M&A

As economists obsess over plunging foreign direct investment into China, they risk missing a far more important trend: the giant waves of capital zooming in the other direction.

In 2023 alone, Chinese outward direct investment in the Asia-Pacific region surged 37% to nearly US$20 billion. That outflow speaks to how Chinese companies seeking growth abroad are altering financial dynamics from Asia to the West to Latin America.

And how China Inc’s investment ambitions are only just beginning to remake the global pecking order, despite Washington’s attempts to curb its influence.

“China’s ODI has risen substantially since the turn of the millennium,” says Frederic Neumann, chief Asia economist at HSBC. “Only starting to venture out into the international investment landscape in the mid-2000s, China was, in a sense, ‘late to the game.’ However, after rapid increases in the first half of the 2010s, China’s stock of ODI now surpasses that of Japan, Germany and the UK.”

And there’s still room for exponential growth. As of the end of 2023, Neumann notes, the overall stock of Chinese outward investment was just one-third that of the US, and still small relative to the size of China’s economy. At 15.7% of gross domestic product (GDP), Neumann says, “it’s well below” that of the major developed economies and the global average of 34%.

The reason, Neumann explains, is that Chinese firms have strong incentives to “go out” to explore global markets, including the so-called “Global South” developing markets. As China develops, its funding of ODI will be an increasingly vital channel to gain access to resources, markets and trade routes.

The dynamic marks an about-face from earlier policies de-emphasizing ODI in 2016 and 2017 and during the pandemic period. Yet an increasing amount of investment now “would align with broader Chinese economic and political development priorities,” Neumann says.

“We think that Chinese ODI flows are set to accelerate,” he adds. “In our baseline scenario, which envisages ODI rising in line with its recent trend, annual flows could rise by over 50%, with at least $1.4 trillion to be invested abroad between now and 2028.”

There’s an ever more dramatic upside scenario that HSBC is analyzing: China’s ODI rising in sync with per capita gross domestic product. That would mean a near-tripling of the recent pace of ODI to well over $400 billion per year.

China’s outgoing cash contrasts sharply with the 12% drop in overall FDI into emerging Asia in 2023. Roughly half of the investment China is making in the region is going to Southeast Asia, up 27% year on year.

Especially Indonesia. Southeast Asia’s biggest economy, which grew more than 5% in 2023, took in about US$7.3 billion of Chinese ODI last year.

“Indonesia has a track record of navigating shocks and maintaining economic stability,” says economist Satu Kahkonen, World Bank country director for Indonesia.

Incoming president Prabowo Subianto projects 8% growth for Indonesia over the next five years. The challenge, Kahkonen says, “is to build on strong economic fundamentals to deliver faster, greener and more inclusive economic growth.”

To achieve such growth, she adds, “it’s important to continue implementing reforms that remove bottlenecks that limit efficiency, competitiveness, and productivity growth. Doing so will enable Indonesia to accelerate growth, create more and better jobs, and achieve its vision of becoming a high-income country by 2045.”

Clearly, Chinese investment could help Jakarta achieve these lofty goals. That goes for other parts of Asia, too, as China’s global investment trends begin returning to pre-Covid-19 levels.

Significantly, the sectors in which China is focusing are shifting. For example, mining and real estate ODI have declined. More recently, manufacturing, transport, storage and postal services have been among the top sectors. Now, it’s technology, renewable and green energy, electric vehicles and digitalization.

Headline-grabbing EV sector investments include a joint venture between South Korea’s LG Chem and Zhejiang Huayou Cobalt. Others involve mainland automakers putting manufacturing facilities in countries such as Thailand, Vietnam and Malaysia.

China’s geographic priorities are pivoting, too. The US and Europe are less in favor, while Southeast Asia, Latin America and the Middle East are seeing more ODI from Asia’s biggest economy.

“The allure of new global markets and evolving business models are driving Chinese enterprises to venture abroad and expand their presence on the global stage,” notes economist Yi Wu, an author of the China Briefing newsletter published by Dezan Shira & Associates.

This, of course, presents new challenges. “While this trend opens doors to promising opportunities for Chinese firms,” Wu says, “the complexity of navigating diverse regulatory landscapes in different countries can be challenging to their global endeavors.”

There’s much about China’s role in the global economy that is being misunderstood. One is the state of US-China ties, the globe’s most important relationship.

“If you think the US is decoupling from China, think again,” says economist Robin Brooks at the Institute of International Finance. “Look at the sharp rise in China’s trade surplus with key ‘trans-shipment’ hubs around the world. Stuff made in China is still heading to the US, just on a more circuitous route. There is no decoupling. Only relabeling.”

Yet the pivot that may matter most is how China’s cash is moving upmarket.

Wu notes that in recent years, Xi’s Belt and Road Initiative (BRI) “presented tremendous opportunities for China’s ODI investors, leading to a significant uptick in the number and value of investments within these nations.” Yet such BRI projects covered just over 70 countries.

By the end of 2022, Chinese domestic investors had established what Wu calls a “robust global presence” with 47,000 offshore enterprises spanning 190 countries worldwide.

More than 60% of these enterprises were in Asia, 13% in North America, and 10.2% in Europe. That left roughly 16,000 overseas enterprises, around 34% in BRI countries.

All this means China Inc is methodically raising its “presence in the global market,” while “improving local infrastructure and creating massive jobs with their projects launched worldwide,” notes Yu Miaojie, president of China’s Liaoning University.

This includes Latin America. Thilo Hanemann, analyst at the Rhodium Group, notes that the US “is experiencing a post-pandemic boom in foreign direct investment, driven by the resilience of the US economy as well as new industrial policies that incentivize US manufacturing investment such as the CHIPS Act and the Inflation Reduction Act. Chinese companies are notably missing from the party.”

Instead, the burgeoning economies of the Global South are enjoying increased interest from the mainland.

“China’s engagement with Latin America has also been expanding rapidly,” says Wu of China Briefing.

A “substantial catalyst for this expansion,” he notes, was a nearly $3 billion transaction in Peru. There, China Southern Power Grid International acquired two Peruvian assets from Enel, Italy’s largest utility company. It speaks to how “Latin America emerged as a remarkable hub for M&A deals for Chinese enterprises,” Wu says.

Loletta Chow, global leader of EY China Overseas Investment Network, notes that “China remains Latin America’s second-largest trading partner and the region is gradually becoming a crucial economic and trade partner for Chinese enterprises.”

In a November report, EY China calculated that the mergers-and-acquisition deal value by Chinese enterprises in Latin America was $3.3 billion, up 185.9% year on year. The main targets were Peru’s power sector and advanced manufacturing and mobility sector enterprises in Brazil. 

EY Global notes that China Inc’s top interests in Latin America are electronics, cross-border e-commerce, agriculture, healthcare, culture and tourism, logistics, solar energy, and automotive, “signaling broad prospects for future collaboration between the two regions.”

It can also be a way to buttress China’s soft power in the region, notes Linda Calabrese, a research fellow at the Overseas Development Institute. “Therefore,” she says, “investing in renewables has positive non-monetary returns and can improve bilateral relationships.”

Margaret Myers, Asia-region director at the Inter-American Dialogue think tank, notes that Chinese investors “remain focused on traditional sectors of interest, too, including those related to China’s own food and energy security.”

Some of these still account for a significant portion of overall investment, but investment within these sectors is also shifting in ways that are consistent with China’s growing focus on innovation,” Myers says.

In general, she adds, “the sorts of large-scale infrastructure projects” that once characterized BRI “are no longer as emblematic of Chinese investment in Latin American countries as they once were.”

In many parts of the region, Chinese interest in canals, rail, and other major transport and energy, she adds, “is being replaced by a growing emphasis on innovation, whether in information and communication technology, renewable energy, or other emerging industries, consistent with Beijing’s laser focus on its own economic upgrading and global competitiveness.”

More broadly, EY’s Chow adds that “China’s commitment to high-level openness and utilization of international platforms such as the BRICS (Brazil, Russia, India, China) Summit, Shanghai Cooperation Organization Summit, the Third Belt and Road Forum for International Cooperation and Asia-Pacific Economic Cooperation (APEC) meetings supported the creation of an open world economy.”

This, Chow says, “has provided a more favorable policy coordination environment for the internationalization of Chinese enterprises. We look forward to the continued release of momentum in China outbound investment in the future.”

Of course, geopolitical currents are written between the lines in bold font. It’s worth noting that among the nations that saw a roughly 100% drop in engagement with China Inc investments between 2022 and 2023 were the Philippines, Mongolia and Papua New Guinea – all places that are at odds with Beijing on a variety of priorities.

As Christoph Nedopil, director of the Griffith Asia Institute, tells Nikkei Asia: “There are various reasons but it is typically due to incorporation of political and economic risks. For example, the Philippines and China have had some cooling of bilateral relationships.”

So do domestic economics. China Inc isn’t making outbound investments in a vacuum. And China’s wherewithal to continue pouring heaps of cash into projects around the globe requires stabilizing the financial system and ensuring GDP growth ends 2024 as close to 5% as possible.

But the ways in which Chinese ODI is offering a fascinating split-screen counternarrative to faltering FDI at home is a potential megatrend that deserves greater attention.

Follow William Pesek on X, formerly Twitter, at @WilliamPesek

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