In recent years, outbound direct investment from China slowed down significantly, 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, which industries and government policies have helped to shape the future of China’s outbound investments?
In 2016, China had the second-largest source of global outbound FDI, with Chinese companies concluding a record of 622 outbound merger and acquisition deals which totalled United States dollar (USD) 221.7 billion. However, everything changed the following year as China saw a precipitous drop in capital outflow, a year-on-year decline of 29.4 percent, 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.
When the renminbi-yuan (CNY) dropped in value by seven percent in 2016, the government attempted to stabilise China’s currency by establishing a national negative list on investment projects for state-owned enterprises (SOEs). In August 2017, the Chinese Government stated that investments in areas of entertainment, sports, film, luxury, and 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.
Internationally strategic investments
It is important to note how the State has helped guide Chinese companies in recent years when it comes to investing abroad. As China has aimed 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.
The maturation of Chinese investments abroad has been most evidently seen in 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 which assists 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, collaborating with neighboring countries in the Asian region of the initiative.
Infrastructure-based cooperation can also 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. A prime example of this can be found in COSCO, the global shipping carrier. The company 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.
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 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. 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 along the Belt & Road Initiative in the first quarter of 2019, opportunities for Chinese companies to globalise and invest abroad will continue to arise as China begins to develop more sustainably.