Breaking down China’s overseas investment, Part I: The makings of a global phenomenon

Riding the upward wave, China’s recent flurry of outbound investment signals a new major investor on the global map

While China has written a splendid chapter on attracting foreign direct investment (FDI) over the past decade, there have also been many stories about its outbound direct investment (ODI).

Instead of just being a recipient of foreign investment, China’s State-owned enterprises (SOEs) and private companies have become major “foreign investors” in their own right.

An Upward Trend

According to official statistics, by the end of 2011, China’s ODI had increased for 10 straight years, with an average annual increase of nearly 45 percent from 2002 to 2011. Its accumulative ODI had surpassed $400 billion by the end of last year, ranking 13th in the world.

China’s ODI has been increasing at a rapid pace, especially in recent years. From 2006 to 2010, China enjoyed a double-digit average annual growth. It overtook Japan and the United Kingdom in 2010 to become the fifth-largest global investor.

During the first 10 months of this year, China’s ODI in non-financial sectors surged 25.8 percent year on year to $58.2 billion, figures released by China’s Ministry of Commerce (MOC) in November showed.

According to a poll conducted by the China Council for the Promotion of International Trade in April, most of the companies surveyed said their overseas investments were made during the past five years, and only 3 percent said their overseas operations were established 10 years ago.

“The fast growth of China’s ODI shows the improved competitiveness of Chinese companies,” Shi Mingshen, one of China’s most influential business commentators, said to this journalist. “The external environment and China’s ever-increasing foreign reserves also enable the country to invest overseas.”

“With foreign reserves of $3 trillion in hand, we will not sit back and watch the assets depreciate with the third round of quantitative easing. We must make our contribution to global prosperity,” Commerce Minister Chen Deming said at a financial forum last month in Beijing.

China’s ODI this year will surpass that of last year to hit $70 billion and is set to increase in 2013, Chen said.

A World Map

By the end of 2011, Chinese investors had poured money into 177 countries and regions, covering 72 percent of the world’s total, according to official statistics. 70 percent of China’s ODI flowed into Asian countries. Developing countries attracted 89 percent of China’s ODI, and developed countries received the remaining 11 percent, the data showed.

Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation, believes that such investment structure was attributed to the comparatively low market access requirements and low production costs in developing countries.

“Developed countries have stringent market access restrictions, while Chinese investment is more welcome in developing countries,” Mei said. “Plus, Chinese companies tend to invest in developing countries because of the low production costs there, and many of them remain incapable of operating in developed countries.”

Although China’s overseas investment was mostly concentrated in developing countries, that in the developed countries has been on the rise at a rather fast pace.

By the end of last year, China’s ODI in Europe had rapidly increased for three consecutive years and covered all 27 member states of the European Union.

Chinese investment in the United States rose nearly 39 percent year-on-year in 2011 and increased by almost 30 percent during the first seven months of this year.

“With China’s growing overall economic strength and the ever-increasing competitiveness of Chinese companies, China’s overseas investment will gradually switch to developed countries,” Ms. Shi said. “This trend has become increasingly evident in recent years.”

According to statistics from China’s Ministry of Commerce, China’s ODI in the European Union (EU) surged 280 percent year-on-year in 2009 and more than doubled to reach $6 billion in 2010. In 2011, China’s ODI in Europe rose 22.1 percent year-on-year to $8.3 billion.

Rhodium Group, a New York-based consultancy that analyzes global trends, said in a report issued in September that China’s annual investment in Europe tripled from 2006 to 2009, and tripled again in 2011. The number of deals with a value of more than $1 million doubled from less than 50 in 2010 to almost 100 in 2011.

According to a report from accounting firm PricewaterhouseCoopers in France, in 2011, the amount of Chinese investment in Europe for the first time exceeded the amount of investment by European companies in China.

By the end of 2011, China’s cumulative investment in the United Kingdom reached $2.3 billion. “Half of that was made in 2011 alone,” said Wu Kegang, Chief China Adviser of the British Chambers of Commerce.

Chinese investment in the United States also surged. According to a recent report issued by the Asia Society and Rhodium Group, China has set the stage for a record year for outbound investment to the United States with Chinese firms completing investment transactions worth $6.3 billion in the first three quarters of this year.

“China is an increasingly important source of FDI,” said Brenda Foster, president of AmCham Shanghai. “It is critical to educate U.S. states on what can be done to attract more investment from China.”

The Makings of a Global Phenomenon

China’s overseas investment has become a global phenomenon. It can be classified into three categories: financial investment by the state, private investment by wealthy individuals and private-equity firms and the advance of SOEs.

Although SOEs’ share in China’s overseas investment has fallen in recent years, they remain the major force of China’s ODI.

China’s central SOEs currently account for more than two-thirds of China’s total ODI, said Wang Tianlong, a researcher at China Center for International Economic Exchanges.

16 out of the top 18 Chinese multinationals with the biggest holdings of foreign assets were large SOEs, according to a survey conducted in 2010 by the Vale Columbia Center, part of Columbia University in the United States.

“Central SOEs have sufficient capital and are most capable of carrying out overseas investment,” said Ms. Shi.

“There is a misconception about China’s SOEs that should be corrected, which is this: SOE is not the embodiment of the Chinese government. Most SOEs in China have adopted a complete modern corporate system. These enterprises operate on their own, and are fully responsible for their own profits and losses.”

Although China’s ODI is, to some extent, still a SOEs phenomenon, investment by China’s private companies has been on the rise in recent years, especially in mergers and acquisitions (M&A).

The number of M&A deals by private companies has overtaken those by the SOEs for the first time. Official statistics showed that private Chinese enterprises took part in more overseas M&As than their State-owned counterparts did in the past three quarters of this year.

According to a report released in November by the global accounting firm KPMG LLP, in the third quarter, private companies took part in 62.2 percent of the M&A deals that involved Chinese companies, up 50 percent from the first half of the year.

Chinese private investors have been making far more overseas M&A deals in the past four years, with their proportion of the total going from 44 percent to more than 62 percent. At the same time, that of SOEs went from 56 percent to 38 percent, the report said.

By the end of 2011, ODI by private companies accounted for 44 percent of China’s total ODI, said Liang Yutang, deputy head of China Minsheng Banking Corp Ltd.

“Private Chinese companies are an emerging force in the overseas investment market,” concluded the KPMG report.

Author: Li Zhenyu
Source: People’s Daily Online
Li Zhenyu authors the “Golden Decade” column for People’s Daily Online.