China will become the world’s biggest cross-border investor by the end of this decade, with global offshore assets tripling from $6.4tn presently to nearly $20tn by 2020, according to new research.

While much of the total will be in the form of foreign exchange reserves and portfolio investment, a growing share will come from direct Chinese investment in developed western countries, according to a joint report by the economic research firm Rhodium Group and the Berlin-based Mercator Institute for China Studies.

Based on the historical experiences of other countries, China’s global stock of outbound foreign direct investment (OFDI), which includes investing in corporate mergers, acquisitions and start-ups, will grow from $744bn to as much as $2tn by 2020.

The report’s projections are valuable because official cross-border OFDI statistics from China and recipient countries are widely seen as being of poor quality and do not give an accurate picture of real investment flows.

In barely a decade, Chinese OFDI has gone from virtually nothing to more than $100bn year, launching it into the top three exporters of direct investment globally.

Europe in particular has welcomed the Chinese largesse with open arms, especially in the wake of the global financial crisis and sluggish eurozone economic growth.

But the report warned that surging Chinese investment would also require a change in attitude from recipient markets and their politicians to take full advantage of the opportunities and contain the risks.

“Characteristics such as the size, growth and complementarity of the Chinese economy create unique opportunities for Europe,” the report’s authors said. “At the same time, some specific concerns that are related to the nature of China’s political and economic system, for example subsidies, China’s authoritarian political system and lack of openness to [foreign direct investment], create particular challenges.”

 

While early Chinese investments focused on energy and natural resource assets in developing countries, investors are increasingly looking to the US and Europe for fresh opportunities.

Between 2000 and 2014, Chinese companies spent €46bn on 1,047 direct investments in the 28 EU countries, with most of the transactions coming in the wake of the 2008-09 global financial crisis.

The UK is by far the biggest recipient of Chinese direct investment, with a cumulative total of €12.2bn over that period. Germany is second with €6.9bn and France third with €5.9bn.

Following a drop in 2013 to €6bn, from more than €7bn each year in 2011 and 2012, Chinese investment in Europe came surging back in 2014, hitting a record high of €14bn for the whole year.

 

Europe’s energy, automotive, food and real estate sectors attracted the most Chinese money.

Despite the recent sharp rise and heady predictions for Chinese outbound investment in the future, the country is still playing catch-up.

“China is so unique and important because it is already a major global investor and it has the potential to become the single most important driver of global FDI growth over the next decade,” the report said.

While China is the world’s biggest trader of goods, its share of global financial cross-border assets and liabilities barely reached 3.4 per cent by 2011.

Today, its stock of OFDI as a proportion of GDP stands at just 7 per cent, compared to 38 per cent for the US, 20 per cent for Japan and 47 per cent for Germany.

One issue that could stymie the rise of Chinese investment is the ongoing difficulty international companies face trying to invest in China.

“In terms of formal restrictions to FDI, China is considered one of the least open countries among the G20 economies,” the report’s authors said. “Moreover, there is rampant informal discrimination against foreign companies as well.”

Another problem is that Chinese companies enjoy a range of state-provided subsidies, including cheap capital and assistance from the Chinese government, when investing abroad. By contrast, European companies are legally barred from receiving “state aid” when bidding for assets within Europe.

Since the “state aid” restriction only applies to European companies, many Chinese investors were able to outbid private European companies in competition for European assets because of help from Beijing.

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