Research and analysis

Chinese outward investment - keeping up the pace

Published 18 December 2014

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 1 August 2016

This article is no longer current. Please refer to Overseas Business Risk - China

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk - China

Chinese outward investment - keeping up the pace

Summary

Official data show that Chinese outward investment has grown by an average of 40 percent per year over the past decade. Sustained growth is likely to continue, supported by regulatory reform and increasing competition within a slowing domestic economy. In 2013 the UK remained China’s most popular investment destination in Europe.

Detail

China reaching out

At the recent APEC Summit in Beijing President Xi estimated that Chinese outward investment would exceed $1.25 trillion over the next 10 years, up from a total stock of overseas Chinese investment of around $400 billion today.

Latest data from China’s MOFCOM suggests Xi’s forecast is not unrealistic: in 2013 China’s overseas investment reached $108bn, up 23 percent year-on-year. Over the past decade, Chinese investment has grown by an average of 40 percent year-on-year.

Chinese overseas investment is no longer the preserve of State Owned Enterprises (SOEs). Official data show that in the first three quarters in 2014, private companies accounted for twice the number of projects as SOEs.

In dollar terms, investment from private sector increased by 120% compared with a decline of 37 percent in investment from SOEs. The sector focus also continues to shift away from energy and mining and towards property, financial services, retail and manufacturing.

What is behind the trend

The enormous foreign reserves push for China’s rebalancing from the world exporter/the world factory. At the end of Q3 2014, the foreign reserves reached US$3.89 trillion. It is estimated that 70% are assets denominated in US dollar.

The authorities have been trying to diversify the foreign exchange reserves for many years. This is happening most visibly through sovereign wealth funds such as CIC and Gingko Tree, who in recent years have invested heavily in UK property and heavily regulated infrastructure.

Diversification is also happening behind-the-scenes through the ‘Co-Financing Office’ whereby the People’s Bank of China lends reserves to commercial banks to then lend to their corporate clients for overseas projects.

Accessing new markets is an important driver for both private companies and SOEs. For the latter, new markets are often seen as one way of coping with the serious excess capacity that many Chinese firms now face after 5 years of credit-fuelled infrastructure investment led growth.

Over the last year or so the authorities have also significantly reduced the regulatory burden surrounding overseas investment. The 2014 regulation (published on 18 November) stated that only when the investment is into ‘sensitive countries/regions or sensitive sectors’ should the approval from the central authority be needed. The Director General Gu Dawei of the Department for Foreign Capital and Outward Investment of NDRC (China’s planning ministry) who has visited the UK twice this year, commented that around 99 per cent of investment projects included on the previous list would now only require ex-post registration, rather than ex-ante approval.

The strategy of ‘moving up the value chain’ is a key incentive for many private enterprises, particularly in the context of an increasingly competitive domestic economy. This can come either in the form of acquiring technology or brands:

a. Technology: e.g. Huawei, who run 17 R&D sites and 19 joint innovation centres across Europe, employing in total around 850 people; or NVC Lighting, who established the UK headquarters in 2007 by purchasing a UK lighting company. Since 2009, the company has achieved annual growth at 30% in average. NVC UK has been forged as the base to reach out the whole European market;

b. Brands: e.g. Sanpower Group, who earlier this year purchased 89 percent of House of Fraser Group and are reported to be opening new stores in Russia, Abu Dhabi and more than 50 outlets across China; of Dalian Wanda Group, who in 2013 acquired 93 percent of Sunseeker Yachts, which the Group intends to deploy in its growing number of marinas down the east coast of China.

Opportunities for UK

According to official data, the Chinese investment stock in UK reached US$11.8bn in 2013, with the average annual growth of 85% for the past five years. The UK remains the most popular major European destination for Chinese investment into the UK by far.

UK infrastructure is likely to receive particular attention from Chinese investors. A recent report from Pinsent Masons forecast that China was set to invest £105bn in British infrastructure by 2025, with energy, property and transport sectors likely to be particularly popular, as illustrated respectively by Chinese interest in Hinkley Point C, One Nine Elms and High Speed Two.

Of course, it isn’t plain sailing and problems will inevitably arise with Chinese investments into the UK (as happens with overseas investments deals everywhere). The main problems associated with Chinese investors remain as we reported last year, i.e.:

a. Chinese investors will focus more on equity and M&A than Greenfield investment, particularly in the early stages. Greenfield is better for us, all things being equal, because it brings more value into the UK. The ABP and Wanda investments are significant because they have big Greenfield elements. But equally, this kind of investment brings a new source of risk…

b. Governance: many Chinese companies have poorly-developed and opaque governance arrangements. Some may struggle to win the full confidence of banks, shareholders and the media in the UK. Through lack of experience or naivety, some may struggle to make their projects profitable, and some may fail completely. UK counterparties will need to ensure due diligence before they sign big deals. And we should encourage Chinese investors to seek out the right professional advice and partners in the UK (legal, accountancy, PR, design etc); and

c. Some deals in sensitive areas may give rise to political or security unease. When this happens we will need to react fast; address any risks by tightening regulation rather than discriminating against investors from a particular country; and if necessary warn off in advance, rather than reacting after the event. Ministers will need to be ready to make the case for Chinese investment when necessary.

However we expect that with more Chinese participation in the developed markets, the buyers from China can better learn the international norms and integrate into the global market, thus to benefit both the market and the players.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.