New paradigms of Chinese outbound investments

By José Izquierdo Fernández

If you are not related to business but you live in China, chances are that you heard about the dramatic surge of Chinese overseas investments in the last ten years and its sudden collapse at the end of 2016. If you do not live in China but are related to business –yes, internship also works–, it is probable that you are familiar with the highly polarized feelings awaken by Chinese investments in your host country. In other words, regardless of your focus and country of residence, you know something about the increasingly popular phenomenon of Chinese outbound direct investments (ODI). 

Unlike what a superficial analysis could suggest, the global attention received by Chinese ODI cannot be merely explained by its impressive growth. Actually, most of the articles that you can find online were written as a consequence of the unexpected breakdown of what everybody assured to be a non-stoppable trend. Skeptics could say that it is just because there are large sums of money involved, and -even more- hopes to get a part of it by a great variety of actors. While that might be closer from the truth, I would still find essential to put some more explanatory variables at work here. And, before you stop reading, I promise not to throw big figures coming from nobody-knows-where to explain it… that will come later. 

In fact, this topic can be described through four top stories: 

1Revolution: the revolutionary speed at which Chinese ODI evolved just surprised everyone everywhere (and this is true for both, the ups and downs). When there is a new and eye-catching trend, people try to understand. And, since nobody made a movie about it –yet–, we can only read. 

A chart showing Chinese outbound investments.[Source: The Rhodium Group & Merics report 2017]

2 Geographical distribution: Chinese companies have started to invest abroad when some markets were already very competitive. That, together with the distinct needs of the Chinese economy (e.g. resources), made outflows to reach ‘infrequent’ destinations. Since people did not know why Ethiopia was one of the main destinations of Chinese investments in Africa, we couldn’t do anything else than reading about it. 

A chart showing distribution of Chinese outbound investments in the world. [Source: BBVA Research]

3 Diversity of actors: the actors pushing Chinese ODI to new heights have specific features differentiating them from their international counterparts. In particular, it is State Owned Enterprises (SOEs) that had the main role in initiating this trend and the ones which, still today, represent the most of Chinese outward investments in terms of volume. At the same time, together with the vibrant development of the Chinese economy, more and more private companies start to look abroad to expand their markets. This unique mix of public and private actors obliged practitioners to study Chinese history and politics and, although many did movies about it, reading still seems to be best way to go.

A chart showing state-owned vs private companies in Europe and North America, 2000-2015.[Source: Rhodium Group]

4 Money: sorry, I know I promised, but I couldn’t omit it. According to UNCTAD World Investment Report –just released, you have to read it! – Chinese investments in 2016 surpassed the vertiginous amount of USD 180 billion, a historical record. That repre-sents an increase of almost 800% in just one decade. With such an amount of capital going from one country to, basically, all-around the world, people do read about it.

A chart showing number of Chinese M&A transactions in the EU-28 by Size between 2000-2014. [Source: Rhodium Group]

With these four stories in mind, I will write a set of two consecutive articles elaborating on the key factors shaping the development of Chinese outbound investments. The current one is meant, not just to fish some readers by showing flashy graphs, but mostly to explain why this phenomenon is so important. The following piece will explain where it comes from and how Chinese overseas investments developed overtime becoming into one of the pillars of modern globalization. Finally, the third and last article will present an overall vision of the current situation and some reasonable conclusions about how things might develop in the near future. 

What can you expect from the forthcoming articles? 

1 A fresh and informative outlook about Chinese ODI without other commercial purposes than polishing my writing skills. 

2 Solid analysis based on substantial field research, interviews to leading practitioners, and lots of reading.

3 A sincere attempt to unveil the reality unfolding behind the great wall of marketing briefs, investment promotion articles, and sensationalist business journals’ articles.

What you should not expect…

1 A bunch of colorful diagrams mixed with big numbers and unrealistic forecast of Chinese investments abroad. 

2 An alarmist approach to Chinese ODI connecting these transactions with Machiavellian intentions through a cold-war-style logic.

Then, till next week. 

(José Izquierdo Fernández is Robin Li Scholar at the Yenching Academy of Peking University. José is a certified Spanish lawyer specialized in corporate law and cross-border M&A.)