3 August, 2016
The People’s Republic of China (“PRC” or “China”) has implemented the “Going Out” Initiative for years. With policy and financial support from the government, more Chinese companies have strategically planned and developed their investment globally in the past decade.
According to the Department of Outbound Investment and Economic Cooperation of the Ministry of Commerce of the PRC, in 2015, the total amount of the direct outbound investment from China (excluding financial investment) set a new record of USD 118.02 billion, making China the world’s third largest investor.
Features of China's outbound Investments
The key features of China’s outbound investments can be briefly summarised as follows:
> China’s outbound investment covers various industries. About nine industries have obtained USD 1 billion worth of investment from China. Save for traditional industries such as business service, wholesale and retail, investments in manufacturing, science study and technology service, real estate, hospitality and catering have been increasing rapidly in the past few years.
> With the implementation of the One Belt, One Road Initiative issued on 28 March 2015 (“ B&R Initiative”), China’s outbound investment in countries along the “Belt and Road” zone (“ B&R Countries”) has increased substantially. In January and February of 2016, investment in the B&R countries reached USD 2.23 billion, equivalent to 7.5% of the total amount of investment in the same period.
> Another impact of the B&R Initiative on China’s outbound investments is the increasing concentration of such investments in certain regions such as Asia. About 60% of China’s outbound investment is made in Asian countries, with Hong Kong being the first choice, followed by ASEAN countries.
> In the past few years, apart from central and state-owned enterprises, private and local companies from various provinces
and cities have also been actively seeking opportunities overseas to set up or extend their outbound businesses. Companies from
eleven provinces and cities in the Yangtze River Economic Zone are most active in outbound investment compared to those from other provinces and cities.
Why China's Outbound Investments Will Likely Increase.
Although China’s economic development has slowed down in recent years, the Chinese government is making great efforts to stabilise the market. Along with this, it is fair to believe that China’s outbound investments will increase due to the following reasons:
> Until the end of 2015, China’s GDP was RMB 67.7 trillion and based on its economic aggregate, the country is still ranked as the second largest country in the world. Meanwhile, with its increasing GDP per capita, China has become a net capital exporter and its outbound investments is set to eclipse inbound investments since the end of 2014, with Chinese companies becoming stronger and more capable in meeting the demands offered to venture out of China.
> On 6 April 2014, the PRC Ministry of Commerce issued a revised Administrative Measures for Outbound Investment (“the Measures”), which took effect on 6 October 2014. Pursuant to the Measures, most outbound investments no longer require approvals from relevant authorities, and the simplified administrative procedures have made it easier and cheaper for Chinese companies to invest overseas. The Measures have thus supported outbound investment from both legal and policy perspectives.
> After the 2008 global financial crisis, restructuring of the international economy was targeted at promoting an orderly and free-flowing economy, efficient allocation of resources and deep integration of markets. Through these processes, the world is able to understand China and its companies better, and foreign countries have been anxious to receive investment from and cooperate with China.
> The B&R Initiative does not only encourage Chinese companies to “go out”, but also indicates the direction and destinations of outbound investments for Chinese companies. These are mainly the Southeast Asian countries, which are also the B&R Countries.
In response to the B&R Initiative, more Chinese companies are willing to invest in Southeast Asia with clear targets and goals.
> China has consistently pursued a win-win principle for both Chinese investors and destination countries, making China’s outbound investment one that is generally welcomed and supported by local governments of destination countries.
TRENDS OF CHINA’S OUTBOUND INVESTMENTS
For many years, calls for regional connectivity have been echoed within Southeast Asian countries. Some politicians and economists are optimistic that China’s B&R Initiative can help to spur economic development in this region, and boost the region’s competitiveness and connectivity. It is therefore helpful to have a better understanding of the trends of China’s outbound investments:
> The focus of Chinese investors, among other things, will be on natural resources and infrastructure in developing countries. These include mining operations, highway and railway construction and large hydropower dams. Related industries stand to benefit from investments in natural resources and infrastructure, and will ultimately be enhanced by infrastructural improvements.
> China will focus on capacity cooperation with other countries. While most developing Southeast Asian countries are undergoing industrialisation and require assistance on capacity, some industries in China have already faced an issue of overcapacity.
Therefore, Chinese companies in industries such as rail transit and power, electricity, light textiles and automobiles will be the leading entities to seek a transfer of regional capacity and cooperation on international capacity.
> Chinese companies will be seeking new business partners, and will be especially interested in cooperation with foreign brands because they are concerned with improving product designs and R&D capabilities in order to develop the mainland market. Such companies hope to do so through, amongst other methods, mergers & acquisition or joint venture so as to introduce foreign design, technology and other advantages to China, ultimately to jointly explore the booming Chinese market.
> Considering the long-term development in foreign countries, Chinese companies cannot only rely on mainland financial institutions for the purposes of project financing. There is an unmet need that can be taken up by international financial centres such as Hong Kong and Singapore.
Despite the promising prospects of China’s outbound investments, it is likely that Chinese companies will face some challenges when “going out” of China.
They include: (i) heated international competition amidst the economic recovery and restructuring process, where Chinese investors will face more competitors and risks dealing with cross-border transactions; (ii) recent strengthening of restrictions on the outflow of funds from China by the State Administration of Foreign Exchange, coupled with incomplete taxation policies for outbound investment, which may together discourage Chinese companies to “go out”; and (iii) the diversity in cultures and the legal systems, as well as the lack of understanding of the destination countries, which may pose difficulties to outbound Chinese investors
For further information, please contact:
Ch’ng Li-Ling, Partner, RHTLaw TaylorWessing