Outbound foreign direct investment (FDI) from China slowed significantly in 2017, as more stringent controls were placed on certain types of capital outflow. As China’s outward investments mature and develop to adjust to the country’s current trajectory, Veronica Gianola and Shane Farrelly of D’Andrea & Partners discuss which industries and government policies have helped to shape China’s future outbound FDI.

Policy changes

In 2016, China had the second-largest source of global outbound FDI, with Chinese companies concluding a record 622 outbound merger and acquisition deals which totalled United States dollar (USD) 221.7 billion.[1] However, the following year China saw a precipitous drop in capital outflow, a year-on-year decline of 29.4 per cent, as the Chinese Government in an attempt to strengthen national capital controls and rein in overseas investments placed restrictions on certain areas of outbound FDI.

 

After the renminbi-yuan (CNY) dropped in value by seven per cent in 2016, the government attempted to stabilise China’s currency, at the beginning of 2017 by establishing a national negative list on investment projects for state-owned enterprises (SOEs).[2] In August 2017, the Chinese Government stated that investments in areas of entertainment, sports, film and luxury real estate would be heavily discouraged, while investments in gambling would be banned outright. At the end of 2017, the National Development and Reform Commission sought to further restrict outbound capital by requiring that Chinese companies seek regulatory approval for foreign acquisitions conducted through offshore entities.[3]

While Chinese outbound FDI had initially been directed towards the country’s domestic manufacturing base, recent acquisitions however, have been in areas described as ‘irrational outbound investment’ (e.g. hotels, football clubs and high-end real estate).

Internationally strategic investments
It is important to note how the State has helped guide Chinese companies when it comes to investing abroad. As China aims to gradually move away from its image as the world’s manufacturer, changes in strategy were bound to arise, with a conscious shift to higher-quality international investments. These changes are now supported by government policies that are looking to promote China as a world leader.

Made in China 2025 is one   Inspired by Germany’s Industry 4.0, Made in China 2025 has the government aiming to upgrade 10 strategic industries in order to innovate China’s manufacturing capability through the utilisation of information technology (IT). The plan aims to upgrade all industry, however, the 10 strategically highlighted industries include: new advanced IT services; automated machine tools and robotics; aerospace and aeronautical equipment; maritime equipment and high-tech shipping; modern rail transport equipment; new-energy vehicles and equipment; power equipment; agricultural equipment; new materials and biopharmaceuticals and advanced medical products.

In order to avoid the middle-income trap, China must invest in their high-tech industries and adopt cutting-edge industrial improvements already seen in many other countries around the world. A direction which the central government already seems to be heading. The government theorises, that in pushing Chinese firms to internationalise, businesses will be then forced to innovate their manufacturing processes in order to compete. Chinese companies that have already invested abroad in high-value sectors can drive on their industry to globalise and meet the increasingly higher demands of both foreign and domestic customers in an increasingly globalized market place. Recent examples of this include ChemChina acquiring the Swiss pesticide and seed producer Syngenta AG for USD 43 billion and Tencent’s takeover of Supercell, the Finnish mobile game developer, for USD 8.6 billion.

The maturation of Chinese investments abroad has not only been seen in high tech and innovative industries but also outbound investments in trade, logistics and cultural projects. As the Chinese Government places greater emphasis on the Belt and Road Initiative (BRI), the Silk Road Fund and the Asian Infrastructure Investment Bank will assist Chinese companies in supporting the building of infrastructure across the Asia-Pacific region. This means improving connectivity and cooperation between Chinese investments located around the world. Connectivity is becoming increasingly important as China collaborates with countries like Indonesia, Laos and Thailand to help build projects such as the Jakarta-Bandung high-speed railway, in Laos, the China-Laos railway and the China-Thailand railway project.[4]

Infrastructure-based cooperation can be seen in countries along the ‘belt’ portion of the BRI, especially in developing economies that are ripe for investment. SOEs have started to form partnerships with local operations in countries that participate in the BRI, as the Chinese Government sets out to improve existing international relationships and increase the amount of outbound investments. An example of this can be found in COSCO, the global shipping carrier. The company recently acquired management responsibilities of the Piraeus port in Greece for euro (EUR) 500 million and since that acquisition, business has tripled with 6,000 containers a day being transferred through the port. Additionally, Chinese companies that have invested in Greece now have an access point to the rest of the European Union.[5]

Conclusion

Like other countries which enjoyed rapid economic development, China’s outbound investments have grown exponentially fast. Chinese companies have looked globally to diversify and have seized on market opportunities to help strengthen their business not only in China but abroad as well. However, the rationale for some of these investments has been questioned by the government in recent years. Restrictions on investments considered frivolous, were put in place and government policies were enacted to encourage more development-orientated growth and assist companies in areas of outbound investments. As outbound investments have already shown growth in the first quarter of 2018,[6] opportunities for Chinese companies to globalise and invest abroad will continue to arise as China begins to develop more sustainably.

[1] China’s outbound investment spike set to ease, China Daily, 14th May 2017, <http://usa.chinadaily.com.cn/business/2017-04/14/content_28929785.htm>

[2] Measures for the Supervision and Administration of Outbound Investments Made by Central Enterprises, State Council, January 2017.

[3] Administrative Measures for Enterprise Outbound Investment, National Development and Reform Commission, (December 2017)

[4] Riding the Silk Road, EY, March 2015.http://www.ey.com/Publication/vwLUAssets/ey-china-outbound-investment-report-en/$FILE/ey-china-outbound-investment-report-en.pdf

[5] Chinese carrier Cosco is transforming Piraeus–and has eyes on Thessaloniki, the Guardian,19th June 2014, <https://www.theguardian.com/world/2014/jun/19/china-piraeus-greece-cosco-thessaloniki-railways>

[6] China’s outbound investment up by more than a third in January-April, GB Times, May 18th, 2018, <https://gbtimes.com/chinas-outbound-investment-up-by-more-than-a-third-in-january-april>