Chinese investments abroad are expected to surge over the next half-decade as a rising number of companies are going global to explore the market, according to research by HSBC. Annual flows of outward direct investment (ODI), if the current trend persists, could jump by more than 50%, with investments reaching at least USD1.4 trillion between now and 2028, HSBC Global Research said in a report. Outward direct investment flows reached USD150 billion in 2022, and China became a net foreign direct investor early this year as the inbound flows dropped, the bank report said. China was “late to the game” when it increased overseas investments nearly two decades ago, but now its outward direct investments have already surpassed those of Japan, Germany and the UK, becoming the world’s third-largest after the U.S. and the Netherlands, the report said. However, its total ODI – the value of Chinese investors’ equity in, and net loans to, firms abroad – is still small relative to the size of China’s economy at 15.7%. The bank put the total at between USD2.5 trillion and USD3 trillion. China’s 2022 GDP was about USD18 trillion. The global average for ODI is about 34% of GDP, and China’s total is about one-third of that of the U.S., the report added. “There is, therefore, plenty of room for China’s overseas investment footprint to grow,” it said.
If outward investment rises along with China’s per-capita gross domestic product, the bank’s research arm said, those flows could expand at three times their recent annual pace to more than USD400 billion each year. “Greater certainty surrounds the outlook for Chinese direct investment outflows,” the report said. “These are likely to accelerate in the coming years as they increasingly align with Chinese economic and political development priorities. “We expect that Chinese companies in the technology, renewable energy and EV sectors, blessed with the government’s green light, will be increasingly in the driver’s seat and will actively lead overseas investment.”
China’s outward direct investment peaked in 2016 before slipping under pressure from geopolitics, Covid-19 barriers, and the government’s tightened controls on capital outflows, HSBC said. The government that year also began a clean-up of irrational investments in foreign real estate, entertainment and hotels, the report said. It added that Southeast Asia, Latin America and the Middle East – accounting for most participants in China’s Belt and Road Initiative – are likely to see a rise in investment from China, while its investment flows to the U.S. and European Union are expected to shrink due to geopolitical complications.
Surging inflows over the next few years would reflect the central government’s focus on improving the economy, said Chen Zhiwu, Professor of Finance at the University of Hong Kong. “As a tactical move, it’s very clear that China’s leadership has accepted a temporary softening in terms of capital inflows and outflows to put a stop to economic problems,” Chen said. In the Middle East, HSBC noted, nations’ plans to diversify economies away from oil present a large market for Chinese companies. Energy and infrastructure projects will continue to be the backbone of China’s investment there. Huawei has made headway in expanding the Middle East’s 5G networks, the bank added.
The 10-country Association of Southeast Asian Nations (ASEAN) was the top recipient of China’s ODI last year after 15 years of growth, HSBC said. Experience there “shows that trade and investment integration go hand in hand”. Increased flows in Indonesia reflect China’s “strategy of building a comprehensive supply chain and securing material supplies for its new energy vehicle sector”, and Chinese carmakers’ expansion plans in Thailand may challenge Japan’s dominance in the Thai auto market, HSBC said. “Going forward, we believe that the demand for metals and minerals is a key determinant in the nature, geography and magnitude of China’s outward direct investment,” it said, as reported by the South China Morning Post.
