Chinese outward foreign direct investment (FDI) will be markedly lower in 2017, after a record-setting pace in 2016, according to the latest Economic Intelligence Unit (EIU) analysis.
In 2016, Chinese outward direct investment rose by a remarkable 44% to reach $US 170 billion, according China’s Ministry of Commerce. This was the highest level for outflows ever. As a result, Chinese outward direct investment surpassed inward FDI for the first time in 2016.
The tide turned notably in 2017, however. The first 10 months of 2017 saw a decline of over 40% in outward direct investment flows. The diminished level of Chinese FDI is directly attributed to the brakes that the Chinese government applied. Chinese government approval processes started to tighten in late 2016. Chinese policy makers became concerned that some flows of Chinese capital abroad were designed to bypass their capital controls. A further concern was about large “irrational” investments unlikely to generate returns.
As a result, there were no recorded Chinese acquisitions of property or sports and entertainment assets abroad in the first ten months of 2017. On the other hand, the share of outward investment in the commodity and energy sectors rose in 2017. The Chinese government also readily authorized strategic and technological investments. For example, ChemChina’s $US 43 billion acquisition of the Swiss-based agriculture giant, Syngenta, the largest takeover to date, was confirmed in June 2017.
Among the key recent trends identified by the EIU survey are:
- Developed economies dominate the EIU’s rankings of the most attractive destinations, though emerging markets have risen recently.
- The increased interest in emerging markets is driven in part by the Chinese government’s Belt and Road Initiative (BRI).
- Singapore is the most attractive destination for Chinese investment, overtaking the US. Hong Kong ranks third. Among developed countries, Australia’s 2017 ranking fell from third in 2015 to fifth, while Canada dropped from fourth to ninth.
Looking ahead to 2018, the EIU expects Chinese outward direct investment to rebound, though at the rate of growth that will be much less than 2016’s explosive increase.
There is continued room for growth as China’s global role expands. China still has a much lower level of investment abroad as a share of it GDP (11%) than the US (29%), Japan (28%) or Germany (57%). The future drivers will be China’s desire to grasp global market share by acquiring technology, brands and resources. Investments related to the Belt and Road Initiative – especially construction – will also be favoured by the government. Chinese state-owned enterprises (SOEs) will likely remain the main participants in outward investment, though prominent technology leaders such as Alibaba, Huawei and Tencent will determine whether China grows powerful international brands.
The report is available at https://www.eiu.com/public/topical_report.aspx?campaignid=ChinaODI2017.