China s Overseas Direct Investment (ODI): Current situation and future outlook New York Stock Exchange (NYSE) Dr. Qin Xiao Chairman, the Boyuan Foundation January 7, 2015
Agenda A. China s ODI: High Growth with Scale B. Observations C. One Belt and One Road Initiative D. Issues and Risks E. Outlook 2
2006 2007 2008 2009 2010 2011 2012 2013 2014E China s ODI exceeded USD 100 bn in 2013 China s ODI reached USD 107.84 bn with a YoY growth of 21.7%, ranking third (after the US and Japan) in the world for the 2nd consecutive year. China s ODI grew rapidly during 2006-2013, with a CAGR of 32.8%. ODI is expected to exceed FDI (Foreign Direct Investment) in 2014 Flows of ODI: Billion Dollars Flows of ODI: Billion Dollars 140 120 100 80 60 40 90.63 Stock of ODI: Billion Dollars 531.94 424.78 317.21 245.75 183.97 117.91 660.48 784.5 1000 800 600 400 200 120 100 80 60 40 Flows of FDI: Billion Dollars 20 0 21.2 26.5 55.9 56.5 68.8 74.7 87.8 107.8 124.0 0-200 20 0 2006 2007 2008 2009 2010 2011 2012 2013 2014E 3
ODI stock has already reached a notable scale The ODI stock of China has reached USD 660.48 bn, ranking 11 th worldwide. At the end of 2013, Chinese investors have established 25,400 enterprises overseas, in over 184 countries (regions). ODI accounts for 10.3% of China s total overseas assets, in terms of stock, a relatively small portion compared to China s huge foreign reserves assets. The structure of China s total overseas assets Overseas Direct Investment 10.3% Security Investment 4.4% Reserve Assets 65.4% Other Investments 20.0% 4
ODI breakdown by industry China s ODI stock involves different sectors, among which the top five are: leasing and business services (29.6%), financial sector (17.7%), mining (16.1%), wholesale and retail (13.3%) and manufacturing (6.4%), which account for more than 80% altogether. Manufacturing Industry 6.4% Others 16.9% Leasing and Business Services 29.6% Wholesale and Retail Industry 13.3% Mining Industry 16.1% Financial Industry 17.7% Note: For the classification of Leasing and Business Service in China Domestic Industry Classification Guidance, Leasing includes machinery and equipment leasing and commodity leasing; Business Service includes 9 categories: Business Management Services, Legal Services, Consulting and Investigation, Advertising, Intellectual Property Services, Employment Agency Services, Market Management, Travel Agencies, Conferences and Exhibitions and other business services. 5
ODI breakdown by destination By the end of 2013, the top 10 ODI destinations were the US, Australia, Singapore, the UK, Russia, Kazakhstan, Canada, Norway, Indonesia and France. In official statistics, Hong Kong ranked 1 st, followed by Cayman Islands (2 nd ) and Virgin Islands (3 rd ) however, we excluded them to monitor for real final ODI flows, since these regions are so-called Tax Havens and transit areas for overseas investments. Chinese ODI breakdown by destination Country/Region Proportion Hong Kong, China 57.1% Cayman Islands 6.4% British Virgin Islands 5.1% United States 3.3% Australia 2.6% Singapore 2.2% United Kingdom 1.8% Luxembourg 1.6% Russian Federation 1.1% Kazakhstan 1.1% Canada 0.9% Norway 0.7% Indonesia 0.7% France 0.7% 6
Main ODI investment bodies Regarding financial ODI, the majority of investors are state-owned and joint-stock banks with majority state-holdings. Among the USD 543.4 bn ODI stock of non-financial investments, state-owned enterprises account for 55.2%, and non-state-owned enterprises account for 44.8%. However, the proportion of private sector investment has been growing in recent years. In 2013, SOE contribution decreased to 43.9%, non-state-owned investments rose to above 50%. Private investments making up the majority of non-financial investments may be a trend we will see in the future. 7
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Chinese ODI in the United States China s direct investment into the United States has been growing rapidly during the recent years. According Chinese official data, China had invested USD 3.87 billion in the United States in 2013, surpassed the USD 2.82 billion FDI from the United States. At the end of 2013, China s ODI stock in the US had reached USD 21.9 billion. China s ODI outflow into the United States Flows of ODI in US: Billion Dollars Stock of ODI in US: Billion Dollars China s FDI inflow from the United States 5 4 4 3 3 2 2 1 1 0 0.82 1.24 1.88 2.39 3.34 4.87 8.99 17.08 21.90 0.23 0.20 0.20 0.46 0.91 1.31 1.81 4.05 3.87 2005 2006 2007 2008 2009 2010 2011 2012 2013 25 6 20 5 15 4 10 3 5 2 0-5 1-100 2.1 0.5 3.9 5.4 4.2 2.9 3.0 2.8 8
Breakdown: Chinese ODI in the United States In terms of China s ODI stock in the US, the top 5 sectors are: financial industry (30.3%), manufacturing (20.2%), mining (14.4%), wholesale and retail (8%) and real estate (6.8%). Sector breakdown of China s ODI in the United States, at the end of 2013 Mining Industry 14.4% Real Estate Industry 6.8% Other Industries 6.8% Financial Industry 30.3% Manufacturing Industry 20.2% Wholesale and Retail Industry 8.0% Leasing and Business Services 3.9% Note: However, it is widely considered that China s official data might underestimate the scale and the growth of Chinese direct investments, because of transit investments through tax havens like Hong Kong, Cayman Islands and British Virgin Islands. 9
Agenda A. China s ODI: High Growth with Scale B. Observations C. One Belt and One Road Initiative D. Issues and Risks E. Outlook 10
Inactive ODI in the manufacturing industry China s manufacturing ODI is inactive, accounting for less than 8% of non-financial ODIs; which indicates China s low-end position in the global value chain, although China is a so-called major manufacturing country or world factory. Currently, there are few large Chinese multinational companies that can control the upper ends of the value chain and formed vertical integration worldwide. Those enterprises with a higher degree of internationalization in China are mainly expanding horizontally (market, technology, natural resources e.g. petrochemical, telecom equipment, etc). 11
ODI concentrated in finance and mining China s ODI stock in mining is relatively high (about 20%), indicating a strong motivation in seeking natural resources overseas; however some of the investments have seen poor performance due to declining commodity prices in recent years. At the same time, China s ODI in the financial sector is also relatively high (about 18%), but is mainly concentrated in banking sector in developed economies such as the US and Europe. Investments in the securities and insurance industries are relatively small. 12
Service Industry: Small and scattered Commercial services and wholesale & retail account for more than half of the ODI stock, which indicates characteristics of small, scattered and random. Industry cluster and market competitiveness need to be improved. Investments in utilities sectors, (transportation, telecommunications and logistics infrastructure) have already started attracting investments. Investment in technologies, high tech in particular, regardless of whether it is hardware or software, has not reached a significant scale. 13
Agenda A. China s ODI: High Growth with Scale B. Observations C. One Belt and One Road Initiative D. Issues and Risks E. Outlook 14
One Belt, One Road initiative President Xi Jinping initiated the One Belt, One Road strategy during his visit to Kazakhstan last year, focusing on investments to the New Silk Road Economic Belt and the Maritime Silk Road, which will connect China with Central Asia, Europe and South Asia. China promoted the establishment of the Asia Infrastructure Investment Bank (AIIB) and the BRICS bank, targeting infrastructure investment along the One Belt, One Road and encouraging more Chinese enterprises to participate. The One Belt, One Road Initiative is a grand overseas investment strategy for Chinese enterprises s ODI in next decade. 15
One Belt, One Road Regions The One Belt, One Road regions include Russia, the Netherlands, France, Germany, Belgium, Poland, Belarus, Turkey; South Asia (India, Mongolia, Iran, Sri Lanka, Tajikistan, Maldives), Central Asia (Turkmenistan, Kazakhstan, Uzbekistan, Kyrgyzstan), South Korea and ASEAN. 16
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Current direct investment in the region China s direct investment to the One Belt, One Road countries amounted to USD 12.67 billion in 2013, accounting for 11.7% of total investment. By the end of 2013, direct investment stock was USD 76 billion, accounting for 11.5% of the total. The overall proportion of China s overseas direct investment is relatively low. However, ODI to related countries has been growing remarkably since 2011. 16 14 12 10 Flows of ODI in One Belt and One Road Related Areas: Billion Dollars Stock of ODI in One Belt and One Road Related Areas: Billion Dollars 42.5 59.6 76.0 100 80 60 8 6 4 2 0 0.5 1.1 3.5 5.2 9.6 13.8 19.2 26.3 0.2 0.2 1.3 1.1 2.5 4.3 4.7 6.2 13.0 14.8 12.7 40 20 0-20 17
Focus on regional infrastructure development The One Belt, One Road strategy is aimed mainly at the increasing needs of the region's infrastructure. According to the Asian Development Bank, there is a huge infrastructure gap in Asia and the use of Chinese expertise in infrastructure construction (high-speed rail, ports, roads) has much room for development. Initial fund for the One Belt, One Road will mainly backed by China s foreign exchange reserves, and be implemented via the Asian Infrastructure Investment Fund, BRIC bank loans and other development financings. Under the One Belt, One Road initiative, China s overseas investment is expected to grow rapidly in the coming years. 18
One Belt, One Road strategic goals First: to provide funding, technical and management support for infrastructure projects in the region. Second, to digest China s domestic excess capacity and boost China's infrastructure and equipment exports. Third, to encourage Chinese multinationals to go abroad and to participate in international competition. Fourth, to promote regional economic cooperation and development. 19
Agenda A. China s ODI: High Growth with Scale B. Observations C. One Belt and One Road Initiative D. Issues and Risks E. Outlook 20
The role of government and enterprises Government should speed up negotiations on regional free trade agreements, promote trade and investment facilitation, and provide services for ODI of Chinese enterprises. Also the government should properly handle potential geopolitical issues creating a better environment for enterprises to play. The government should not intervene in business decision. Enterprises should focus on commercial interests, instead of undertaking political and foreign affairs mission. 21
Public vs. commercial attributes Enterprises with the function to provide public goods may have preferential loans and related policy support from government; commercial enterprises should be aimed at profit making and must assume sole responsibility for it's own profits or losses. 22
Improving the structure of China s ODI Chinese enterprises should strive to move up on the global value-chain ladder: to increase value-added and forge world-class Chinese multinational firms with global vertical specialization. China should improve the structure of their overseas direct investment. This includes increasing the proportion of manufacturing investments to help digest excess domestic capacity, expanding the global market for China s applicable technologies, increasing access to foreign high-tech to aid China s industry upgrading. 23
Legal and regulatory considerations Host countries usually have various legal, regulatory, and policy restrictions, which include access regulations (qualification, equity share limits), merger regulations (antitrust, national security, etc.), competition watchdogs (fair competition, consumer rights protection, antitrust, etc.), tax rules, capital requirements (for banking and insurance companies), environmental monitoring etc. Chinese companies often lack expertise and a thorough understanding of host country laws and regulations. This leads to frequent wastage of manpower and resources on ultimately fruitless investment projects. In particular, Chinese enterprises should pay attention to the legality of certain operations, such as anti-bribery laws, money laundering laws, and carefully deal with the countries targeted by Western sanctions and bans. 24
Political Risk Geopolitical risks includes risks associated with politics, war, nationalization, breaches of contract, etc Many acquisitions are blocked by host country s governments under national security considerations. Foreign sentiment of a China Threat acts as a barrier to China s going abroad policy, especially for large SOEs. 25
Social, cultural or religious conflicts Differences in social, cultural or religious backgrounds are an inevitable reality. These differences should be respected by Chinese investors. As a basicly non-religious country, Chinese people sometimes may lack understanding and respect for host country s cultural and religious customs, and this may cause trouble for Chinese enterprises investing overseas. 26
Labor relations As there are no truly independent trade unions in China, Chinese enterprises usually lack the experience in dealing with labor rights issues. 27
Cultural integration In US business schools, India s Tata Group s acquisition of Land Rover as well as China s acquisition of Volvo have been used as case studies to analyze the differences in cultural integration, product development, and HR after mergers. While Land Rover had significant success, the Volvo acquisition, while not definitely a failure, has been comparatively underwhelming. Some of China s overseas acquisitions have often ended in failure, such as TCL s acquisition of Thomson's TV business and the Alcatel mobile phone business, SAIC s acquisition of Ssangyong Motors and Pingan s acquisition of Fortis. The issue of culture clashes deserves to be highlighted and discussed in-depth. 28
Agenda A. China s ODI: High Growth with Scale B. Observations C. One Belt and One Road Initiative D. Issues and Risks E. Outlook 29
Rapid ODI growth in the coming decade China has already become a major economic power in terms of GDP, foreign trade, FDI, manufacturing. We expect a rapid growth of Chinese outbound cross-border capital activities in the coming decade. The One Belt, One Road Initiative can been seen as a concrete going abroad plan, and should lead to a period of rapid expansion of China s overseas direct investment in the region. 30
Possible developments In the process of China s capital account liberalization, and due to the sluggish global economy, asset prices may be undervalued, which may provide Chinese companies with buying opportunities. Cross-border expansion of Chinese firms will help digest excess domestic capacity, accelerate the upgrading and adjustment of the industrial structure, encourage effective use of foreign exchange reserves, and exert a positive impact on global and regional geopolitics. We expect the shares of overseas investment in manufacturing and infrastructure to rise significantly. While Chinese ODI in the financial sector will maintain its rapid growth momentum. 31
ODI flow could surpass USD 350 billion by 2025 Assuming the trend continues in the upcoming years, factoring in development over the next decade (assuming 15% annual flow growth before 2020 and 8-10% growth in 2021-2025), we forecast: China s outbound direct investment flow may reach a level of USD 350 to 400 billion per year by 2025. This would be second in the world, only after the United States. In terms of stock, China will accumulate over USD 3 trillion overseas investments, which would rank China s ODI stock within the top 5 globally. 32
Thank you! 33