From World Factory to Global Investor

A Multi-perspective Analysis on China’s Outward Direct Investment

Xuedong Ding, Chen Meng

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781315455792
• Topic: Business
• Subtopic: Business General
• Index: Business

Chinese outward direct investment (ODI) is growing rapidly in recent years. As an important phenomenon in the global economy, China's ODI deserves more thorough analysis. This book looks at China's ODI activities from multi-perspectives. With the rebalancing of China's own structural growth and China's shift towards a net capital exporter, her initiatives such as "One Belt One Road (OBOR)" have brought profound implications to the traditional super-sovereign or multilateral financial and investment cooperation mechanism. As her investment destinations and investment methods become more diversified and sophisticated, this book offers unique and refreshing insight into China's ODI activities.

The book covers the whole range of history and policy development of China's ODI and analyses China's ODI trends and characteristics in the recent years. It reviews China's major policy changes after the Third Plenary Session of the 18th Central Committee of the Communist Party and how they may impact China's ODI strategy and activities. The book addresses potential challenges and risks of rising ODI activities from practitioners' perspective, and discusses how recipient countries may react and respond to the surge of Chinese capital. The book also offers policy implications and future research agenda in relation to the Chinese investments.

Part I
Review of Chinese outward direct investment

1
Outward Direct Investment by Chinese Enterprises

A survey (2005–2016)

Chen Meng, Zhihua Lyu and Chunyang Jiang¹

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

Source: Ministry of Commerce.

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...

Table of contents

• Cover
• Title
• Copyright
• CONTENTS
• List of figures
• List of tables
• Foreword
• Foreword
• Acknowledgements
• List of contributors
• Abbreviations
• Introduction and overview
• PART I Review of Chinese outward direct investment
• PART II Policy development and implications
• PART III The dynamics of Chinese ODI
• PART IV Chinese ODI in a global context
• PART V Conclusion
• Index