 2017- The US and China are currently negotiating to prepare for the signing of a bilateral investment treaty (BIT). While the US anticipates that China will open up its service industry market, the main aim of the Chinese is considered to be the securing of a safety valve for their purchases of US companies which frequently become political problems in the US. In July 2013, negotiations at the 5th U.S.－China Strategic and Economic Dialogue (S&ED) made great progress when China agreed to adopt the negative list approach (Note 3) for liberalization of industries where foreign investment is permitted. Furthermore, at the 6th S&ED negotiations also in July 2013, they agreed “to put in written form, by the end of 2014, the main issues of the treaty and the main provisions in the treaty document” and “to start negotiations on the negative list in 2015.”

While some take a positive stance toward these movements, Scissors thinks that negotiations on the US-China BIT probably will not be concluded until 2017. He thinks, “Currently the Xi Jinping Administration is strengthening enforcement of the anti-monopoly law against foreign companies as part of an anti-corruption movement. There is no chance that negotiations can be concluded in such an environment where US companies are being treated unfairly. I think that the negotiations will move forward when the anti-corruption movement quiets down, but in 2016, the year of the US presidential election, I expect that US politicians will, conversely, take a hardline toward China. Therefore, the environment will not be right for negotiations until 2017.”

Note 1: Department of Commerce statistics sometimes vary widely due to the timing of integration of

58 investment projects and revisions. Note 2: These materials are based on fDi Markets, a database of the Financial Times, for green field investment and on Thomson One, a Thomson Reuters’ database, for M&A, with the addition of information from various business-related media reports and the industrial world. Note 3: This approach opens all sectors except for those that are listed as exceptions. Compared to the positive list approach that opens only those sectors that are designated, a much larger degree of liberalization is generally achieved.

59

3-(2) Canada: Revision of Investment Law Puts Brakes on Investment; Cases Sudden Drop

Chinese direct investment in Canada in 2013 fell sharply due to stronger restrictions on foreign investment under Canada’s new investment law and delays in development of oil sands. While acceptance of foreign capital is essential for resource development in Canada, one can also glimpse Canada’s sense of caution regarding Chinese business.

-Cautious Stance in Trade and Investment with China- Canada’s investment law was amended in December 2012, tightening regulations on direct investment in Canada by state-owned enterprises. Under the new investment law, purchases of Canadian companies by foreign state-owned companies are not recognized as a rule, and investments more than CAD354.00 million are subject to periodic reviews by the Canadian government. Thus, the law discourages foreign investment in Canada.

Due to this legal revision, Chinese investment in 2013 dropped sharply in terms of both cases and amount. According to Statistics Canada, the balance of direct investment increased. However, according to research by the Heritage Foundation, Chinese companies’ direct investment in Canada (cumulative of individual transactions) declined from USD21,570.00 million in 2012 when the oil sands company Nexen was purchased by China National Offshore Oil Corporation (CNOOC) to USD220.00 million in 2013. In contrast to most years when all investment tends to be concentrated in the energy sector, investment in other fields was conspicuous.

There is much criticism against the new investment law, and Jim Prentice, premier of the province of Alberta (former Minister of Industry), stated, “The new law sends the message that state-owned enterprises are not welcome as future investors. It practically stopped investment from China in the oil and gas sector.” Moreover, the decline in the Harper Administration’s political interest in China is also said to encourage Canadian companies to be wary of trade and business initiatives with China. Yuen Pau Woo, distinguished fellow (and previous president) at the Asia Pacific Foundation of Canada, criticizes the government’s stance, saying “Delay in putting the investment agreement with China into effect and lack of interest in promoting free trade are spurring doubts about China.”

-Delay of Oil Sands Development Also a Factor- The delay of oil sands development is also a factor in the decline of corporate investment activities. Development of oil sands in Canada is fettered by the doubling of management and operation costs, revisions in the royalty system, increases in compliance cost, stricter environmental regulations, delay of pipeline approval, public backlash about the environmental burden, and intensification of competition with the US and other countries. So in an increasing number of cases, investment is pausing or retreating. Not only China but also other countries such as South Korea and Saudi Arabia have little interest in additional investment in the oilfields, and instead they are placing priority on increasing the efficiency and boosting the profit ratio of their existing investments. As one example, China National Petroleum Corporation (PetroChina) agreed to pay CAD1,320.00 million to

60 acquire an interest in the Dover Oil Sands Project of Athabasca Oil Corporation (in Calgary, Canada), but due to a change in policy by the operating company, the payment scheduled for June 2014 was postponed. As a result of re-negotiation, the final investment amount was smaller than that initially planned, at CAD1,184.00 million.

China Petrochemical Corporation (Sinopec), China Life Insurance (Group) Company, Bank of China, and China Investment Corporation jointly hold approximately 58% of the stock of Suneshine Bank, but the additional investment necessary for working capital and debt repayment (estimated at CAD500 million) for the West Ells project in northern Alberta has been cut off. The project has been temporarily halted because it cannot pay its creditors and suppliers.

Sinopec is currently studying the possibility of selling all its interests in the oilfield development project called Northern Lights Oil Sands Project where it holds a 50% interest and withdrawing from the project. Sinopec has invested approximately CAD7.0 billion over the 10 years since 2005 in Canada’s oil sands projects, but because the economic viability is poor, the company’s stance toward oil sands development is growing negative. Meanwhile, accompanying the progress of the LNG export project in British Columbia on the west coast, Sinopec’s interest has turned to LNG development, which imposes less of an environmental burden. In April 2013, Sinopec newly acquired a 15% stake in the Pacific Northwest LNG Project led by the Malaysian state-owned oil company Petroliam Nasional Berhad (Petronas).

-Investment Agreement with China Finally Put into Effect- On the other hand, there is also movement to promote investment with China. There was a delay in the effectuation of the Foreign Investment Protection and Promotion Agreement signed by China and Canada in September 2012, but it did go into effect two years after it was signed, in October 2014. When it was signed, the framework of legal rights and restrictions related to promotion of foreign companies’ investment was solidified, and subsequently although China ratified it, ratification by Canada was delayed. The opposition party, the New Democratic Party (NDP), indicated its concerns about this agreement, saying “This could give the same rights to Chinese state-owned enterprises that private companies have. This will probably give China access to and management of Canada’s natural resources.”

61

4. Central and South America 4-(1) Brazil: Investment in Auto Industry and Infrastructure Sector is Prominent According to the Central Bank of Brazil, Chinese investment in Brazil shot up from 2007 until 2010 and subsequently has trended between USD100 million and USD200 million. However, it is said that most investment by Chinese companies is via third countries, and so the actual investment amount is considered to be much larger. As a recent feature, there has been a shift from investment in primary industries such as purchases of companies in oil and mineral resources and investment in raw materials suppliers toward investment in infrastructure such as communications as well as capital goods and the auto industry.

-Most Chinese Investment Is Via Third Countries- Looking at Chinese investment over the past 10 years according to the central bank’s statistics, it was USD4.00 million in 2004, USD8.00million in 2005, and USD7.00million in 2006, but it rose sharply starting in 2007 to peak in 2010 at USD395.00 million (refer to Figure 4-(1)-1).

Figure 4-(1)-1: Trends in Chinese Investment

450 400 395 350

300 250 185 200 179 150 110 100 83 (USD million) (USD 50 0 2009 10 11 12 13 （Year）

Source: Central Bank of Brazil.

Since investment is counted as being from the third country when it is conducted via a third country not only in the case of China but in all such cases, it is difficult to determine the full extent of Chinese foreign investment from the central bank’s data. Much of the investment from China to Brazil appears to be conducted through tax havens such as the Virgin Islands.

Inward direct investment by country/region in 2013 starting from the highest was the Netherlands (USD10,511.00 million), US (USD9,021.00 million), Luxembourg (USD5,067.00 million), and Chile (USD2,963.00 million). Looking at the investment surge from China in 2010, the Central Bank of Brazil’s data shows it to be USD395.00 million, but Banco Bradesco, a major Brazilian bank, says that investment from China (including Hong Kong) was USD7,348.00 million in 2010 and USD245.00 million in 2013. The reason for the large amount of investment in 2010 is that China Petrochemical Corporation (Sinopec Group) acquired

62

40% of the Brazilian subsidiary of the Spanish oil company Repsol for USD7, 100.00 million.

-Investment Also in Human Resources Training- According to the August 2014 report of the Conselho Empresarial Brasil-China (China Brazil Business Council), in recent years, investment has stood out in industrial sectors including automobiles as well as infrastructure sectors such as electric power.

As examples, in July 2012, China National Heavy Duty Truck Group Co., Ltd., built a knock-down plant for trucks for USD150.00 million. In August 2014, Chery Automobile Co., Ltd., spent USD400.00 million to become the first Chinese auto manufacturer to build an auto plant, and it also built a new engine plant (USD130 .00million) on adjacent land. Exame, a local newspaper covering economic news, reported that Anhui Jianghuai Automobile Co., Ltd., plans to build a plant with production capacity for 100,000 vehicles per year for 1.0 billion real (BRL) (approximately JPY46.0 billion; BRL1 = approximately JPY46) in the state of Bahia in the northeast in 2015.

In the electric power infrastructure sector, China Three Gorges Corporation purchased one-third of the stock of a hydroelectric power generation project in São Manuel from Energias de Portugal (EDP) in April 2014. Moreover, the world’s largest electric power transmission company, State Grid Corporation of China (SGCC) put together a consortium with Furnas and Eletro-norte to bid on an electric power transmission network from the state of Para to Sao Paulo and invested BRL4.5 billion, equivalent to 51% of the total. The company already holds the management rights for over 6,000 kilometers of electric power network lines in the country.

It appears that investment from China will continue in the future. In July 2014, a Brazil-China Summit Meeting was held, and a local newspaper reported that Brazilian President Dilma Vana Rousseff and PRC President Xi Jinping signed an agreement covering 32 items. The agreement covered a wide variety of items, including mining, energy, and finance. In addition to participation by a consortium including a large Brazilian general contractor and a Chinese company in bidding on a railway network construction project and cooperation between companies of both countries in infrastructure-related and hydroelectric power projects, memorandums of understanding are being exchanged among companies on cooperation, exchanges, and technical tie-ups, and investment in education and human resources is also included.

63

5. Europe and Russia 5-(1) Great Britain: Active Large-scale Investment; Advances in Closer Economic Cooperation

According to UK Trade & Investment (UKTI), the number of cases of investment from China in FY2013 (April 2013-March 2014) was 88 cases, an increase of 25.7% YOY. At the UK-China Summit Meeting held in London on June 17, 2014, agreement was reached on strengthening economic cooperation including supply of liquid natural gas (LNG) to China, expansion of Chinese investment in British infrastructure development, and promotion of renminbi transactions in Britain. Following the 6th UK-China Economic and Financial Dialogue held on September 12, the economies of the two countries grew closer, with Britain announcing that it would issue the first renminbi-denominated government bonds outside of China.

-China Ranks 6th in Cases of Investment in Britain by Country/Region- According to the 2012 (most recent) direct investment statistics issued by the Office for National Statistics (ONS), Chinese direct investment was 193.00 million pounds (GBP) (approximately JPY36,284.00 million at GBP1 = approximately JPY188) (the figure for 2011 has not been released; the figure for 2010 is GBP9.00 million). According to UKTI, there were 88 cases of Chinese investment in FY2013, up 25.7% YOY, putting China in sixth place by country/region (seventh place in FY2012) (refer to Figure 5-(1)-1).

Figure 5-(1)-1: Inward Direct Investment in Britain and Number of Employees (units: cases, persons, %) FY2011 FY2012 FY2013 Rank Country/Region Cases Employees Cases Employees Cases Employees YOY YOY 1 US 336 37,525 396 17.9 48,802 501 26.5 32,488 2 Japan 88 7,818 114 29.5 7,442 116 1.8 5,049 3 France 65 12,038 93 43.1 16,001 110 18.3 19,077 4 Germany 66 4,994 78 18.2 14,589 102 30.8 8,805 5 Canada 59 1,342 63 6.8 21,208 89 41.3 2,857 6 China 92 2,116 70 − 23.9 3,409 88 25.7 5,450 7 India 81 5,454 89 9.9 7,255 74 − 16.9 4,563 8 Italy 98 1,673 93 − 5.1 6,892 70 − 24.7 3,807 9 Australia 51 1,500 61 19.6 1,297 69 13.1 2,687 10 Ireland - - 45 n.a. 2,809 55 22.2 1,828 Total (including “Other”) 1,406 112,659 1,559 10.9 170,096 1,773 13.7 111,361 Note: The number of employees includes those who avoided unemployment and whose jobs were safeguarded by mergers and acquisitions, in addition to newly hired employees. Source: UK Trade & Investment (UKTI).

According to UKTI and other sources, investments in FY2013 include the following. The major Chinese auto manufacturer Geely Automobile purchased Manganese Bronze Holdings PLC, which manufactures the London taxis familiarly known as “black cabs,” for approximately GBP11.00 million in February. In addition, Sunseeker International Limited, a luxury yacht manufacturer, was purchased by Dalian Wanda Group, a major real estate

64 company, and there were real estate projects (totaling approximately GBP700.00 million) including construction of the Wanda Hotel, a five-star hotel that is the first overseas luxury hotel by a Chinese hotel company. In October during a China business mission led by George Osborne, Chancellor of the Exchequer, Beijing Construction Engineering Group (BCEG) announced that, through a joint venture by Carillion Plc and the Greater Manchester Pension Fund, it was chosen to develop Europe’s largest office building and commercial complex at Manchester City Airport. The total construction cost is expected to be GBP800 million.

In January 2014, the large Chinese developer Greenland Group acquired the old factory site of RAM Brewery and announced a development plan for housing and commercial facilities, which is the first in Britain for the company. In June, another major company, China Life Insurance Company, acquired a 70% interest in a high-rise building with over 90,000 sq. meters of floor space located in London’s Canary Wharf. Such real estate investments have followed one after the other, and the trend is expected to continue. Moreover, in September, Nanjing Xinjiekou Department Store Co., Ltd. (“Nanjing Cenbest”), part of the Chinese conglomerate Sanpower Group, announced that it had acquired approximately 89% of the stock of the House of Fraser, a long-established UK department store. The corporate value of the House of Fraser is approximately GBP480.00 million, which makes it the largest purchase of a foreign company in the Chinese retail world.

-Settlement in Renminbi Possible in London Market- Li Keqiang, premier of the PRC, paid a formal visit to Britain during June 16-19, 2014, and at the summit meeting with Prime Minister Cameron on June 17, 2014, he agreed to strengthen cooperation in economic fields, mainly including energy, finance, and infrastructure. In particular, attention was attracted by the contract for British Petroleum to supply China National Offshore Oil Corporation (CNOOC) with 1.50 million tons of LNG annually for the next 20 years until 2019, equivalent to GBP12.0 billion. In the financial sector, the London market became the first market outside of Asia to enable settlements in renminbi. It became possible to deal directly in pounds and renminbi, and in addition, China Construction Bank was designated at the handling bank. In the infrastructure sector, Prime Minister Cameron displayed a welcoming stance toward Chinese investment in infrastructure, including the promotion of participation of Chinese companies in a project to newly construct a nuclear power plant in Britain and the signing of a memorandum of understanding (MOU) concerning the design and construction of railways, including the new high-speed rail plan (HS2). The trade and investment agreements signed at the meeting amounted to a total of GBP14.0 billion.

The two countries are taking steps to actively support investment promotion. As an example, Oliver Letwin, Minister for Government Policy at the Cabinet Office, announced the Chinese Enterprises Investment Guide to the UK (2014) at the British Embassy in Beijing on March 25. This guide, which was prepared mainly by the Institute for International Economic Research under the National Development and Reform Commission, is the first foreign investment guide for Chinese companies.

65

5-(2) Germany: Investment Amount Remains Low; Uptrend in Number of Cases

Chinese companies have a strong interest in Germany. Although direct investment in Germany has remained at a low level, there has been a conspicuous increase in the number of cases of investment. The main aim of the Chinese companies is to acquire superior technology and know-how by purchasing German companies. There are also many benefits for the German companies, and they are by no means reluctant about being purchased by Chinese companies.

-Investment withdrawals in Manufacturing Industry in excess- The economic relationship between Germany and China is becoming closer in recent years. Looking at trends in trade, Germany’s 2013 exports to China amounted to 67,025.00 million euros (EUR), or three times the EUR21,235.00 million of 2005. The import amount also increased significantly, at EUR73,701.00 million in 2013. China is Germany’s fifth largest export destination and the second largest source of imports, making China one of Germany’s most important trading partners. As a symbol of the stronger economic relationship between the two countries, it is worth mentioning the opening of the first Chinese Chamber of Commerce in the EU in Berlin in January 2014.

Looking at investment trends in both countries, German companies’ investment in China remains conspicuous, but Chinese companies’ investment in Germany currently remains at a low level. According to an announcement in June 2014 by the Deutsche Bundesbank, China’s inward direct investment in 2013 (net, flow) was EUR4.00 million, a significant decrease from EUR697.00 million in 2012.

Looking at Chinese investment by industry, investment in the service sector was EUR46.00 million, consisting primarily of specialized services including law, accounting, and patent offices, etc., (EUR53.00 million) and finance and insurance (EUR36.00 million). Investment withdrawals in manufacturing were in excess in continuation from 2012. Investment in machinery increased, but investment withdrawals in chemicals, metals, autos and auto parts were in excess across the board.

-Increase to 139 Cases of Investment- The amount of investment from China remains as low as ever, but the number of cases of investment is increasing. According to a report by Germany Trade & Invest (GTAI), there were 139 cases of investment by Chinese companies in 2013, up from 98 cases in 2012. Looking at investment projects by industry, the top industries were electronics and semiconductors at 16%, industrial machinery at 13%, and consumer goods including food and alcoholic beverages at 11%.

Looking at recent examples of Chinese companies’ investment, the food packaging manufacturer Greatview opened its first plant outside China in the eastern part of the state of Sachsen-Anhalt in June 2013, and in addition, China International Marine Containers (Group) Ltd., (CIMC), a major manufacturing of commercial vehicles, bought Ziegler, a manufacturer of fire engines that had gone bankrupt, in November 2013 for EUR55.00 million.

66

In addition, Times New Material Technology (TMT), a manufacturer of parts for railways and autos, agreed in December 2013 to purchase the rubber and plastics operations of ZF Friedrichshafen AG, a large auto parts manufacturer, and start a new company, which began operation as BOGE Elastmetall on September 1, 2014, as reported in the newspaper Neue Osnabrücker Zeitung on September 1. The management and employees remain unchanged.

There were also cases of investment in the renewable energy sector. Astronergy, a manufacturer of thin solar panels, purchased the solar module production plant, in Frankfurt-on-the-Oder in the state of Brandenburg in eastern Germany, from Conergy Global Solutions GmbH, a major solar company, in December 2013. This investment created jobs for 210 persons.

In 2014, Chinese investment continued to be active. Power Construction Corporation of China (POWERCHINA), a major provider of electric power service, purchased TLT-Turbo GmbH, an industrial fan manufacturer in the Siemens Group, in February 2014.

Furthermore in May AVICEM, a subsidiary of the state-owned enterprise Aviation Industry Corporation of China (AVIC), announced its purchase of Hilite, a manufacturer of auto engine parts. In addition to Germany, Hilite has bases in the US and China, and as of May, it had 1,370 employees. The CEO of Hilite, Karl Hammer, talked about the benefits of the purchase for AVICEM, saying, “AVICEM and Hilite are ideal collaborative partners. By joining with AVICEM, Hilite will maintain its current momentum and will build a sustainable growth platform. Hilite’s superior technology and know-how will complement AVICEM’s powertrain product group.” AVICEM also purchased KOKI TECHNIK Transmission Systems GmbH (KOKI), a manufacturer of auto transmission parts, in July 2014. In a press release about the purchase, KOKI announced concerning its tie-up with AVICEM, “We will form a base for sustainable growth and internationalization, both in Europe and in China, where the auto market is undergoing conspicuous growth.” After the acquisition, KOKI’s offices and plants, employees, and management will remain the same as before.

-Benefits Also for the Purchased German Companies- Chinese companies’ aim in purchasing German companies, in addition to acquiring superior technology, and know-how and their customer network, is to have the brand power of the “Made in Germany” label on their companies’ products.

Meanwhile, there are strong concerns in Germany that acquisitions by Chinese companies will lead to massive personnel reductions and plant closures, and much of the coverage in the media is negative. However, as presented in the case of the purchase of AVICEM, an increasing number of German companies are actually seeing acquisition by Chinese companies as a chance for further business growth and internationalization. PricewaterhouseCoopers Co., Ltd. (PwC) conducted interviews with 22 German companies that had been purchased by Chinese companies concerning why they agreed to the purchase and developments following the purchase. The results were released in August 2013. As reasons why they agreed to the purchase (selected from

67 multiple-choice answers), 12 companies responded, “We were looking for outside investors to actualize our growth strategy.” In addition, companies experiencing management difficulties and companies that had found no management successors were also positive regarding acquisition. Eight companies responded, “Reconfiguration (of the company and business) was necessary” and three companies responded, “We were looking for a management successor.” Concerning the number of employees following the purchase, seven companies said that the number of employees “increased,” twelve said “no change,” and three said they “decreased.”

68

5-(3) France: Movement toward Expanding Operations in Africa by Acquiring French Companies

Chinese direct investment in 2013 in France was approximately EUR500.00 million, which represents an excessive withdrawal, but there were 33 cases, continuing a favorable trend from the previous year’s 31 cases. In addition to luxury brands, there were prominent cases in the manufacturing industry in which the purchased companies launched reorganization. A trend is also visible in which Chinese companies aim to expand operations into Africa by purchasing French companies.

-Lively Investment in Luxury Brands- According to Invest in France Agency (AFII), there are already 310 Chinese companies employing around 16,000 workers in France. Since 2009, cases of investment have risen rapidly, and every year there are just over 30 cases of new investment. The withdrawals of inward direct investment in 2013 (international balance of payment basis, net, flow, investment via third country not included) were in excess, approximately EUR500.00million (according to Banque de France), but there were 33 cases (including three from Hong Kong) of investment in France by Chinese companies, a strong showing following the 31 cases in the previous year.

What attracts the robust interest of Chinese investors in France is luxury brands. In the past few years, there has been an ongoing trend toward buying producers of Bordeaux wine, which is popular in China. In 2013, Château Loudenne and Chateau de Lugagnac became Chinese-owned. In Bordeaux since 2008, it is said that over 80 chateaux have been purchased by Chinese investors.

There are also companies that have aimed to establish a luxury brand by opening a shop in Paris. The Chinese brand TTF opened its first shop outside China in September 2013 in Paris’ Place Vendôme where luxury jewelry shops are concentrated. TTF said, “Paris is internationally regarded as the capital of luxury jewelry. It is a strategic location where we can access jewelry-related brand marketing, design, jewelry techniques, and superior human resources.” The company plans to invest EUR10.00 million over the next 10 years.

-Expansion of Sales Channels through Purchased Companies- In the manufacturing industry, the objective in purchasing French companies is often to expand sales channels and acquire technology. Manoir Industries, a manufacturer of cast products, sold its metal processing operations for nuclear power, petrochemicals, and railways, because they were positioned as non-strategic sectors, to Yantai Taihai, a giant Chinese forged steel products company, in June 2013. Manoir Industries is a subcontractor of Areva, France’s major nuclear power company, and it manufactures parts for the nuclear power plant steam generators that Areva delivered to Électricité de France (EDF). Through the purchase of these operations, Yantai Taihai became the world’s largest manufacturer of forged steel products for nuclear power plants. Using the brand name of Manoir Industries, Yantai Taihai plans to expand its sales channels to India and the Middle East, in addition to Europe.

Moreover, China’s Maanshan Iron & Steel Co., Ltd., announced its acquisition of Valdunes, a France’s manufacturer of wheel axles for railways, for EUR13.00 million in June 2014. Valdunes possesses specialized

69 manufacturing technology for axles for high-speed rail such as the TGV by Alstom, France’s heavy electric railway giant. Valdunes has performed poorly stemming from reasons related to the European debt crisis, and it was proceeding with bankruptcy and reorganization. Maanshan Iron & Steel Co., Ltd., will invest EUR50.00million over the next five years to modernize Valdune’s production facilities. Valdune will control the axles for high-speed rail in Europe.

Furthermore, Chinese companies that have invested in French companies are considered likely to increase their exports to, and investment in, third countries in the future. In the nuclear sector, China General Nuclear Power Group (CGN) and China National Nuclear Corporation (CNNC) which has joined with EDF and Areva, succeeded in receiving the contract for the construction of Hinkley Point C Nuclear Power Station in southwest England in October 2013.

- Bank’s Paris Branch Supports Africa-related Business- There is also movement aimed at expanding operations in Africa by acquiring French companies. China’s largest container terminal operator, China Merchants Holdings (International) Co., Ltd., (CMHI) announced that it acquired 49% of the shares of Terminal Link, a subsidiary of the CMA CGM Group, a French maritime container shipping giant, in January 2013. Terminal Link, with headquarters in Marseille in southern France, is developing its container terminal operations in Côte d'Ivoire (Abidjan) and Morocco (Tangier, Casablanca in Africa). Through Terminal Link, CMHI plans to strengthen its establishment of operations on the African continent. CMHI already began operation of container terminals in Nigeria in 2006 and in Togo and Djibouti in 2012.

In the air transport sector, HNA Group Co., Ltd., the parent company of Hainan Airlines, Ltd., invested in 2012 in Aigle Azur Airport, whose main strength is medium-distance routes in France and northern Africa. After it started a route connecting Beijing and northern Africa via Paris, the company launched an expansion of its African operations by purchasing ESMA Aviation Academy, a pilot training school in France, in August 2013 and broadening the places from which it accepts trainees to include China and Africa.

While Chinese companies proceed to advance in Europe and Africa, the Export-Import Bank of China opened its first foreign branch in Paris in October 2013. According to AFII, in addition to financial intermediary operations for Chinese companies in France and the rest of Europe, the branch overseas trade, investment, and finance in Africa and French-speaking countries as well. The branch says that approximately one-quarter of all its operations are Africa-related, and it decided to open in Paris because it is difficult to conduct business in some African countries due to deteriorating safety and because transportation to and from Paris is convenient and French is spoken in many African countries.

Entry of Chinese capital is conspicuous in the luxury hotel industry where, until now, capital from the US and Middle East was prominent. In June 2014, Kai Yuan Holdings Limited, a Hong Kong investment company, announced its purchase of the Paris Marriott Champs-Elysees Hotel for EUR344.50 million. In August, Hongkong and Shanghai Hotels, Limited, which operates luxury hotels, opened the Peninsula Paris, the first in

70

Europe, in an upscale district near the Arc de Triomphe in a joint venture with Qatar capital. Paris, which is the world’s largest tourist city, is known for the high occupancy rate of its luxury hotels. As Chinese tourists increase in the future, Chinese capital is likely to expand to four- and three-star hotels as well.

-Chinese Companies Expected to Expand Investment in France- Overall, the reaction is that “Chinese companies’ investment is a positive thing for France’s economy and for employment.” The AFII’s report on a survey of Chinese companies in France (released March 2014) gives the following assessment: “The majority of Chinese investment is being managed from a long-term perspective. They will not decide to withdraw based on short-term criteria such as business fluctuations.” Chinese companies in France also state, “We are observing Frances labor and environmental regulations.”

France’s major economic newspaper, Les Echos, ran the headline “Welcome! When China Invests in France” in February 2014 for a special feature article that validated the acquisitions of French companies by Chinese companies. In the newspaper’s analysis, when French and Chinese companies partner together, “French companies can secure capital and the (Chinese) market, and Chinese companies can secure “French companies’) know-how and new sales channels, making it thus mutually beneficial.” Amidst the continued economic downturn and no bright signs in the employment situation, there is growing interest in France in Chinese companies’ expansion of investment in France.

71

5-(4) Russia: Finance and Real Estate Expand with Growth Just Under 20%

According to Russia’s Federal State Statistics Service, Chinese direct investment in Russia in 2013 was USD253.77 million, up 19.6% YOY. By country, the component ratio of the balance of Chinese direct investment stopped at just over 1%. Both Russia and China expect to increase Chinese direct investment in Russia by sevenfold by the year 2020. Potential for investment expansion is considered to exist in sectors such as autos, resources and energy, and transportation and infrastructure development.

-Balance of Chinese Direct Investment in Russia in 2013 up 14.9%- Inward direct investment in 2013 (reported basis, gross, flow) was USD26,118.00 million, up 39.9% YOY. Of that, China’s was USD253.77 million, up 19.6% YOY, with a component ratio of 1.0% (refer to Figure 5-(4)-1). By industry, the financial industry was up 72.4% YOY and accounted for 21.7% of the total, while real estate transactions increased by 1.9 times to account for 19.6% of the total, followed by construction (18.9%), mining (12.9%), and manufacturing (10.7%).

Figure 5-(4)-1: Chinese Direct Investment in Russia by Industry (reported basis, gross, flow) (units: USD thousand, %) 2012 2013 Amount Amount Component Ratio YOY Construction 54,363 47,961 18.9 − 11.8 Mining (including resource and energy mining) 45,642 32,640 12.9 − 28.5 38,091 27,114 10.7 − 28.8 Lumber processing 30,783 636 0.3 − 97.9 Metals and substitutes 3,061 － － － Non- metal mineral processing 1,263 2,030 0.8 60.7 Leather goods and shoes 604 299 0.1 − 50.5 Textiles 279 5,872 2.3 2004.7 Manufacturing Rubber and plastic products 154 10 0.0 − 93.5 Food processing 84 － － － Chemicals 5 0 0.0 − 100.0 Electric, electronic, and optical － 21 0.0 － instruments Other 1,858 1,687 0.7 − 9.2 Finance 31,873 54,953 21.7 72.4 Real estate transactions 17,287 49,752 19.6 187.8 Agriculture, forestry, and livestock 13,250 24,235 9.6 82.9 Retail, wholesale, and auto repair 6,902 9,734 3.8 41.0 Transport and communications 4,665 6,333 2.5 35.8 Hotel and restaurant 142 982 0.4 591.5 Total (including “Other”) 212,236 253,765 100.0 19.6 Source: Russia’s Federal State Statistics Service.

The balance of inward direct investment at the end of 2013 (reported basis) was USD126,051.00 million, down 7.3% YOY (refer to Figure 5-(4)-2). By country/region, Cyprus accounted for 35.5% of the total, followed by the Netherlands (18.8%), and Germany (10.1%). Investment from China was USD1,679.00 million, up 14.9% YOY, which was 1.3% of the total and put China in 11th place by country/region.

72

Figure 5-(4)-2: Balance of Inward Direct Investment by Major Country/Region (reported basis) (units: USD million, %) End of 2012 End of 2013 Amount Amount Component Ratio YOY Cyprus 52,770 44,781 35.5 − 15.1 Netherlands 21,248 23,723 18.8 11.6 Germany 11,388 12,704 10.1 11.6 British Virgin Islands 8,357 4,415 3.5 − 47.2 India 2,960 3,372 2.7 13.9 Austria 3,064 2,967 2.4 − 3.2 US 3,676 2,831 2.2 − 23.0 France 3,260 2,746 2.2 − 15.8 UK 3,315 2,726 2.2 − 17.8 Switzerland 2,483 2,675 2.1 7.7 China 1,461 1,679 1.3 14.9 Japan 1,240 1,296 1.0 4.5 Total (including “Other”) 136,018 126,051 100.0 − 7.3 Source: Same as Figure 5-(4)-1.

-Amount of Chinese Investment to Increase Sevenfold by 2020- At the meeting of the China-Russia Investment Cooperation Committee held in Beijing in September 2014, Chinese Vice Premier Zhang Gaoli, together with pointing out that “the rapid development of Chinese-Russian relations is leading to the expansion of the bilateral cooperative relationship in investment and the financial sector,” also said, “Chinese direct investment in Russia is continuing the lively activity seen in 2014. The total amount of Chinese investment in Russia heretofore has reached USD32.0 billion, making China the fourth largest investor in Russia.”

At the same meeting, Russian First Deputy Prime Minister Igor Shuvalov commented on the expansion of the investment relationship between the two countries, saying, “To expand the investment relationship of our two countries, Russia plans to prepare new sectors for Chinese companies that are eager to invest and to provide the most advantageous investment terms and conditions as well as financial services (Reported by China and Russia Trading Association, September 10).

Prior to this, on May 16, 2014, at talks that coincided with the Meeting of APEC Ministers Responsible for Trade (MRT) in Qingdao, China, Alexey Ulyukaev, Minister of Economic Development of the Russian Federation, and Gao Hucheng, Commerce Minister of China, emphasized that mutual investment will be a new starting point for the economic growth of Russia and China. Through projects already in progress, it is anticipated that Chinese direct investment in Russia will increase sevenfold by 2020.

-Potential in Autos, Natural Resources, and Energy Sectors- In an interview with Chinese media during his visit to China in May 2014, Russian President Putin stressed that expansion of the cooperative relationship with China is a priority in Russia’s foreign policy. He said that it is necessary to focus on promotion of investment between the two countries, and listed autos, agricultural products processing, natural resources and energy, and development of transportation infrastructure as sectors with potential. Moreover, examples of successful investment cooperation by the two countries include 73 reconstruction of the airport in Kaluga Oblast (subcontractor: Petro Haihua) and construction of auto parts manufacturing plants also in Kaluga Oblast (Fuyao Glass Corporation’s auto glass plant and Yapp’s plastic fuel tank manufacturing plant) (Russian Presidential Executive Office website, May 19, 2014).

Fuyao Glass Corporation signed an investment agreement in June 2011 with Kaluga Oblast concerning “implementation of a construction project for an auto glass manufacturing plant.” In September 2013, the opening ceremony of the plant was held, and manufacturing began. The amount invested in this project was USD200.00 million. The largest investment project in the auto sector which started in 2014 is the construction of an auto manufacturing plant of Great Wall Motor Company Limited in Tula Oblast. This plant is the first Chinese auto manufacturing plant in Russia. It is scheduled to start production in 2017 and is expected to have a production capacity of 150,000 vehicles annually. The total investment amount is USD500.00 million.

Natural resources and energy also comprise an important sector for Chinese-Russian investment. The large Chinese coal production company China Shenhua Energy Company Limited reached an agreement in March 2013 with En+ Group Ltd., a Russian company that runs mining operations, and the China Development Bank to cooperate on coal, energy, and infrastructure-related projects in Russia. In December 2013, Razrez Ugol LLC Company, a joint venture of China Shenhua Energy Company Limited and Vostsibugol in the En+ Group, acquired coal mining rights in the Transbaikal region (Siberian Federal District).

China Shenhua Energy Company Limited signed a memorandum of understanding (MOU) with Russia’s RT Globalnye resursy concerning implementation of a project involving coal mining in Amur Oblast. In addition to coal mining, both companies agreed to construct a coal port terminal called Port Vera in the coastal region. Construction is scheduled to being in 2015.

Chinese companies also have an interest in infrastructure-related projects in Russia. In May 2014, China Railway Construction Corporation Limited (CRCC) and the China International Fund Limited (CIF), which is based in Hong Kong, signed an agreement with Mosinzhproekt, a company owned by the city of Moscow, concerning construction of subway lines in Moscow. The plan calls for new lines that will extend 14.9 kilometers and include six stations. If construction begins in 2015, then it will be complete in 2017 at the earliest. The amount invested in the project is expected to be 2.0 billion rubles (RUB) (approximately JPY5.0 billion at RUB1 = approximately JPY2.5) (Ria Novosti, May 21, 2014).

74

6. Middle East and Africa 6-(1) Iran: Expansion Centered around Infrastructure and Energy

Since the Rouhani Administration came to power, there has been heightened interest among foreign companies, and particularly among Chinese companies and investors, in Iran. Their main interest lies in infrastructure and energy, and they are becoming involved in railway electrification projects and the petrochemical business. If agreement is reached in the nuclear talks and economic sanctions are lifted, then significant expansion of direct investment can be expected in the future.

-Energy Poured into Attracting Funds and Technology- The Organization for Investment, Economic and Technical Assistance of Iran (OIETAI) of the Ministry of Economic Affairs and Finance is pouring energy into attracting funds and technology from outside the country. Moreover, the ministry announced a comprehensive package to promote investment up to March 2015 based on the 5th Economic Development Plan (March 2010 – March 2015), and its plan is to strengthen support for investors. Introduction of foreign funds and technology is expected to jump if final agreement is reached in the nuclear talks between Iran and six countries (P5+1) including the five permanent members of the UN Security Council and Germany and the economic sanctions are lifted because the sanctions hare limited foreign companies’ introduction of know-how, services, management, and technology. According to the Fars News Agency, Behrouz Ali Shiri, former Vice Minister of Economy and Finance (former president of the Organization for Investment, Economic and Technical Assistance of Iran, currently advisor), announced on July 7, 2014, that inward direct investment in FY2013 (March 2013-March 2014) reached USD3,317.00 million.

-Entry One after Another into Large Projects- According to Iran Daily, Mohammad Ali Abrishami, Deputy Minister of Industries and Mines , and Managing Director of Iran Small Industries and Industrial Parks Organization (ISIPO), announced on May 7 that China will construct an industrial park using Iranian labor. The aim of this project is to strengthen economic relations with China and boost productivity, and China is studying candidate sites for the construction.

In the infrastructure sector, an agreement was signed in June with China for a railway electrification project involving the Tehran-Mashhad section. Fars News Agency reported that this is a joint project between the Iranian company Mapna, which engages in projects in electric power, energy, and railways, etc., and the Taiwanese company China Motor Corporation (CMC), etc. The project will cover repair and reconstruction of the current lines, construction of high-speed tracks, and procurement of train cars, etc. It is expected to shorten the travel time between Tehran and Mashhad from the current 12 hours to 6 hours, and 35 million people are expected to use it annually. Construction is scheduled to last 42 months.

In the energy sector, the local media reported that Abbas Shari Moghaddam, Deputy Minister of Petroleum and president of National Petrochemical Company (NPC), and the Chinese agreed on August 25 on an investment in the five petrochemical projects of Kavia II, Lorestan, Mahabad, Takht-e Jamshid and Marvdasht, and if the Central Bank of the Islamic Republic of Iran approves, the project will be implemented. It is a

75

EUR2.0 billion project. It is reported that China is putting energy into investment in this sector in Iran and will also invest in the projects of Bushehr, Lordegan, Hangam, Gachsaran, Sabalan and Sadaf.

Meanwhile, withdrawals of Chinese companies from the Iranian market have also been observed. In the energy sector, China’s state-owned oil company withdrew from the South Azadegan oilfields. This company had signed a USD2.5 billion buyback contract with National Iranian Oil Company in October 2009. In the contract, production volume is estimated at 320,000 barrels per day in the first stage and 600,000 barrels per day in the second stage. However, work was delayed, and in January 2014, the ministry requested the companies to improve operations within three months, but no improvement was seen and so the contract was withdrawn on April 29. In the contract, 185 test wells were planned in the first stage, but only seven had been drilled. Subsequently, the project was continued by Iran’s Petroleum Engineering and Development Company and National Iranian Drilling Company.

-Trade with China in Expansionary Trend- Iran’s trade with the world overall is shrinking due to the economic sanctions, but its trade with China is in an expansionary trend. The amount of Iran’s non-petroleum exports to China in FY2013 was USD7,432.00 million (cf. FY2012 at USD5,501.00 million), and imports from China amounted to USD9,649.00 million (cf. FY2012 at USD8,161.00 million). Iran is China’s third largest supplier of oil and is the import source of approximately 12% of the oil China consumes.

76

6-(2) United Arab Emirates (UAE): Active Movement in the Financial and Real Estate Sectors

The number of Chinese companies setting up operations in the UAE is increasing. It is said that there are 4,200 Chinese companies and 300,000 Chinese people in the UAE. The amount of Chinese investment in the UAE that can be confirmed statistically is low level, but since 2013, there has been active movement of Chinese capital in the financial sector and real estate sector. The UAE is aggressively strengthening its relationship with China, the world’s second-largest economy, and the construction of strategic partnerships is being promoted at the government level.

-Chinese Companies’ Entry into UAE Rapidly Expanding- According to Emirates News Agency (WAM), the number of Chinese companies has reached approximately 4,200. According to information from the Dubai Chamber of Commerce and Industry, Chinese companies that were members of the chamber numbered 2,200 in 2012, 2,530 in 2013, and 2,885 in 2014, displaying a high growth rate of around 15% annually. Moreover, looking at the nationalities of new companies that began operations in 2013 in the Jebel Ali Free Zone (JAFZ) adjacent to Dubai’s Port of Jebel Ali, a hub port in the Middle East, China was in third place with 44 companies, following local UAE companies and Indian companies, and in recent years, China has been a major investor in JAFZ. As a result of this inflow of companies, the population of Chinese in the UAE is estimated at 300,000 persons out of a total UAE population of approximately 9,000,000 persons. So, the Chinese community has a growing presence in the UAE.

However, the Chinese investment that can be confirmed on the basis of FDI statistics amounts to only a small fraction of total FDI. In the figures of the UAE National Bureau of Statistics, only the top ten countries are clearly listed in the latest data on direct investment in the UAE by country (including real estate investment by non-residents). In 2012, while Great Britain, India, France, Japan, the US, and others were listed, China was not even in the top ten, and the amount of its investment was not published.

The majority of direct investment in the UAE appears to be in the two emirates of Abu Dhabi and Dubai, which constitute over 90% of the country’s GDP. According to the Statistics Centre - Abu Dhabi (SCAD), the balance of China’s direct investment, including Hong Kong and Macao, up to 2012 in the Emirate of Abu Dhabi was only 0.4% (USD56.89 million) out of USD14,222.46 million (including real estate investment by non-residents) in total direct investment. This is extremely low compared to 4.5% for Japan and 1.7% for South Korea. Moreover, according the Dubai Statistics Center, direct investment from China including Hong Kong in the Emirate of Dubai in 2011 was down 31.6% YOY, to USD1,262.71 million, and was only 3.0% of the USD41,940.00 million in direct investment received (Note 1).

On the other hand, according to Chinese statistics in 2013 Statistical Bulletin of China's Outward Foreign Direct Investment, it can be confirmed that Chinese direct investment in the UAE is in an uptrend. In 2013, it rose sharply to USD294.58 million, an increase of 2.8 times YOY in 2013. Looking at the trend over the past few years, whereas the average amount during the three years of 2005-2007 was USD34.44 million, the average during the three years of 2008-2010 was USD188.37 million and in the three years of 2011-2013 was

77

USD238.09 million, thus displaying significant growth over the years. In particular, direct investment grew sharply following the economic crises of the Lehman Shock in 2008 and the Dubai Shock in 2009. On a stock base, it has doubled in the past three years and increased by more than 10 times in the past seven years (compared to 2006), to USD1,514.57 million.

-Four Major Chinese State-owned Banks All Present- It is difficult to gain an overview of Chinese companies’ direct foreign investment in the UAE because official materials and statistics have not been published on trends by industry or individual cases. To the extent that can be confirmed in media reports and press releases from individual institutions and companies, there was active movement of Chinese capital in 2013 in the financial and real estate sectors.

In the financial sector, in 2008 the Industrial and Commercial Bank of China Limited (ICBC) was the first Chinese financial institution to set up operations and establish a subsidiary in the Dubai International Financial Centre (DIFC). In November 2013, it began operations as the ICBC Dubai Branch, and in 2009, the Abu Dhabi Branch acquired a wholesale bank license. In February 2013, the Bank of China opened the Bank of China Middle East (Dubai) Limited in DIFC as its first location in the Middle East, and in March, the Agricultural Bank of China (ABC) followed. In April, China Construction Bank also opened a location in DIFC, and thus all four major Chinese state-owned banks are now present in the DIFC. DIFC offers a variety of financial incentives in the free zone established in 2004 with the aim of making Dubai one of the world’s financial hubs. Three Japanese megabanks also have locations in DIFC. DIFC places priority on its relationship with China, the second-largest economy in the world, and it sent a delegation led by H. E. Essa Kazim, governor of DIFC, to Beijing in May 2014 to hold talks with Chinese business dignitaries.

According to media reports regarding the real estate sector, Chinese capital in Dubai real estate tripled in 2013 compared to the previous year, to 1.3 billion dirhams (AED) (approximately JPY41.6 billion at AED1 = approximately JPY32), placing China seventh among non-Arab countries. Dubai’s real estate market began to skyrocket again from the second half of 2012, and purchases for speculative purposes are intensifying. Chinese companies that participate in large-scale real estate developments have also begun to appear. China State Construction Engineering Corporation Limited announced in June 2013 that it is investing in Viceroy Dubai Palm Jumeirah, a luxury hotel development by SKAI Holdings, a real estate investment company in Dubai. The total cost of this project is USD1.0 billion, and completion is scheduled for 2016. China State Construction Engineering Corporation Limited established China State Construction Engineering Corporation (Middle East) (LLC), a local subsidiary in Dubai, in 2005, and although it has built housing, hospitals, and office buildings in the gulf region, this is its first investment. It was also reported that the Hong Kong company Chow Tai Fook Endowment Industry Investment Development Group (CTEF) purchased assets of the Dubai Pearl project consisting of luxury housing and a hotel, etc., from Pearl Dubai FZ LLC, a real estate developer in Dubai, in

February 2014 for USD1.9 billion.

-Both Countries Promote Their Strategic Partnership Relationship- In January 2012, the UAE and China signed a strategic partnership agreement. When then-Chinese Premier

78

Wen Jiabao visited the UAE, he and Mohammed bin Rashid Al Maktoum, UAE Vice President and Prime Minister, concurred on the agreement. Regarding economic relations, in addition to promoting trade and investment, it stresses promotion of cooperation in the infrastructure, financial, and energy sectors. During the Chinese premier’s visit, multiple memorandums of understanding (MOUs) were signed by the two countries, including a currency swap agreement for AED20.0 billion between the two countries’ central banks for the purpose of promoting trade and investment and a cooperation agreement for an oil production project in an undeveloped region between Abu Dhabi National Oil Company (ADNOC) and China National Petroleum Corporation (CNPC). In March 2012, Mohammed bin Zayed bin Sultan Al Nahyan, crown prince of Abu Dhabi, visited Beijing.

The UAE and China established diplomatic relations in 1984, and 2014 was the 30th anniversary. Zhang Yesui, vice minister of the Ministry of Foreign Affairs in China, visited the UAE in April 2014 and said in a meeting with Crown Prince Al Nahyan that after making “the UAE is China’s important strategic partner in the Middle East and Gulf Region,” he would like to strengthen the relationship between both countries in a variety of fields including investment, energy, and infrastructure and would like to promote the creation of a free trade zone between the Gulf Cooperation Council (GCC) (Note 2) and China. The UAE also places priority on strengthening economic relations with China in order to boost its own function as a hub for both business and tourism in the Middle East and to realize further growth, and so the two countries’ relationship is expected to expand even more in the future.

Note 1: The amount of FDI received by the UAE overall in 2011 was USD7,679.00 million, which is significantly below the amount received by Dubai. This appears to be due to differences in the definitions of FDI and in calculation methods used by each issuing institution. Note 2: A regional cooperation mechanism that consists of the six gulf countries of Saudi Arabia, Qatar, Kuwait, Oman, and Bahrain, and the UAE. It promotes economic integration such as customs union.

79

6-(3) Israel: Large Investments in Infrastructure Projects and Food Continue

Chinese companies have successfully bid on consecutive infrastructure projects in Israel. The Israeli government favors the high cost performance of Chinese companies. On the other hand, some are beginning to fear aggressive investment by Chinese companies, which now manage the largest food manufacturer in Israel.

-Israeli Government Favors the Speediness of Chinese Companies- The state-owned Israel Ports Development & Assets Company, Ltd., which is involved in domestic port development projects, announced on September 23 that the successful bidder on the Port of Ashdod No. 2 Construction Project is a subsidiary of China Harbour Engineering Company, Ltd. (CHEC), a large Chinese general contractor.

The port city of Ashdod, which faces the Mediterranean Sea, is Israel’s largest port for imports, and the 40th anniversary of the port is in 2015. Cargo ships from Europe and the US and container ships from Asia via the Suez Canal dock at this port. The Port of Ashdod’s current annual container handling capacity is 1.182 million TEU (based on 20-foot containers)

According to Israel Ports Development & Assets Company, Ltd., over 90% of Israel’s trade passes through ports. Since trade volume is increasing annually but there is limited current space for container ships in the port, the government decided in 2007 to augment the port facilities for container ships in Ashdod in the south and in Haifa in the north. The total cost of the Port of Ashdod No. 2 is 3.3 billion sheqels (ILS) (approximately JPY99.0 billion at ILS1= approximately JPY30). In addition to extending the existing seawall and dredging the port, a container terminal, etc., will be built on a 640,000 sq. meter site.

Chinese companies have a past record of working on domestic infrastructure projects in Israel. The construction of the Haifa Bypass Tunnel which opened in 2010 was the work of China Civil Engineering Construction Corporation (CCECC). The tunnel is a total of six kilometers in length and enables vehicles to pass through the northern commercial city of Haifa without going through the city center. CCECC is currently working on the construction of a railway tunnel in northern Israel together with an Israeli company.

The government is planning the construction of a railway to connect the Port of Eilat on the Red Sea with the Port of Ashdod. Once it is complete, it will be possible to go from the Mediterranean Sea to the Red Sea without going through the Suez Canal.

Israel and China exchanged a memorandum of understanding (MOU) on transportation infrastructure projects in 2012. Israel’s Ministry of Transport and Road Safety indicated that it would like to consign the construction of the railway to Eilat to China Communications Construction Company Limited (CCCC). The reason was because a leading economic newspaper at that time in 2012 had stated that Chinese companies have the speed to finish a project in a relatively short time frame and former Israeli prime minister Netanyahu had praised the

80 speed of the Chinese people’s work when speaking to the Minister of Transport of the PRC.

-Majority of Shares in Major Food Company Sold to Chinese Company- In May 2014, Apax Partners LLP (Britain), a private equity fund, announced the sales of 56% of the shares of Tnuva, the largest food manufacturer in Israel, to China’s food manufacturing giant Bright Food (Group) Corporation Limited.

Tnuva’s history stretches back to the 1920s, before the country of Israel was founded. It originated from agricultural cooperative unions that Jewish farmers from kibbutzim (Note 1) and moshavim (Note 2) set up to unify the production, processing, and sales of agricultural products. Initially, Tnuva handled dairy products, poultry, eggs, fruit, and vegetables, but later as its dairy operations continued to grow, it became the top domestic dairy product manufacturer by repeatedly expanding its operations and merging with competitors. In 2008, Apax Partners purchased a majority share of Tnuva’s stock from its Israeli owners.

Israel consumes a large amount of dairy products, and because tariffs are high on dairy products, most consumers buy domestic cheese and yoghurt. In Israel, dairy products are part of the daily diet that regular households cannot do without, to the extent that higher cheese prices set off large-scale demonstrations when prices soared in June 2011.

Large domestic food manufacturers were also sold to foreign-owned companies such as Unilever and Nestlé, but the transfer of the majority share of a company that may be called the symbol of “Israeli food” to a Chinese company caused a huge reaction in the media and among the public.

Efraim Halevi, former director of Mossad, the Israeli intelligence agency, stated, “It is not desirable to put the largest domestic food manufacturer under the control of another country.” Moreover, by consigning port and railway projects to China, which is cooperating with countries that Israel considers enemies, Halevi fears, “Not only are we placing our national infrastructure under Chinese management, but it may even impact the relationship between Israel and the US.”

Note 1: Kibbutzim are collective communities found in Israel. In Hebrew, “kibbutz” means “group” or “gathering.” They were set up before Israel was founded, mainly by Jewish immigrants. Originally, most kibbutzim were engaged in agriculture, but recently there are kibbutzim that develop light industry, hi-tech ventures, and commerce.

Note 2: Like Kibbutzim, moshavim are a kind of settlement peculiar to Israel. Unlike the common property system of kibbutzim, farms that are operated and worked by only a family are organized into cooperatives on a village basis. Some moshavim in rural areas have developed tourism and wineries.

81

6-(4) Egypt: Progress in Diversification of Investment Sectors to Manufacturing and Communications, Etc.

According to the Central Bank of Egypt, the amount of Chinese direct investment (international balance of payment basis, flow) in FY2012/2013 (July 2012-June 2013) was USD48.80 million, down 33.7% YOY, and at the end of the third quarter of FY2013/14, it was sluggish at USD4.10 million. The amount of Chinese direct investment out of total direct investment is small, at 0.5%. However, in recent years, Chinese investment is diversifying to manufacturing and communications, etc.

-Cases of Investment via Tax Havens and for Economic Cooperation- Of the USD9,614.00 million in inward direct investment in FY2012/13 (down 18.3% YOY), only 0.5% was from China. Approximately half of the total was from EU countries, starting with Britain, and approximately 20% was from the US. Statistically, China’s presence is faint (refer to Figure 6-(4)-1). Although the amount of Chinese investment has remained low, the sight of Chinese businesses and Chinese people in real life is steadily increasing. Behind the gap felt between the presence of the Chinese in the statistics and in real life lies the fact that, when Chinese companies investment, they often invest via tax havens rather than directly from China and cases that appear to be investments are actually cases of intergovernmental economic cooperation. For these reasons, not all cases are necessarily directly reflected in direct investment statistics; however, it is a fact that Chinese companies are involved in an increasing number of projects, and China’s presence in Egypt is growing.

Figure 6-(4)-1: Trends in Direct Investment in Egypt by Major Asian Countries/Regions

Japan India China Singapore South Korea Taiwan 120.0

100.0

80.0 73.6 60.0 60.0 48.0 48.8

(USD million) 40.0 26.9 20.0

0.0 2008/09 2009/10 2010/11 2011/12 2012/13

Note: Figures for FY2012/13 are provisional. Source: Central Bank of Egypt

-Base for Exports to Middle Eastern and North African Markets- According to news reports and materials released by companies, Chinese companies in recent years have been entering sectors such as manufacturing and communications, in addition to the conventional sectors of energy, distribution, and construction.

82

In manufacturing, the Hisense Group, a consumer appliance giant, invested approximately USD60.00 million in a base for exports to Middle Eastern and North African markets and opened a complete knockdown (CKD) production plant (annual production capacity approximately 100,000 units) for liquid crystal televisions in 6th of October City, a satellite city of Cairo, in November 2008. The plant also began production of air conditioners in 2010 (reported basis). The company signed a memorandum of understanding (MOU) with the Shams Industrial Group., its Egyptian partner company, in August 2012 to develop Hisense Industrial Park specializing in consumer appliances in 6th of October City. This industrial park, planned as a base for exports to Middle Eastern and European markets, will be 200,000 sq. meters in size and produce 500,000 air conditioners and 1.50 million large consumer appliances annually. Hisense itself announced a plan to establish a plant for televisions, air conditioners, refrigerators, and washing machines in the industrial park to meet the demand in Egypt and the European market.

Consumer electronics giant Haier lnc. has also been exploring setting up a plant in Egypt since 2011 (according to the company’s website). In May 2012, the company signed an exclusive sales agreement with International Business Systems (IBS), the local company with experience as the Egyptian distributor for Sony cameras and PlayStations.

In auto production, China is gradually building a foothold in Egypt. In January 2014, First Automobile Works (FAW) announced that FAW and the Egyptian company New Engineering Company would establish a passenger car, bus, and transport vehicle assembly plant with an investment of approximately USD100 million. The Chinese company Geely Automobile Holdings Limited (Geely), which joined with the Egyptian company Ghabbour Auto Company in October 2012, has a complete car assembly line and produces approximately 30,000 Emgrands, a luxury sedan, annually. According to reports, BYD Company Limited (BYD) has started to assemble their main model ”F3” since the end of 2009, while the Chery Automobile’s “Chery” model and Brilliance Auto’s “Brilliance” model are also locally assembled.

In the communications sector, Huawei Technologies Co., Ltd., specified Egypt as its regional base and opened a Network Operations Center (NOC) as its North African headquarters in November 2012 in Smart Village in Cairo. NOC supports network stability, security, and commercial activities for users in 22 countries in the region. In addition, Huawei also opened a regional Technical Assistance Center (TAC) and a Global Resource Service Center (GRSC) to support major projects in the region. The company plans to provide further training during the next five years for students, graduates, customers, and partners. In 2013, the company set up the Huawei Authorized Network Academy (HANA) in the National Telecommunication Institute (NTI) in Smart Village. At the beginning of 2014, Huawei opened Huawei Authorized Learning Partners (HALP), training facilities offering the latest technology in the communications center, in cooperation with the National Telecommunications Institute (NTI) in Nasr City. Thus, Huawei is steadily building footholds in Egypt.

- Advance to the China-Egypt Suez Economic and Trade Cooperation Zone in the North-West Gulf of Suez Economic Zone-

83

An increasing number of Chinese companies are advancing to the China-Egypt Suez Economic and Trade Cooperation Zone in the North-West Gulf of Suez Economic Zone (hereinafter “cooperation zone”). Construction on the cooperation zone was started through the collaboration of the Chinese and Egyptian governments in 1997, and in 1998, Tianjin Development Holdings Limited became involved by investing 10%. Based on the commitment of then-President Hu Jintao of China at the Forum on China-Africa Cooperation (FOCAC) held in Beijing in November 2006, Tianjin Development Holdings Limited increased its investment in July 2008, and construction was expedited by the establishment of the Egypt Teda Investment Company (capital: USD80.00 million). Likewise through a commitment at FOCAC, the China-Africa Development Fund which supports Chinese companies that are setting up operations in Africa invested USD24.00 million in Tianjin Development Holdings Limited.

Construction of 1.34 sq. kilometers out of 7 sq. kilometers of the cooperation zone was completed at the end of 2012, and mainly small and medium companies have begun to set up operations there. Although the investment amount is small at USD1.00 million, Egypt Tianjin Yashmagh Textile Company, which produces keffiyeh, the headscarf that indispensable for Arab men’s traditional clothing, is setting up a plant. In 2013, three large Chinese manufacturers, Jushi Egypt for Fiberglass Industry S.A.E., China XD Group, and Muyang Group set up operations in the cooperation zone. Jushi is a glass fiber giant. It plans to construct a glass fiber plant with a production volume of 200,000 tons in three phases (according to the company’s website). Phase one which calls for an investment of USD220.00 million (annual production 80,000 ton scale) began production in May 2014. Henceforth, with an additional investment of USD300.00 million, the plan is to finish phase two by the end of 2015 (80,000 ton scale), finish phase 3 by the end of 2018, and then be in full operation. Currently, the plant has 900 employees (of which 60 are Chinese; 40% of managers are Egyptian), but when the plant is in full operation, it expects to have 1,500 employees (China Daily Africa, September 26, 2014).

An accurate breakdown of the nationality of the companies is unknown, but according to the website of the cooperation zone, the total number of companies as of September 2014 was 58, with a cumulative investment of USD610.00 million.

-Increased Comings and Goings at the Government Level Involving Investment Promotion- In June 2014, as soon as the new Sisi Administration was launched, comings and goings at the government level increased.

In August, Chinese Foreign Minister Wang Yi visited Egypt for the first strategic dialogue with the new Egyptian administration. At this time, in addition to meeting with President Sisi, Foreign Minister Shoukry, and Secretary-General of the Arab League Nabil Elaraby, the Chinese Foreign Minister Wang Yi and the Chinese delegation also met with representatives from the Ministry of Transportation and Suez Canal Authority, in addition to Mounir Fakhry Abdel Nour, Minister of Industry, Trade, and Small Industries; Mohamed Shaker, Minister of Electricity and Energy; Ashraf Salman, Minister of Investment; and Naglaa el-Ahwany, Minister of International Cooperation. Chinese Foreign Minister Wang Yi said that China is prepared to cooperate with Egypt in various fields, including industry, agriculture, and aerospace and showed that China is willing to

84 increase its investment in Egypt. They also exchanged opinions on future cooperation in renewable energy sectors such as solar and wind power and on management of special economic zones. They touched on strengthening of the economic cooperation between the two countries and discussed the railway sector including high-speed rail and provision of a human resources training program.

Without delay, Egypt held an investment promotion seminar for Chinese companies sponsored by the Ministry of Investment in September in Tianjin. In addition to Minister of Investment Ashraf Salman, in attendance were the Egyptian ambassador to China and vice president of the Special Economic Zone Bureau, and they called for investment in Egypt, particularly in the above-mentioned Suez Economic and Trade Cooperation Zone in the North-West Gulf of Suez Economic Zone. At the seminar, a signing ceremony was also held for the extension of the cooperation zone where China has promoted development (phase 2, approximately 6 sq. kilometers).

-China Business Desk Opened in Egyptian Bank- Bank of China, the second-largest commercial bank in China, opened a China Business Desk in Egypt’s Commercial International Bank (CIB) in May 2013. CIB is a large local private bank with a network of 155 branches in Egypt, and in June 2011, it signed a memorandum of understanding with Bank of Tokyo-Mitsubishi UFJ concerning promotion of collaboration and set up a Japan Desk in CIB.

The Egyptian-Chinese Business Council (ECBC) founded in 2006 has worked on promotion of the Egypt-China trade relationship, improvement of the investment environment, and business matching support, etc. ECBC plays a role as a liaison that mediates between the Chinese Chamber of Commerce and bodies interested in Egyptian business; accelerates exchanges of opinions, sharing of experiences, and technology transfer; secures mutual benefits; and promotes increased tourism. According to ECBC’s website, its members currently include 68 Egyptian companies and 43 Chinese companies. In addition, the Egyptian-Chinese Chamber of Commerce Association was launched in December 2013, and attendees at its first meeting included the Chinese ambassador to Egypt; Moataz Al-Said, head of the Chamber of Commerce; and Ahmed Rezk, former Egyptian ambassador to China as well as businesspeople from both countries. Also in attendance were then-Minister of Investment Osama Saleh and Mounir Fakhry Abdel Nour, Minister of Industry, Trade, and Small Industries.

The Chinese government appears to be taking steps to invigorate direct investment in Egypt which has been sluggish in recent years and seems to be encouraging companies that set up operations in Egypt. The opening of a China Desk in an Egyptian bank and the launch of the Egyptian-Chinese Chamber of Commerce Association also suggest that the activities of Chinese companies in Egypt will grow in the future.

85

6-(5) Algeria: Algeria is the Second-largest Presence in China’s Investment in Africa

Among the countries in North Africa, Algeria has the longest history of investment from China and has been the second-largest destination of Chinese investment in Africa since 2012. China has received the contracts for the majority of the large-scale public infrastructure projects since 2003, and China’s presence in Algeria is strong. In the future, China intends to actively promote direct investment in industry and technology transfer.

-Investment in Algeria Prominent among Investment in Maghreb Countries- The number of Chinese companies registered at the National Commercial Register Center of Algeria’s Ministry of Commerce at the end of July 2013 was 784. That number continuously climbed from 1997 to 2013, and it climbed particularly sharply from 2003 to 2007 when China received contracts for large public projects. According to the African Development Bank, of the engineering contracts for infrastructure development signed in Algeria from 2003 to 2011, approximately 80% were awarded to Chinese companies.

The shares of direct investment from around the world in Maghreb countries (2011, stock base) (Algeria, Libya, Mauritania, Morocco and Tunisia) are as follow. Morocco received the most, at 39.3%, following by Tunisia at 26.7% and Algeria at 18.5%. Looking only at Chinese investment, 81.6% of China’s total investment in all five Maghreb countries goes to Algeria. According to a report issued by the Heritage Foundation, a US think tank, Of African countries, Algeria placed second after Nigeria as a destination for Chinese investment in 2012, surpassing South Africa for the first time. The cumulative total of new contracts for Chinese investment in Algeria in the first half of 2014 reached USD15.4 billion, and of that, USD11.4 billion was invested in transportation and USD3.5 billion was invested in real estate.

China’s Ministry of Commerce publishes a list of Chinese companies with plans for overseas investment on its website. From 2003 to 2012, 145 Chinese companies had plans for investment somewhere in the five Maghreb countries, and of these, 72 were for Algeria. The number of investment plans that were approved between 2011 and August 2014 were 37 for Algeria, 13 for Morocco, 7 for Tunisia, and 12 for Mauritania, and so Algeria remains dominant.

-Entry into Communications-related Industries in Recent Years- According to the above-mentioned list, the majority of the Chinese investment in Algeria is in engineering- and construction-related companies.

In response to an interview by JETRO inquiring about the trends in investment by Chinese companies in Algeria in recent years, Professor Thierry Pairault of the Centre for Studies on Modern and Contemporary China at École des Hautes Études en Sciences Socials (EHESS) said, “China is prepared to invest in all sectors. Rather than raise the issue of recent trends in Chinese investment in Algeria, we should look at which sectors Algeria will open up to Chinese investment.” The Algerian government did not permit Chinese companies to enter the auto and pharmaceutical sectors for many years, giving preference to the French companies Renault

86 and Sanofi. However, recently some sort of agreement was reached on a joint venture between China’s First Automobile Works Group (FAW) and Algerian entrepreneurs as well as on a cooperative project between a Chinese pharmaceutical company and the Algerian government. Pairault’s view is that the Algerian government intends to broaden the sectors where Chinese investment is allowed. As examples of operations by Chinese companies in Algeria, when the communications market was deregulated in 2010, Algérie Télécom selected Huawei Technologies Co., Ltd., to improve and expand the Algerian telecommunications network. In November 2013, Huawei announced the opening of a communication technology training center, its second following one in Morocco, in a tie-up with Ministry of Post, Information Technology and Communication, in the IT industrial agglomeration located in Sidi Abdellah on the outskirts of the capital city Alger. It is located on a 3,000 sq. meter site and plans to provide a training program in telecommunications and information technology.

Most of the Chinese investment in Africa is concentrated in the natural resource sector, and China has made investments in infrastructure for resource development in exchange for resource extraction rights. However, this does not apply in Algeria, which has abundant foreign currency thanks to resource exports. According to Pairault, there is currently no drilling of large-scale oil or gas wells in Algeria’s oil and natural gas sector, and there is little likelihood of Chinese investment in that sector in the short term (of China’s oil imports, 0.9% is from Algeria).

-Mainly State-owned Companies under the Central Government- In the Maghreb region, a very high percentage (26.2%) of the Chinese companies that invest are state-owned companies under the supervision of China’s central government (of which there were 113 companies at the end of 2013). For comparison, the percentage of such companies is 7.5% in other developing countries and 18.3% in sub-Saharan Africa. Pairault expressed the following view, “The establishment of a position for Chinese companies in the Maghreb region was done intentionally by the Chinese government. China is looking for new investment sectors in that region where it can offer Chinese products and services.”

-Algerian Government Welcomes Chinese Investment- In exports to Algeria, China displaced France as the top source of exports for the first time in 2013. There is criticism in the media of the quality of Chinese products seen in the Algerian market, but the presence of Chinese products is large. On February 24, 2014, both countries announced the signing of an Algeria-China comprehensive strategic cooperation plan for 2014-2018 to mark the 55th anniversary of diplomatic relations. The plan advocates the strengthening of political dialogue between the two countries and strengthening of cooperation in areas including economic, scientific, technological, military, and security fields. At the press conference after signing the plan, Algerian Foreign Minister Ramtane Lamamra and Chinese Foreign Minister Wang Yi made clear their intention to promote direct investment and technology transfer to Algeria from China in industrial sectors except for oil and natural gas.

The mainstream view is that Chinese investment is contributing to the growth of the Algerian economy, but on the other hand, it is not leading to a resolution of the high unemployment rate which is a major issue in Algeria. There is criticism that Chinese investment does not create local employment since Chinese companies bring

87 laborers from China for infrastructure construction, which accounts for the majority of the Chinese investment. According to the China Trade and External Economic Statistical Yearbook (2009, 2012), the number of Chinese workers in Algeria peaked at 49,631 in 2009 and subsequently declined slightly to 36,562 workers in 2011. Most are Chinese employees working at Chinese companies under temporary contracts.

88

6-(6) Morocco, Tunisia, and Mauritania: Investment Amount is Small, but Interest is Strong

The amount of Chinese direct investment in Morocco, Tunisia, and Mauritania is small, and the sectors are limited. However, since interest is gradually growing, new expansion seems likely.

-Morocco: First Project in the Energy Sector Contracted- Looking at inward direct investment in Morocco (2013, flow basis) by country share, France which has historically invested in Morocco is in the top spot with a 43% share, far ahead of other countries. Next are Singapore and the United Arab Emirates (UAE) with 10%. Aside from Saudi Arabia, the top six are all EU countries, and China is not among the top investor countries. According to the Heritage Foundation, a US think tank, the cumulative total of China’s new direct investment agreements with Morocco in the first half of 2014 was approximatelyUSD500.00 million.

In the Maghreb region, Algeria is China’s largest investment destination, but Chinese investment in Morocco has been increasing in recent years. From 2011 to August 2014, China’s Ministry of Commerce approved 13 plans for investment by Chinese companies in Morocco, and particularly since 2014 there has been an increase in the number of cases approved. Forays into the energy, electric power-related and marine product industries are prominent.

In July 2013, China’s first project in the energy sector in Morocco was signed. Shandong Electric Power Construction Corporation III (SEPCOIII) signed a new construction contract with Office National de l’Electricité et de l’Eau Potable (ONEE) for a coal-fired thermal power plant in Jerada in northeastern Morocco (530 kilometers from the capital of Rabat near the border of Algeria). The total construction cost is 3 billion dirham (MAD) (approximately JPY39.0 billion at MAD1 = approximately JPY13). It is funded mainly by the Export-Import Bank of China, and operations are scheduled to being in the fourth quarter of 2016. In August 2014, a meeting was held by the Bank of China’s Vice President Yue Yi and a delegation of Chinese companies with Prime Minister Abdelilah Benkirane of Morocco. In a press release after the meeting, the Chinese showed a willingness to open branches in Morocco.

According to reports in China’s electronic media, China Today, the number of Chinese companies in Morocco as counted by the Chinese Embassy in Morocco is only about 30 companies, and the majority of those are in the information and communication sector, such as Huawei Technologies Co., Ltd., and ZTE Corporation. Others are engaged in infrastructure and public works (roads, bridges, and harbors). Until recently, the entry of Chinese companies was hampered due to reasons such as the difficulty of acquiring an entry visa, but since March 2014, Chinese officials do not need a visa. There are plans for direct flights between the two countries to begin in 2014, and so access from China to Morocco is expected to become easier. To promote investment by Chinese companies, Morocco held a China-Africa Investment Conference during June 24-25, 2014.

89

Figure 6-(6)-1: List of Chinese Companies’ Investment Plans in Morocco Agreement Chinese Companies Project Scope Date Business and technology support, consulting, management, and 1 China Harbour Engineering Co., Ltd. operation of all types of engineering contracting construction 6/27/2012 projects

2 CNFC Machinery maintenance 7/23/2014

3 CNFC Marine products, shipping and trade 7/23/2014

4 CNFC Marine products, shipping and trade 7/23/2014

5 CNFC Marine products, shipping and trade 7/23/2014

6 CNFC Trade, marine product wholesaling 7/23/2014

7 CNFC Trade 7/23/2014

8 CNFC Marine products, shipping and trade 7/23/2014

9 CNFC Marine products, trade in ships and shipping materials 7/23/2014

1 China Railway No.8 Engineering Project contracting, equipment leasing, export of equipment and 9/30/2013 0 Group CO.,LTD materials 1 China National Aero-Technology Market development, project development, product sales, after-sales 4/29/2014 1 Import & Export Corporation service, data collection 1 China Gezhouba Group Company Market development, project management 7/21/2014 2 Limited 1 China Geo-Engineering Corporation Project contracts, trade 9/19/2011 3 International Ltd. (CGCINT) Source: Website of China’s Ministry of Commerce.

The most successful of the Chinese companies operating in Morocco has been Huawei. In 2013, Huawei accounted for 70% of Morocco’s mobile phone market, and annual sales that year were USD180.00 million, up 10% YOY. The company employs over 400 people, 75% of whom are Moroccan. In 2012, Huawei Morocco Academy was opened as the company’s first French-speaking training center.

-Tunisia: Shrimp Farming Business in Production Stage- Inward direct investment in Tunisia accounted for 10% of investment in production and created one-third of exports and over 15% of employment. According to the World Investment Reports 2013 of the United Nations Conference on Trade and Development (UNCTAD), Tunisia is one of the 11 main countries in Africa in terms of FDI (flow basis). However, China’s share of FDI in Tunisia is small, and currently, there is little noticeable movement in Chinese investment. The largest investment is from former colonial powers such as France and other EU countries, followed by the Middle Eastern oil-producing countries. Looking at share by country of FDI in Tunisia in 2012, Qatar was the top country, at 31%, followed by France at 15%, Austria at 13%, Italy at 9%, Canada at 6%, and the UK and Germany at 4% each.

According to the Heritage Foundation, the cumulative amount of new contracts for direct investment by China in Tunisia in the first half of 2014 was USD110.00 million, mainly in the real estate sector. Plans for

90 investment in Tunisia approved by China’s Ministry of Commerce numbered only seven from 2011 to August 2014 (refer to Figure 6-(6)-2). On the other hand, in August 2013, the two countries signed an agreement concerning development cooperation in the agriculture and fisheries sector in Tunisia. Moreover, a shrimp farming business started in 2012 in the Mahdia region (in the eastern coastal area 200 kilometers from the capital city of Tunis) has entered the production stage. In April 2014, in the Bizerte region (in the northern coastal area 70 kilometers northwest from the capital city of Tunis), it was reported that market-related persons, representatives of the national agricultural union, and representatives of China’s industrial world held a meeting on development of the region.

Figure 6-(6)-2: List of Chinese Companies’ Investment Plans in Tunisia Agreement Chinese Companies Project Scope Date China Sinomach Heavy Industry 1 Spare parts, engineering consulting service 12/22/2011 Corporation Services including geophysical exploration and geophysical data BGP Inc., China National collection, processing, and interpretation; research, manufacture, sales, 2 9/28/2012 Petroleum Corporation import and export, and leasing and maintenance services for related equipment Greatwall Drilling Company Supply of equipment and materials for oil and gas exploration and 3 11/28/2012 (GWDC) development, equipment maintenance services Project supervision and coordination, contact with the relevant SINOHYDRO Corporation 4 domestic central government, local governments, and related ministries 6/15/2012 Limied and bureaus Sales, import, and export of hardware and other related products, 5 Hexing Electrical Co.,Ltd. 10/22/2012 power meters, power electronic equipment, and test equipment, etc. Import and export of laptop computers, multimedia projectors and Zibo Chongzheng International 6 related equipment, import and export of products such as educational 10/26/2012 Trading Co.,Ltd. aids Lingshang (Hubei) Trading Co., Tunisian market development and customer management for the Blue 7 12/25/2012 Ltd. Season Brand Source: Same as Figure 6-(6)-1.

-Mauritania: Construction of a Marine Products Processing Plant and Securing of Fishing Rights- The total amount of FDI in Mauritania increased significantly from USD131.00 million in 2010 (flow basis) to USD12, 004.00 million in 2012. China also has a strong interest in Mauritania, and the cumulative amount of Chinese investment in the country in new direct investment contracts in the first half of 2014 was USD1.1 billion. Chinese companies’ plans for direct investment in Mauritania that have been approved by China’s Ministry of Commerce numbered 12 from 2011 to August 2014, and of those, half were investments related to the fishing industry (refer to Figure 6-(6)-3).

Fishing resources provide the Mauritanian economy with a strategic chance to obtain foreign currency. The fishing industry constitutes 10% of the country’s GDP and 35% to 50% of its exports, and 36% of the workforce is employed in the fishing industry. In 2010, Poly-hondone Pelagic Fishery.Co, part of China Poly Group, invested USD100 million in Nouadhibou in northwestern Mauritania to construct a marine products processing plant, and it also secured 25-year fishing rights with tax benefits. However, it has been pointed out that the company’s investment has caused problems, including overfishing of fishing resources without regard for the

91 ecosystem and unemployment among fishing industry workers.

Figure 6-(6)-3: List of Chinese Companies’ Investment Plans in Mauritania Agreement Chinese Companies Project Scope Date MCC TianGong Group 1 Construction 6/4/2013 Corporation Limited (CTMCC) Oil and oil engineering project contracting, equipment import and 2 Sinopec Service 10/30/2013 export China Gezhouba Group 3 Market development and project management 7/21/2014 Company Limited Buying, refrigeration, processing, and sales of all types of marine 4 Dalian King Brine Seafoods 6/13/2011 products China Jiangsu International Contracting of foundational construction (urban and rural waste water, 5 Economic-Technical 12/23/2013 field irrigation, and construction of housing and bridges, etc.) Cooperation Corportion Group Construction, public works, house construction, real estate construction Jiangsu Zhongnan Construction 6 projects, decorative engineering, elevator equipment and related 2014/5/16 Group Co., Ltd. engineering, installation work Fishing related business such as fish meal and fish processing, sale of Zhejiang Zhongta Import & 7 fresh and frozen fish, storage, shipping business, ship rental business, 10/19/2012 Export Co., Ltd. and refrigeration business Ningbo Yuchao Import & 8 Market research and development, after-sales service 12/18/2012 Export Co., Ltd. Ningbo Shipu Jinpeng Trade Processing and production of fish meal and fish oil, marine products 9 8/16/2013 Co., Ltd. processing Fuzhou Hongdong Peragic 10 Refrigeration, transport, and export/import trade 9/29/2012 Fishery Co., Ltd. Rongcheng City Fushun Fishery 11 Marine products processing and sales 4/18/2012 Processing & Trading Co., Ltd. Beihai Xinhong Hengda 12 Mechanical Equipment Co. , Production and sales of fish meal and fish oil 11/6/2013 Ltd. Source: Same as Figure 6-(6)-1.

-Some Interest in Moroccan Agricultural Technology- In response to an interview by JETRO, Professor Thierry Pairault of the Centre for Studies on Modern and Contemporary China at École des Hautes Études en Sciences Socials (EHESS) commented, “Currently, there is no particularly conspicuous trend among Chinese companies toward investment in Morocco, Tunisia, or Mauritania. Chinese companies’ interest in Tunisia and Morocco is definitely increasing, but it is largely interest in a trade relationship, which I think is not likely to change in the short term. The same applies to Mauritania. However, China’s interest in modern agricultural technology in Morocco should be noted. China seems to be considering the development of the European market via Morocco, which has signed an FTA with the EU, and the transfer of Moroccan agricultural technology to China.

92

6-(7) Republic of South Africa: Investment Expands in Diverse Sectors Such as Consumer Appliances and Autos

Cumulative direct investment by China in South Africa was 43,159.00 million rand (ZAR) at the end of 2012 (approximately JPY431.6 billion at ZAR1 = approximately JPY10). At the end of 2005, the amount was ZAR340.00 million, and this rose sharply starting in 2008. The investment sectors are not limited to mining and are diverse, including manufacturing such as consumer appliances and autos, agriculture, real estate, and infrastructure. We tracked the trends in Chinese companies’ business in South Africa as well as the characteristics of investment in recent years.

-Hisense Begins Production of LCD TVs- According to the South African Reserve Bank (SARB), the cumulative amount of Chinese direct investment in South Africa was ZAR43,159.00 million at the end of 2012, placing China fifth by country. Chinese companies’ investments rose sharply from 2008, mainly in the mining sector. Recently, their investment is not limited to mining but rather is expanding to services such as real estate, in addition to manufacturing and agriculture.

As examples of recent major investments by Chinese companies in South Africa, China’s large consumer appliance manufacturer Hisense Group began production of LCD TVs on the outskirts of Cape Town in June 2013. According to an announcement from South Africa’s Economic Development Department, the company plans to invest approximately ZAR350.00 million in renovating an aging plant of Tedelex Trading (Pty), Ltd., and to create employment for about 1,000 persons in five years. According to the Wall Street Journal, the current production efficiency is about half of China’s, but due to rising labor costs in China, Chinese companies are increasingly tending to build plants in Africa and hire African workers.

In the auto sector, First Automobile Works invested USD100 million and began producing trucks in the Coega Industrial Development Zone in Port Elizabeth in July 2014. Up to now, the company has invested ZAR600 million in plant construction, and the plant is initially scheduled to produce 5,000 trucks annually. In the future, the plan is to produce 35,000 passenger cars. Employment will be limited to 350 persons initially, but when auto production is expanded in the future, the creation of another 600 jobs is anticipated.

In the steel industry, there is visible movement toward future investment. According to an announcement by Industrial Development Corporation (IDC), in September 2014 IDC and Hebei Iron & Steel Group signed an MOU concerning a steel project in South Africa. IDC conducted a feasibility study on the construction of a new low-cost steelworks using South Africa’s cheap iron ore. According to the study, a plan could call for an investment of USD2.7 billion in phase 1 for a production capacity of 3.00 million tons and then investment of USD1.8 billion in phase 2 for a production capacity of 2.00 million tons. In the future, Hebei Iron & Steel Group will become a partner and conduct a detailed feasibility study. Ebrahim Patel, South Africa’s Minister of Economic Development, welcomed the signing of the memorandum of understanding by the two parties since it is necessary to develop a competitive environment in the domestic steel industry in order to reduce the procurement price of steel products.

93

In the agricultural sector, Perfect (China) Co., Ltd., a health food and nursing care equipment manufacturer, bought the Val de Vie Wine Estate in Western Cape Province in August 2013, making it the first Chinese company to enter the wine industry in South Africa. According to an announcement by the winery, the purchase consists of a 25-hectare winery including 21 hectares of vineyards. The company exported 2.80 million bottles of South African wine to China in 2011 and 2012, but it plans to expand sales channels for South African wine in the Asian region in the future and so expects to expand export volume even further.

According to the South African newspaper Business Report, the Chinese real estate company Shanghai Zendai Property Limited purchased and will develop 1,600 hectares of land in Modderfontein on the eastern outskirts of Johannesburg from AECI, a South African chemical and explosives company, in November 2013. The company plans to invest more than ZAR80.0 billion over the next 15 years in a new urban development dubbed the “New York of Africa.” The development will include a financial hub, housing, and facilities for education and sports, etc. This project will create 22,000 jobs in the next ten years and is expected to have direct and indirect economic effects equivalent to ZAR14.0 billion.

As examples of entry into the infrastructure sector by Chinese companies, two Chinese companies etc. won the bid for 1,064 locomotives for general cargo transport for the South African company Transnet SOC, Ltd., in March 2014. According to an announcement by Transet, CSR Corporation Limited and the Canadian company Bombardier Inc. won the bid for 599 electric locomotives, and China CNR Corporation Limited and the US company General Electric Company (GE) won the bid for 465 diesel locomotives. This bid was the largest order ever for locomotives from South Africa, and the cost is expected to be ZAR50.0 billion. Moreover, infrastructure development of the accompanying railway and port is expected to cost ZAR307.0 billion.

-Steering of South African Industrial Policy to be Reviewed When Chinese Production Bases Relocate-

Chinese companies are heading to Africa to relocate their production bases in the labor-intensive, unskilled sector.

At a China-Africa Business Forum held in South Africa in September 2014, Martyn Davies, CEO of the research firm Frontier Advisory, said, “In China, the marketization of services is rapidly occurring. In the manufacturing sector, employment is shifting from China to Southeast Asia, etc., and some of it is shifting to Africa as well.” Moreover, Peter Draper, senior research fellow at South African Institute of International Affairs (SAIIA), framed the issue by saying, “In China, the private sector is working dynamically and is driving the economy, but in South Africa, the focus is on a growth model that is centered around state-owned enterprises. To attract investment to South Africa, it is essential to improve the investment environment in the private sector.” He emphasized that South Africa should review its industrial policy, viewing Chinese companies’ relocation of their production bases as an opportunity.

94

7. Japan 7-(1) Japan: Large Recovery in Direct Investment to Japan; Balance Also in an Uptrend

Chinese companies’ direct investment in Japan is less than 1% of the total balance of investment Japan receives, but it is continuing to rise. The amount of investment (flow basis) declined briefly from 2010 but appears to have significantly recovered in 2013, while direct investment in M&A seems to have remained small.

-Large Statistical Gap between Japan and China, but Recovery Is Shared Feature of Both- According to the statistics on the international balance of payments released by the Bank of Japan, direct investment (net, flow) from China was in a downtrend, with JPY27.6 billion in 2010 followed by JPY8.9 billion in 2011, and JPY5.7 billion in 2012. However, it rose to JPY13.8 billion in 2013. According to Chinese statistics, the amounts were USD337.99 million in 2010, USD149.42 million in 2011, USD210.65 million in 2012, and USD434.05 million in 2013, displaying a large gap with Japan’s statistics. However, both sets of statistics show a decline starting in 2010 and then a significant recovery in 2013.

The balance of China’s direct investment in Japan is in an uptrend. Looking at the Bank of Japan’s statistics, it was JPY60.7 billion at the end of 2013 (JPY25.6 billion in manufacturing and JPY35.1 billion in non-manufacturing) (refer to Figure 7-(1)-1). However, this is only 0.3% of the total balance of direct investment in Japan. Looking at the rest of Asia, China’s direct investment in Japan is fairly small, compared with JPY1,407.7 billion from Singapore, JPY574.2 billion from Hong Kong, JPY219.0 billion from South Korea, and JPY239.5 billion from Taiwan.

-M&As Begin to Decrease in 2013- Among Chinese companies’ investments in Japan, M&As began to increase from around 2009. According to Thomson Reuters’ data, the number of M&As with Japan by companies was low, with four in 2007 and three in 2008, but they increased to 7 in 2009 and 17 in 2010. Subsequently, there were seven in 2011 and nine in 2012. However, in 2013, there were just two cases of M&A, the acquisition of shares of Renown Incorporated’s stock by Jining Ruyi Investment Co., Ltd., and the acquisition of all the stock (transferred from Mitsubishi Materials Corporation) of Tamadai, an aluminum die-casting business, by Dalian Jinwen Metal Products Co., Ltd.

According to JETRO assistance programs and news reports, the following are examples of direct investment in Japan other than M&A in 2013. In April, Dalian Auto, which designs auto body process lines and manufactures welding jigs, established Auto Tech Japan, which plans and designs auto welding lines, conducts new development of nursing care robots, conducts R&D for new businesses and new products, and conducts international trade. In September, Shanghai Electric Power Company established Shanghai Electric Power Japan Co., Ltd., a wholly-owned subsidiary. Together with Japanese companies, it is pursuing investment in, and development of, clean energy generation projects. Also in September, TeleTek Services Co., Ltd., which builds and operates communications infrastructure and does consulting, established TeleTek as a Japanese corporation.

95

It supports the business development in Japan of its major customers who are in partnerships with major Japanese communications companies. It is actively hiring engineers in Japan and aims to expand sales channels in Japan.

Figure 7-(1)-1: Balance of Direct Investment in Japan (by country/region) (units: JPY100 million, %)

End of End of End of End of End of End of Component 2000 2005 2010 2011 2012 2013 Ratio Total 57,821 119,033 175,020 175,482 178,079 179,758 100.0 Asia 4,522 7,873 18,975 20,689 24,099 25,822 14.4 China 96 120 325 435 476 607 0.3 Taiwan 1,722 1,635 1,838 1,864 2,170 2,395 1.3 South Korea 123 367 1,576 1,726 2,461 2,190 1.2 Hong Kong 2,018 3,068 3,297 3,556 4,976 5,742 3.2 Singapore 460 2,537 11,331 12,435 13,278 14,077 7.8 North America 18,658 56,072 60,236 56,520 54,838 56,780 31.6 US 16,255 51,559 59,092 55,003 53,308 55,216 30.7

Canada 2,403 4,512 1,144 1,516 1,530 1,564 0.9 Central and South 19,231 17,607 15,387 11,996 6.7 America 4,051 9,655 Cayman Islands undisclosed 6,578 15,311 14,322 12,176 9,912 5.5 Oceania 625 561 1,015 1,090 1,336 1,691 0.9 Australia 621 555 801 875 961 1,301 0.7 Western Europe 75,155 79,078 82,142 83,192 46.3 (Europe*) 29,812 44,761 Germany 5,548 6,937 8,158 7,486 7,239 6,783 3.8 UK 4,245 3,563 7,650 12,329 13,354 13,819 7.7 France 9,494 12,661 15,644 15,905 15,566 15,014 8.4 Netherlands 6,149 13,691 30,069 30,978 27,284 29,150 16.2 Switzerland － 2,659 4,296 4,787 11,661 10,715 6.0 Eastern Europe, － － － － － Russia, Etc. 48 55 Middle East 104 17 48 161 119 128 0.1 Africa 0 1 315 291 119 110 0.1 *From 2010 onward, “Europe” includes Eastern Europe and Russia, etc. Source: Bank of Japan.

96

Trends in Overseas Direct Investment by Chinese Companies in 2013

Published January 2015 (in Japanese)

Japan External Trade Organization (JETRO) China and North Asia Division, Overseas Research Department Ark Hills Mori Bldg. P.O. Box 528 1-12-32 Akasaka Minato-ku, Tokyo, JAPAN

Postal code: 107-6006 Tel: +81-3-3582-5181

Unauthorized reproduction prohibited

97