Chinese outbound foreign direct investments (FDI) have bounced back from the lows of the Covid pandemic in 2021 and 2022, with increased investment in Asia. However, Chinese overseas lending has softened due to weaknesses in the domestic economy.
“Chinese outbound foreign direct investments are growing and the total for 2024 will be much higher than 2023,” Jean-Marc Blanchard, founding executive director of the Mr & Mrs S.H. Wong Center for the Study of Multinational Corporations, a US think tank, told FinanceAsia.
“I disagree vehemently with the claim that Chinese outbound foreign direct investment is becoming ‘small and beautiful’,” Blanchard declared.
China's non-financial outbound direct investment increased 12.4% year-on-year to $94.1 billion in the first eight months of this year, according to China’s Ministry of Commerce.
There are two noteworthy trends on Chinese outbound investments, Blanchard said. One is a shift away from natural resources to manufacturing such as vehicles, while the second trend is much greater Chinese investment in Asia, particularly Southeast Asia, he added.
“The drivers of these trends are intense competition and problematic growth prospects at home, trade barriers in Europe and the US, and the fact that Chinese companies need to access resources that are unavailable in China,” Blanchard explained.
Middle-income countries, such as Indonesia, are quickly becoming some of the largest recipients of Chinese investment, Andre Wheeler, chief executive officer of Asia Pacific Connex, an Australian consultancy, told FA. To date, Indonesia has received $55 billion of Chinese investment, beyond infrastructure to areas like mining and clean energy, Wheeler said.
“After hitting a bottom in 2021, announced outbound FDI by Chinese firms has rebounded in the past two years. However, investment levels are nowhere near previous highs,” said a report of the Rhodium Group, a US consultancy, on September 16.
“Investment is more concentrated on emerging markets than G7 economies, with a noticeable shift toward Asia,” said the Rhodium Group report.
2020 bottom
Newly announced Chinese overseas direct investment values bottomed out in 2020 at $47 billion and increased to $67 billion in 2022 and $103 billion in 2023, according to Rhodium Group’s calculations. The value of announced transactions in 2023 is still less than half of the level in the peak year of 2016, the Rhodium Group report qualified.
In 2016, nearly 70% of announced Chinese outbound investments went to Europe and North America, said the report. “In the past five years though, flows to North America have contracted sharply, in no small part because of Chinese restrictions on “irrational” overseas investments in sectors such as real estate or entertainment.”
The combined share of North America and Europe has dropped to less than half of the annual Chinese outbound investment, the Rhodium Group report pointed out. “The biggest relative winner was Asia, which has become the largest recipient of Chinese outbound FDI since 2017. Vietnam, Malaysia, Indonesia, and Singapore have all seen at least $1 billion in investments in 2023 and 2024 as Chinese firms invest in automotive, real estate, and metal and mineral assets.”
Since 2016, overseas mergers and acquisitions (M&A) activity by Chinese firms has declined significantly, bringing down the relative share of M&A in announced Chinese outbound investment from 85% in 2016 to 15% in the first half of 2024, said the Rhodium Group report. “M&A activity came under pressure due to greater regulatory hurdles at home and abroad.”
Notably, Chinese outbound FDI in electric vehicles (EV) supply chains tripled from roughly $10 billion in 2021 to $29.7 billion in 2022 and dropped slightly to $28.2 billion in 2023, according to Rhodium Group.
“Chinese FDI is now geared toward taking market share in overseas markets, so incumbent companies will increasingly find themselves in competition with Chinese firms at home and in third markets . . . The global expansion of Chinese EV makers will be the first test of how well-equipped governments are to navigate this challenge,” said the Rhodium Group report.
In recent weeks, Washington has accused Chinese EVs of overcapacity, claiming Chinese exports of EVs disrupt both the US and global markets. The European Union (EU) has agreed to impose large tariffs on imports of Chinese-made EVs, after the majority of EU member states supported the tariffs.
China’s infrastructure activities under the Belt and Road Initiative (BRI) have decreased by 40% from 2018, said Wheeler. Mining, particularly in rare earths and critical minerals, has overtaken transport connectivity spending, which now accounts for 16% of Chinese overseas investments, to be 21% of Chinese overseas spending, he added. Chinese spending on overseas mining soared by 158% to $19.4 billion in 2023, Wheeler pointed out. “This focused approach has seen China secure 80% of the global graphite market.”
The BRI is the ambitious project of Chinese President Xi Jinping, which aims to connect China economically with other countries through trade and infrastructure projects like railway.
“Projects are now modelled around how they become self-funding by virtue of being in more profitable and scalable. This explains why we see a shift to sectors like technology, energy, and healthcare,” Wheeler explained.
Chinese overseas lending softens
In contrast to the resurgence of Chinese outbound FDI, Chinese overseas lending is weak.
While Chinese banks have become the top cross-border lender to developing countries, their expansion has slowed recently in terms of volume and market share, said a Bank for International Settlements (BIS) paper in September.
The number of countries where China is the most important lender has recently decreased. As of end-2019, for 72 out of a total of 140 developing countries, Chinese banks were the most important lender, but that number has fallen to 65 in 2023, said the BIS paper. The amount of outstanding Chinese bank loans to developing countries decreased from $500 billion in 2022 to about $480 billion in 2023, according to the BIS paper.
Chinese bank lending to overseas borrowers slowed in 2023 and 2024 for a variety of reasons, a former World Bank officer told FA. “The ongoing and systemic problems with China's property developer debts is putting pressure on Chinese banks. Their balance sheets and profits are suffering from bad loans. Therefore, this affects their ability to lend overseas.”
Chinese loans to Africa sharply declined from $28.4 billion in 2016 to $1.9 billion in 2020, according to Boston University’s Global Development Policy Center. In 2023, Chinese lending to Africa rose to $4.61 billion, its first increase since 2016 and more than three times the level in 2022, according to the Center.
“This uptick suggests that China is gradually re-engaging with Africa after a period of reduced financial commitments. However, despite this increase, China is adopting a more cautious approach to its investments in Africa,” Christopher Edyegu, an analyst of Africa Risk Consulting, told FA.
China has adopted this cautious approach due to several factors, including the debt distress in some African borrowers, the impact of Covid and economic challenges within China, Edyegu explained.
The real asset return on BRI loans is 1.7%, according to a World Bank paper on July 9. This is more than the 1.4% return on 10-year Chinese government bonds and the 0.1% return on 10-year US Treasury bonds, but less than the 4.6% return on Chinese equities on the Shanghai Composite Index and the 8.1% return on global equities on the MSCI World index, according to the paper.
“In narrow financial terms, the BRI so far is a ‘no gain, no loss’ project,” said the World Bank paper.
However, the non-financial returns of the BRI are overseas market access for Chinese firms and political benefits for the Chinese government, the paper added.
