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China’s outbound investment set to eclipse inbound for first time
2014-10-27
Brief:China outbound direct investment rose 21.6 per cent in the first nine months compared with last year to $75bn which is for the first time set to exceed investment into the country, highlighting the ongoing shift of global economic influence to the east.
China’s outbound direct investment is for the first time set to exceed investment into the country, highlighting the ongoing shift of global economic influence to the east.

Outbound direct investment rose 21.6 per cent in the first nine months compared with last year to $75bn and on last Wednesday a senior Chinese official said that on current trends it would probably exceed inbound investment by the end of the year.

This is just a matter of time; if it doesn’t happen this year then it will happen in the very near future,” said Zhang Xiangchen, China’s assistant minister of commerce. “China is already a capital exporting country and it is now poised to become a net exporter of capital.”

From Africa and Latin America to the US and Europe, cash-rich Chinese investors are already snapping up real estate, companies and other assets while growth at home is poised to fall to its slowest annual pace in nearly two and a half decades.

This month a Chinese insurance company bought the iconic Waldorf Astoria Hotel in Manhattan for nearly $2bn while in the same week China’s state-owned Bright Food Group, which bought Britain’s Weetabix two years ago, took a majority stake in Italian olive oil maker Salov Group.

But with $4tn in government-administered foreign exchange reserves and Beijing’s active policy of supporting offshore acquisitions, there is enormous potential for a much larger flow of investment abroad.

The rise in outbound investment over the past decade has already been meteoric. In 2002 Chinese investors spent just $2.7bn on acquisitions and greenfield projects abroad but by 2013 the total had increased 40-fold to $108bn.

In the first half of this year there was a rare drop in outbound Chinese investment, according to alternative data published by the US think-tank the Heritage Foundation, which compiles its own numbers.

Analysts blamed the drop largely on the country’s vociferous anti-corruption campaign, which discouraged offshore deals since these are often used to skim off cash and assets and stash them beyond the reach of the Chinese authorities.

But there was a surge in deals in the third quarter, according to the Ministry of Commerce, as investment into China from abroad registered its worst performance since the depths of the financial crisis.

In July and August, investment into China dropped 14 per cent and 17 per cent respectively from the same months a year earlier.

Inbound FDI recovered somewhat in September but total investment into China of $87.4bn in the first nine months of the year was still down 1.4 per cent from the same period a year ago.

Apart from a drop during the global financial crisis, FDI inflows to China have grown steadily since the country joined the World Trade Organization in 2001 and reached a record $118bn last year.

At current rates of growth, inbound FDI will be lucky to reach that level again this year, while outbound investment could come in at close to $130bn for 2014.

China still maintains tight restrictions on cross-border financial and portfolio investments and the renminbi is still not fully convertible, but the outward flow of direct investment is being facilitated by looser Chinese regulations.

While companies still need to consult several ministries and government agencies before they are able to invest abroad, many formal approval procedures have been simplified this year.

The Ministry of Commerce this month adopted new measures that mean it no longer approves every single outbound investment deal over $100m, although it still requires all deals to be “registered” and approvals from several other agencies are needed for most deals.

“It is expected that [the looser regulations] will further accelerate the flow of outbound capital from China, in particular into favoured markets like Australia, the US and the UK,” said Alistair Meadows, head of international capital in Asia-Pacific for JLL, the real estate investment consultancy.

The slowing domestic economy is another powerful factor pushing Chinese companies to hunt for acquisitions abroad.

The world’s second-largest economy is suffering from chronic over-investment and overcapacity after a five-year credit boom and is on track this year to post its slowest annual growth rate since 1990.
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