In what has been called the "third wave" of China's outbound direct investment (ODI), the focus has been on companies in the developed economies in high technology and services. Previous "waves" have focused on supporting developing economies and investing in commodities and extraction industries.

The increase in China's ODI is driven by the government's strong encouragement for domestic companies to invest overseas in a bid to boost their international competitiveness. The added benefit to Beijing of ODI is that it utilises surplus domestic capacity and helps to slow the rapid build-up of the country's foreign-exchange reserves, which had reached a record US$3.8 trillion by end of 2014.

Slow global economic recovery and depreciating foreign currencies have provided a decent tailwind to this endeavour.

China's ODI grew by 19 per cent year on year on average between 2009 and 2014. This compared with foreign direct investment (FDI) into China growing on average 5 per cent year on year during the same period. Last year, China's ODI reached $116 billion, almost the same as the FDI total of $120 billion.

Some of the landmark and headline-making deals we have seen include the $2.3-billion acquisition by Lenovo of IBM's x86 Server business. Another deal involved Anbang Insurance teaming up with Hilton Worldwide Holdings to purchase The Waldorf Astoria New York hotel for $1.95 billion. Last but not least, in financial services, Industrial and Commercial Bank of China purchased a 60-per-cent share of South African Standard Bank for $765 million.

So what is the outlook for China's ODI and are there any new trends to watch out for?

First, in our view China's ODI will continue to grow by around 20 per cent a year, with China overtaking the United States as the world's largest outbound direct investor in the next few years. This year, the pace of investment to accelerate, pushed by massive infrastructure investments in Asia and Europe envisaged in the "One Belt, One Road" initiative.

Second, Chinese companies will continue to shift their geographic and sector focus. The investment destination is changing away from Africa, Latin America and Asia. Chinese investors are now making strategic investment in developed markets, in particular the European Union and North America. Europe has recorded 14 per cent of China's ODI in goods and services in the last five years [4].

In addition, China's "third wave" ODI is shifting focus from acquiring natural resources such as coal, oil and metals to infrastructure including rail, shipping and ports. Investors are now turning to agriculture, technologies, high-end manufacturing, consumer goods, real estate, services and brands. This is at an early stage but growth rates are rapidly accelerating.

Finally, another important trend is that private investors are becoming the main driving force of ODI. State-owned enterprises continue to do deals in the industrial, resources and energy sectors. Privately owned enterprises are investing in more value-added industry sectors such as agribusiness, technology, high-end manufacturing and real estate in more countries and regions. They are looking for intellectual property and brands to bring back to the Chinese market.

Mergers and acquisitions have become the fastest way for Chinese companies to tap foreign markets and move higher up the value chain. Foreign-currency depreciation against the renminbi prices continue to provide a favourable environment for China's M&A activities.

The opportunities, however, come with challenges. Acquiring value-added assets is likely to remain extremely difficult. Chinese companies are still not well understood overseas. Cultural integration can be a challenge. To adapt to these challenges we have seen private enterprises hiring local management, applying local operating models in a bid to retain talent and cut acquisition risk.

China's new wave of ODI is underpinned by the government actively reforming and deregulating its regulation of overseas investment. We can expect more developments in the near and mid-terms.

For instance, with Chinese companies speeding up their pace of overseas expansion, renminbi-denominated deals could be promoted in overseas mergers and expansions. In particular, the expansion of China's trading and capital-investment space in regional economic cooperation would greatly facilitate the internationalisation of the renminbi, or yuan, through deepening the pool of RMB liquidity globally, more RMB cross-border investment along with associated cross-border RMB loans and other derivatives.

All in all, Chinese corporate overseas investment is supported by the government and is helping further to open the economy at home and China's participation in the global economy abroad. It is a new era of global cooperation and a clear win-win story.

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