In recent years, China’s outbound foreign direct investment (OFDI) has experienced significant shifts, reflecting changes in both global economic conditions and domestic policies. After a period of rapid expansion, Chinese companies are once again venturing abroad, but with different objectives and destinations compared to the previous decade.
Historical Context: The Boom and Subsequent Slowdown
In the early 2000s, China’s outbound FDI was minimal. However, during the early 2010s, Chinese firms began to capitalize on opportunities arising from the global financial crisis, seeking to internationalize and diversify their portfolios. The period between 2014 and 2016 marked a significant boom in outbound investments, driven by Beijing’s relaxation of investment approvals. This policy shift led to annual FDI transactions exceeding $200 billion in 2016.
This surge in capital outflows raised concerns about potential capital flight. In response, the Chinese government reinstated stricter capital controls in 2017. Additional measures, such as efforts to de-leverage the financial system and anti-corruption campaigns targeting prominent investors like HNA, Anbang, and Fosun, further dampened outbound investment activities. Concurrently, recipient countries reassessed the national security and economic implications of Chinese investments, leading to heightened regulatory barriers, particularly in sectors like technology and critical infrastructure.
Discrepancies in Data: Official Statistics vs. Transaction Data
The extent of the slowdown in China’s outbound FDI post-2016 varies depending on the data source. Official balance of payments (BOP) statistics indicate a 30% decline in annual outflows in 2017, stabilizing at an average of $150 billion annually thereafter. In contrast, transaction-based datasets reveal a more pronounced decrease. For instance, Rhodium Group’s China Cross-Border Monitor (CBM) data shows that the annual value of completed FDI transactions by Chinese companies halved from $204 billion in 2017 to an average of $97 billion in 2018 and 2019. The COVID-19 pandemic and China’s stringent zero-COVID policy further curtailed internationalization efforts, reducing average annual investment to approximately $45 billion between 2020 and 2023.
The resilience of China’s OFDI since 2018, as reported by the State Administration of Foreign Exchange (SAFE), appears inconsistent with CBM transaction data and other available metrics. While China reported nearly $1 trillion in new OFDI assets, approximately 115 countries participating in the IMF’s Coordinated Direct Investment Survey (CDIS) reported only $187 billion in new FDI from China during the same period. This discrepancy suggests that a substantial portion of China’s reported OFDI may not represent “real economy” investments but could instead reflect Chinese firms parking earnings from exports and other international activities in offshore USD accounts. Factors such as capital controls, the role of Hong Kong as a global gateway, and the opacity surrounding official government assets contribute to these inconsistencies.
Recent Trends: A Rebound with New Characteristics
After reaching a nadir in 2021, announced outbound FDI by Chinese firms has rebounded over the past two years. However, investment levels remain below previous peaks, especially when excluding rumored transactions lacking specific details. The nature of these investments has evolved:
- Geographical Shift: There’s a noticeable pivot towards Asia and emerging markets, with reduced emphasis on G7 economies. This shift indicates a strategic realignment towards regions perceived as more receptive or strategically aligned with China’s interests.
- Investment Approach: The current wave of outbound investments is characterized by organic expansion efforts from mature private companies with global ambitions, rather than large-scale, one-off acquisitions that were prevalent in the past.
Implications for Business and Policy Leaders
The evolving landscape of China’s outbound investment presents both opportunities and challenges:
- Economic and National Security: The new generation of Chinese outbound investments could introduce novel national and economic security concerns for host countries. Governments may need to reassess and update existing policy frameworks, including investment reviews, trade policies, industrial strategies, anti-subsidy measures, and supply chain security protocols.
- Business Strategies: Companies worldwide must navigate this changing environment, balancing the prospects of engaging with Chinese investors against potential regulatory and geopolitical risks.
Conclusion
China’s outbound investment landscape is undergoing a transformation, marked by a strategic shift in destinations and investment approaches. Understanding these changes is crucial for policymakers and business leaders aiming to effectively engage with the next generation of Chinese multinational enterprises.
References
· Rhodium Group. Next Generation: China’s Outbound Investment. Retrieved from https://cbm.rhg.com/research-note/next-generation-chinas-outbound-investment
· The Wall Street Journal. Chinese Firms Pour Billions Into Green-Energy ‘Tsunami’. Retrieved from https://www.wsj.com/articles/chinese-firms-pour-billions-into-green-energy-tsunami-efb37981
· Financial Times. Chinese outbound investment surges to record on clean energy ‘tsunami’. Retrieved from https://www.ft.com/content/67887a67-f188-459a-b927-147b454fe335
· Reuters. China’s 2024 non-financial outbound direct investment rose 10.5% on year. Retrieved from https://www.reuters.com/markets/asia/chinas-2024-non-financial-outbound-direct-investment-rose-105-year-2025-01-21/
