Bangkok--24 Mar--HSBC Thailand
China's outward investment will continue despite or even because of the domestic economic slowdown, as the country looks to diversify its savings into overseas assets
Growth in ODI has held up during past slowdowns, but the sectors, regions and channels are continuously shifting
Cross-border M&A in particular is growing rapidly, which will lead to new challenges for China as well as receiving countries, but the benefits will outweigh the concerns
Since we last wrote about the New Silk Road, China's economy had decelerated to its slowest rate of growth in a quarter of a century (see On the New Silk Road III: Paving the way: from vision to reality, 21 April 2015). However, China's outward direct investment (ODI) has continued to expand. Non-financial ODI growth was 10.1% in 2015 and now exceeds what China receives in foreign direct investment. The trend has continued into 2016, with ODI surging 80% y-o-y in Jan-Feb 2016.
We believe the economic case for the continued globalisation of China's capital is intact despite the slowdown in its domestic economy. China is looking to invest in assets that will make long-term returns. The New Silk Road over land and sea, often referred to as the One Belt, One Road initiative, is an important part of the plan.
China's trade with countries along the Maritime Silk Road has grown by an average of 18.2% annually over the past decade and now accounts for 20% of China's total trade volume. Chinese companies' direct investments in these countries have grown from USD240m to USD9.3bn over the same period.
China's ODI flows are also diversifying. They are shifting by sector, away from mining and towards commercial services, manufacturing, utilities and IT. We believe Chinese companies are looking for more than just natural resources and will become increasingly interested in market access, technology and intellectual property.
Also notable is the strong focus on investment through equity ownership rather than debt. Equity accounts for 80% of China's direct investment assets abroad. This explains the acceleration in China's overseas M&A activity, which remains strong at the start of 2016, with many major deals being done in a range of industries.
China had a late start as a major overseas investor. Its ODI flows and accumulated assets are still relatively small. Nevertheless the pace of growth will raise questions about the economic impacts, and we discuss why we believe some fears are misplaced and why ODI is generally mutually beneficial.