On 21 July 2016, the Chinese Ministry of Commerce (“MOFCOM”) published a report on China’s foreign direct investments (“FDI”). According to the report, from January to June 2016, China’s total FDI from non-financial sectors was RMB100 billion more than the foreign capital spent; rising by 58.7% from 2015. The exponential growth in China’s outbound investment has raised numerous concerns among industry experts.
At the same time, the growth in fixed asset investments from private investors declined to 2.8%. Is the exponential growth in foreign investments a consequential result of a decline in private investments? Is there a seesawing relationship between the two? These questions have triggered heated discussions.
Experts outlined the factors attributed to the surge in China’s outbound investments in the first half of 2016: (1) rare investment opportunities in domestic market and cash-rich investors; (2) numerous attractive investment opportunities overseas given the market turmoil in Europe, loosed control in market access, the investor-friendly landscape in the U.S., and depreciation of the yuan; (3) mega deals in the first half of 2016.
The U.S. government proposed to “bring manufacturing back” in 2012. Since the 2008 global financial crisis, it has gradually relaxed its grip on market entry by foreign investors, which presents numerous opportunities for foreign investors who aim to invest in the U.S.. During the first half of 2016, the yuan has depreciated 2.67% against the U.S. dollar, making overseas assets more attractive in the eyes of the Chinese investors. According to Mei Xinyu, Researcher of Chinese Academy of International Trade and Economic Cooperation under the MOFCOM, the yuan depreciation has, to some extent, impeded manufacturing enterprises from setting up production facility overseas. This is because the approach reduces the value of those assets priced in U.S. dollars or the currency of the host country, and thus, erodes the investor’s cost advantage. Despite the above, the depreciation of the yuan has somewhat stimulated investors to seek overseas assets to hedge against currency depreciation risks.
He Zhenwei, Secretary General of China Overseas Development Association, argued that purchasing assets overseas, particularly property, is a relatively passive approach for investors to protect and grow their fortune, and is not likely to be prevalent in the foreseeable future. Mr. He also added that the rapid growth in China’s FDI is partly due to its relatively small base. It was not until 2002 that China started to assess its FDI performance. Therefore, it should come as no surprise that its FDI has seen substantial growth ever since.
The pattern and characteristics of China’s FDI have evolved over time in response to China’s economic structural upgrades and changes in the global economy. Shanghai, Zhejiang, and Jiangsu have contributed an increasingly larger part of China’s FDI and in the first half of 2016, there was a dramatic shift in the types of industries and sectors receiving FDI (from project contracting to manufacturing and leasing). The destination countries have also changed, with Asia and North American countries receiving more investments and Latin American countries less.
The sharp growth in leasing and business services sector, according to Mr. He, is partially due to the high-interest rates in some countries (e.g., Russia). Loan interest rates in Russia can be as high as 20%, causing numerous small to medium enterprises being unable to borrow from banks and having to turn to financial leasing. This mode allows Russian enterprises to rent, rather than purchase, production facilities, as long as they provide acceptable mortgages and pay monthly rentals. As Chinese firms have abundant cash and lower cost of funding thanks to the low-interest rates in China, they invested heavily in overseas (such as Russian) equipment leasing opportunities to reap profits.
MOFCOM’s data shows that during the first half of 2016, China’s Yangtze River Delta region has been actively investing overseas. Investors from this region spent $30.12 billion; 2.2 times that in the same period in 2015 and makes up 33.9% of China’s total FDI. A comparison with 2013 and 2014 shows that Guangdong, Jiangsu, Zhejiang, and Shanghai have increased their FDI contributions, while Beijing saw a decline.
Mr. He sees this as a reflection of the increased importance of the Yangtze River Delta region in China’s economy. This makes sense as this region is a leader in private investment activities and private enterprises have begun to play a larger role in China’s FDI. It is said that 72% of China’s FDI for January to October 2015 came from non-state-owned enterprises and a UBS survey report revealed that 40% of the 2015 M&A deals which were valued at least $100 million were concluded by private enterprises.