Introduction
This article surveys Chinese outward direct investment (ODI) using a database of over 3,400 investment transaction records between January 2005 and December 2016. The objective is to investigate and examine the evolutionary development path of Chinese ODI in the last decade. Our analysis reveals several key findings. First, Chinese private enterprises have become an important force of overseas investment, and there are significant differences between the investment styles and preferences of state-owned enterprises (SOEs) and private enterprises. Second, there is a clear shift of target sectors. Investments in energy and natural resources have decreased over recent years, while investments in the real estate, high technology and services sectors picked up substantially. This also reflects a change in investment motives. Third, developed markets, especially the US and Europe, are the preferred investment destinations. Fourth, financing methods become increasingly diversified and sophisticated. In particular, many domestic Chinese private equity funds have been actively involved in cross-border mergers and acquisitions (M&A), indicating further integration between traditional Chinese enterprises and their financial counterparties.
A new era of Chinese outward direct investment
Chinese ODI growth picked up very quickly from 2006, with an average annual growth rate of 23.2% (Table 1.1). In 2014, Chinese ODI reached USD 123.1 billion according to official statistics (Ministry of Commerce and National Bureau of Statistics of the People’s Republic of China, 2015). This was the first time that Chinese ODI and inward foreign direct investment (FDI) balanced up, indicating that China might be stepping into a new era of being a net capital exporter. In the same year, China’s ODI stock reached USD 882.6 billion, ranking eighth in the world – the first time that China entered the global top ten (UNCTAD, 2016). One year later, in 2015, Chinese ODI flow surpassed FDI.
Table 1.1 Chinese ODI, 2006–2016
| Year | Flow
| Stock (bn $) |
| | Amount (bn $) | YoY Growth (%) | |
|
| 2006 | 21.1 | 43.8 | 90.6 |
| 2007 | 26.5 | 25.3 | 117.9 |
| 2008 | 55.9 | 110.9 | 184.0 |
| 2009 | 56.5 | 1.1 | 245.8 |
| 2010 | 68.8 | 21.7 | 317.2 |
| 2011 | 74.7 | 8.5 | 424.8 |
| 2012 | 87.8 | 17.6 | 531.9 |
| 2013 | 107.8 | 22.8 | 660.5 |
| 2014 | 123.1 | 15.5 | 882.6 |
| 2015 | 145.7 | 18.3 | 1,097.9 |
| 2016(E) | 170.1 | 44.1 | 1,268 |
Stepping into 2016, Chinese enterprises performed remarkably well, with several eye-catching transactions drawing the world’s attention. For example, ChemChina made an official bid to acquire Syngenta AG for USD 43 billion, a new record in Chinese ODI history. Hainan Airline Group continued to impress the world by acquiring the CIT Group, a leading global aircraft leasing company based in the US, for USD 10 billion. According to official statistics, in the first half of 2016, Chinese ODI stood at USD 89 billion, representing year-on-year (YoY) growth of 58.7%. Capital mainly flowed into business services (24.6%), manufacturing (19.8%) and wholesale and retailing (16.4%); of these, the manufacturing sector recorded the highest YoY growth rate of 245.6%. The Ministry of Commerce estimated that the overall ODI flow would reach nearly USD 1,268 billion by the end of 2016.
The surge of Chinese ODI activity in recent years may be driven by several factors. First, the world economy was hit by the global financial crisis and Euro zone debt crisis. Many countries were in desperate need of capital, creating a good opportunity for Chinese companies to invest abroad. Second, the Chinese economic slowdown and deepening economic reforms may push many Chinese companies to seek market expansion or technological upgrade opportunities abroad via direct investments. Third, the Chinese government introduced several policy initiatives that helped boost overseas ODI activities. For instance, on 8 October 2014, the State Council relaxed the rules for government approvals on ODI. Except for those projects involving sensitive countries, regions, or industries, outward direct investments need only to fulfil filing requirements instead of obtaining government approvals and inspections. Deregulation on outward investment is also reflected by the establishment of the China (Shanghai) Pilot Free Trade Zone and easing of foreign exchange controls. The Chinese government recently introduced a series of bilateral or multilateral free trade and investment schemes, such as the Sino-Korea and Sino-Australia Free Trade and Investment Agreements, as well as the introduction of the One Belt One Road (OBOR) Initiative and the establishment of the Asian Infrastructure Investment Bank. All of these will be catalytic factors.
Among the aforementioned policy initiatives, the OBOR Initiative received the most attention. In 2016, Chinese enterprises signed 8,158 engineering and construction contracts with 61 countries along the OBOR region, with a contractual value of USD 126 billion. This represented YoY growth of 36% and accounted for 51.6% of newly signed contract value in total. Although China’s non-financial ODI in these 61 countries along the OBOR region was USD 14.5 billion, down 2% as compared to 2015 and accounting for just 8.5% of China’s total ODI during that period, it is estimated that capital flows into the OBOR region will continue to increase in the coming years.
Data and analysis
Given such a background, it is anticipated that Chinese companies will continue to be internationalized and become an increasingly powerful force of cross-border direct investments. Therefore, it would be very meaningful and important, at this time in particular, to establish a better understanding of Chinese companies’ investment motives and behaviours as well as the major trends and characteristics of Chinese ODI activities. In order to do so, we constructed an ODI transaction database by consolidating various information sources, including the Heritage Foundation, Dealogic, China Venture and news releases. A total of 3,421 transactions between January 2005 and December 2016 were retrieved. Each data entry was cross-compared and verified, and was standardized to conform to the following variable categories (Table 1.2). After excluding 62 failed transactions, construction contracts and investments carried out by entities from Hong Kong, Macau and Taiwan, a total of 1,944 valid transaction records were finally used for statistical analysis.
Main trends and characteristics of Chinese ODI
Our survey shows that Chinese ODI transactions grew rapidly during the last decade, reaching USD 179 billion in 2016, which is nearly 15 times larger than in 2005 (Figure 1.1). The average annual growth rate of Chinese ODI in 2005–2016, measured by value, was 25%. Cross-border M&A has become a major form of ODI. Over the last 12 years, Chinese enterprises carried out 1,137 M&As overseas, accounting for about 58.5% of all ODI transactions.
Table 1.2 Variables Description
| Variables | Dimensions | Description |
|
| Investment Motives | Market | expand market overseas |
| Resources/Assets | acquire natural resources or real assets |
| Technology | acquire advanced technologies and industry know-how |
| Brand | acquire or take advantage of renowned brands; establish own brands in international markets |
| Cost Reduction | reduce cost by utilizing the market and resources |
| and Diversification | overseas; relocate excessive domestic production capacity; diversify business risk |
| Ownership | SOEs | state holdings ≥50% |
| Non-SOEs | private enterprises and state holdings <50% |
| Industry | Real Estate | land acquisition and real estate development |
| Transportation and Infrastructure | construction, transportation and public utilities infrastructure |
| Finance | banking, insurance, etc. |
| High Technology and TMT | advanced industrial technology, TMT and Internet |
| Mining and Energy | mineral exploitation and energy utilization |
| Agriculture | farming, breeding, timber, forestry, fishery and agriculture logistics |
| Manufacturing | general industrial manufacturing, chemicals and machinery |
| Consumption Goods | food and beverages, apparel and other consumable goods |
| Services | administration, technology service and others |
| Acquisition Methods | Absolute Control | equity holdings ≥50% |
| Minor Active | 10% ≤ equity holdings <50... |
