How Chinese businesses will increase overseas investments

Expect Chinese businesses to boost overseas investments, but not necessarily where they have put their money in the past decade, research by the Economist Intelligence Unit suggested.

China’s outbound direct investment trends are shifting after a massive ten-year growth spurt that averaged 35% per year and in 2014 catapulted China into the position of third largest global investor behind the US and Japan. One of the megadeals driving the growth was the $15.1 billion acquisition of Canadian oil and gas firm Nexen by the state-run China National Offshore Oil Co. in 2012.

EIU research, which includes a survey of 110 Chinese companies, found that Chinese investors are diversifying and looking for new growth markets.

“In the past, Chinese investment exhibited a strong pro-cyclical pattern – firms bought natural resources when its economy was growing fast and, as a result, they found themselves often paying peak prices for commodities,” the EIU report says. “A counter-cyclical approach and long-term thinking will be the key to success for future [outbound direct investment].”

The shifting investment trends already have affected previous favourite destinations for Chinese investments. Russia and Taiwan dropped out of the top ten last year and were replaced by rising favourites South Korea and Denmark.
 
Social unrest, tensions with the West, and a high dependency on natural resources lowered Russia’s attractiveness to Chinese investors. Taiwan and Hong Kong, which fell four spots from 2014, were weighed down by more modest economic growth prospects and higher political risk.

South Korea benefited from a free trade agreement it signed with China in 2015. Other winners included Egypt and EU members, reflecting some of the changes Chinese investors are making.

Diversification. Chinese businesses are increasingly interested in investing in services, agriculture, and infrastructure. Chinese investors are drawn to the mature financial market, real estate, and the quality of the infrastructure in EU countries, according to the EIU research. In the agricultural sector, they are interested in US corn, Australian beef, soybeans from Argentina, and New Zealand dairy products.

Markets that rely heavily on natural resources, such as Brazil, Kazakhstan, Kuwait, and Pakistan, lost part of their attractiveness to Chinese investors in 2015.

New growth markets. Developed markets remain favourites of Chinese investors, but economic growth matters. Australia and South Korea climbed in the 2015 rankings because of brighter growth prospects. An improved outlook for GDP growth also lifted Egypt, which is expected to see more political stability, and Portugal, whose public debt position has improved and labour costs have declined.

Government support. Restrictions on capital outflows may tighten, but policies by the Chinese government are projected to continue to support overseas investments by Chinese businesses. One programme, called the “One Belt, One Road” initiative, has become a priority for the Chinese government. State-owned enterprises are expected to particularly benefit from this initiative, which targets infrastructure projects.

Local governments in China are also offering financial support and are setting up regional strategic alliances to help companies expand globally.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.