Explainer: China’s outbound investments

What are the top policy issues in China right now? In this series of explainers on China, we have gathered the knowledge of experts at the World Economic Forum, to write about topics ranging from inclusive growth to urban migration. See the full list of explainers on China’s top policy issues at the bottom of this article, and learn more about our meeting in China, taking place in Dalian, September 09-11, here.

Policy Issue: Outbound Investment
What: Chinese multinationals are rapidly expanding internationally
Related webcast sessions: The Modern Silk Road II Emerging Markets at a Crossroads II The Renminbi’s Global Ambition II Global Economic Outlook: The View from Asia

China is increasingly a global investor in overseas business, with both state-owned and private firms investing overseas in projects and assets as diverse as infrastructure, technology, real estate, agriculture to bonds and equity markets.

In 2014, while Foreign Direct Investment (FDI) in China was $ 128.5 billion, its Outward Direct Investment (ODI) totalled $ 116 billion – a 15% increase from the previous year and a tenfold increase from a decade ago. Should this trend continue, China is projected to turn from a net importer to a net exporter of capital by the end of this year.

This trend has in large part been driven by China’s “Going out Strategy” whereby increasingly competitive and outward-looking Chinese companies, whether state-owned and privately-owned, are venturing to overseas markets for market opportunities. The government has also been encouraging the shift by reducing and streamlining approval processes for outbound investment, raising the threshold at which companies had to seek state approval for overseas investments in 2014.

There has been a distinct change in the type and destination of outbound investments made by China. In the past, a large share of outbound capital went to resource-rich emerging markets to fund infrastructure projects, often supported by China’s policy banks such as the Chinese Development Bank. In recent years, private companies have played a larger role, accounting for 41% of ODI in 2014, and investments have been more focused on acquiring technology and know-how, designed to increase competitiveness by buying into expertise, technology and brand equity.

Increasingly, many of the largest recipients of Chinese ODI are developed markets, including the US, Australia, Britain and Italy. Government-sponsored ODI has also been evolving, taking the form of a more multilateral institutional model. Recently, three organizations have begun to play a central role in this strategy, including the Asian Infrastructure Investment Bank, the Silk Road Fund and The New Development or BRICS Bank.

These institutions aim to pool in financial investments and diversify risks for infrastructure development in their respective regions. In addition to helping Chinese investments venture overseas, the establishment of these institutions also signifies China’s rising influence in global governance since the Bretton Woods system was created after the Second World War. For outbound investments, economics and politics are perceived to be intricately intertwined and this delicate balance may influence the perception of Chinese outbound investments – be they public or privately-led – in overseas markets.

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• How China can address inequalities
• Boosting consumption in China
• China’s environmental goals