Blog Post

China’s outward foreign direct investment

China’s outbound foreign direct investment (ODI) may have exceeded inbound foreign direct investment (FDI) for the first time in 2014, according to the Ministry of Commerce of the People’s Republic of China (MOFCOM).

By: Date: June 28, 2015 Global Economics & Governance Tags & Topics

This result is remarkable because it implies that China may have already become a net exporter of FDI, something surprising given the country’s stage of development as well as its relatively low share of global ODI stocks (Figure 1).

The reality could actually be quite different.  ODI figures may be substantially distorted due to the presence of offshore intermediaries such as Hong Kong, and tax havens in the Caribbean, which accounted for circa 70% of China’s total ODI flows and stocks in 2013 (Figure 2). MOFCOM requires companies to register the first (not the final) destination of their cross-border transactions and  not to take into account reverse flows, making it hard to determine the final size and distribution of Chinese ODI. In a recent Working Paper with Carlos Casanova and Xia Le[i], we recalculate China’s Outbound Foreign Direct Investments (ODI) in a way which accounts for these distortions.

Our estimates show that China’s ODI flows and stocks may have been overestimated andcould actually be more diversified that previously thought (Figure 3). First of all, ODI flows and stocks in 2013 may have been much lower than reported by MOFCOM. The reason for this discrepancy is that approximately 40% of all flows to Hong Kong ending up being reinvested in China as inbound FDI , in order to benefit from preferential conditions (Xiao, 2004).

In addition, the geographical distribution of Chinese ODI stocks and flows may be more balanced than previously thought, with developed markets in North America and Europe accounting for a larger share of final flows and stocks.

While Asia remains the largest recipient of Chinese ODI, its share falls from 70% to 50% according to our estimates. The fact that Asia is the main recipient of Chinese ODI makes sense given the region’s geographical proximity and close trade links with China. However, Chinese official statistics define Asia in very broad terms – to include the Middle East and Central Asia – so this figure would decrease significantly based on narrower geographical classifications.

Europe emerges as the second largest recipient according to our estimates. The continent goes from being a relatively modest recipient of ODI (8% of stocks and 6% of flows in 2013), to accounting for 19% of total stocks, and 17% of total flows in 2013. Take the European Union (EU) as an example: recent media reports have claimed that we are witnessing wave of Chinese investments into the EU; however official statistics place this figure at a modest USD 4.4 billion in 2013. Our estimates show that in reality Chinese ODI flows into the EU could have been closer to USD 10.4 billion, challenging previously held assumptions that China remains a minor investor in the EU.

North America also sees an increase in its share of ODI, with the United States accounting for over 75% of flows and stocks to North America. This comes as no surprise. MOFCOM’s statistics show that Chinese ODI flows into the US were USD 3.8bn in 2013, a figure which is lower than the value of the largest transaction that year (the purchase of Smithfield’s Food for USD4.7bn, which happened via the Cayman Islands). Our estimates put this figure at around USD 9.0 billion (stocks: USD 49.2 billion).

Latin America is the only region that experiences a drop in Chinese ODI, however if we exclude offshore centers from the equation, ODI stocks to the region actually increase after accounting for data limitations based on our estimates (USD 9.9 billion according to MOFCOM vs. USD 23.2 billion based on our estimates).

  

All in all, even if China did not really make it to surpass the landmark of becoming a net creditor in 2014, there is no doubt that it will in the future as China’s ODI stocks in the world are underrepresented relative to the country’s size. In particular, a number of issues will add to the existing momentum behind Chinese ODI.  First, the easing of application procedures for ODI is bound to continue as China moves forward with capital account liberalization. Second, there is a growing need to internationalize Chinese corporations to boost productivity  and reduce excessive capacity in several sector. Boosting ODI to overseas markets where demand is still on the rise, as is the case with most ASEAN countries, will enable China to outsource this excessive capacity. Labor-intensive sectors will also seek to expand overseas in order to benefit from relatively lower labor costs and maximize profit margins, favoring ODI flows to manufacturing activities in ASEAN and to a lesser extent Africa. Third, China’s huge amount of reserves will need to be diversified into higher yielding assets over time.  Fourth and most importantly, the Chinese government is the one pushing this process not only at the level of the individual company but also with grandiose initiatives such as the 21st Century Silk Road.

With the growing importance of Chinese ODI, we also hope that tracking where this huge amount of money is going becomes easier over time.


[i] https://www.bbvaresearch.com/en/publicaciones/chinas-odi-how-much-goes-where-after-round-tripping-and-offshoring/


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Upcoming Event

Feb
9
12:30

Financing the Belt and Road Initiative

The Belt and Road initiative, recently embarked on by China, aims to improve cross-border infrastructure in order to reduce transportation costs across a massive geographical area between China and Europe.

Speakers: Alicia García-Herrero, Mingxi Sun and Jianwei Xu Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

Nicolas Véron

Giving Asia its due in global financial regulation

With US inward turn, China should get a bigger role to bolster system

By: Nicolas Véron Topic: Finance & Financial Regulation Date: January 5, 2017
Read article More on this topic

Blog Post

Alicia García-Herrero
DSC_0160

Is the UK’s role in the European supply chain at risk?

Will tge UK’s engagement in European supply chains be at risk once the UK exits the EU?

By: Alicia García-Herrero and Jianwei Xu Topic: European Macroeconomics & Governance Date: December 20, 2016
Read article More on this topic

Blog Post

Alicia García-Herrero
DSC_0160

UK-China agreement on trade in services is no substitute for a UK-EU deal

The UK government has high hopes that new trade deals with non-EU states will offer an economic boost after Brexit. But how likely is this to materialise? The authors show that a FTA with China is unlikely to offer much to the UK's prominent services sector. Strong links with the EU will remain vital.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: December 6, 2016
Read article Download PDF

Working Paper

cover

Reform of the European Union financial supervisory and regulatory architecture and its implications for Asia

This Working Paper reviews recent developments in the EU’s financial supervisory and regulatory architecture with a view to draw out lessons for regional financial regulatory architecture in Asia.

By: Zsolt Darvas, Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation, Global Economics & Governance Date: November 17, 2016
Read article More on this topic

Blog Post

Alicia García-Herrero
DSC_0160

Trump could give new impetus to EU-China relations

It is too early to say what the Trump administration’s trade policy will look like – but a total cut-off from Asian partners is unlikely. It would harm the US economy, and offer China even more scope to cement its position in Asia. Nevertheless, with TPP and TTIP both looking unlikely, the EU should move fast to build relationships with China and ASEAN countries.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: November 15, 2016
Read article More on this topic More by this author

Podcast

Podcast

Opportunities and challenges for EU-China trade relations

How can trade relations between the EU and China be strengthened? How can the current situation be improved, and what are the potential challenges to do that?

By: Bruegel Topic: Global Economics & Governance Date: November 8, 2016
Read article Download PDF More by this author

Policy Contribution

pc-19-2016_page_01

Financial regulation: The G20’s missing Chinese dream

The current fairly peripheral role of China in the global financial regulatory system is increasingly problematic. The system needs a guiding vision in which China becomes much more central – a ‘Chinese dream.’ This paper outlines three clusters of initiatives to achieve a global financial regulatory system in which China holds a major position.

By: Nicolas Véron Topic: Finance & Financial Regulation, Global Economics & Governance Date: October 26, 2016
Read article Download PDF More on this topic

Policy Contribution

pc-18-16

What consequences would a post-Brexit China-UK trade deal have for the EU?

A China-UK free trade agreement has been extensively discussed since the UK’s vote for Brexit. Many supporters of Brexit argue that the UK’s regained flexibility to strike trade deals with other partners, and in particular with China given its economic size, will be a key advantage. This analysis indicates that a China-UK FTA will be neither as easy nor as clearly advantageous as portrayed by Brexit supporters.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: October 7, 2016
Read article More on this topic More by this author

Opinion

Alicia García-Herrero

The yuan's SDR entry is more symbolism than substance

The yuan's official entry into the International Monetary Fund's basket of reserve currencies on Oct. 1 raised expectations that central banks all over the world would be scrambling to stock up on Chinese money. But the reality is far from that.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 7, 2016
Read article More on this topic More by this author

Opinion

Alicia García-Herrero

China's state-owned enterprises reform still lacking bite

China has gone through a remarkable transformation in recent decades but tough reforms have become rare, especially since the global financial crisis. Among the many reforms announced since President Xi Jinping's administration took office in March 2013, the most significant for China's economic outlook undoubtedly will be the reform of state-owned enterprises (SOEs).

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 4, 2016
Read article More on this topic

Blog Post

Alicia García-Herrero
DSC_0160

What does China’s ‘belt and road initiative’ mean for EU trade?

Much has been written about the Belt and Road initiative since Xi Jinping made it Beijing’s flagship initiative in September 2013. There are many interpretations of the initiative’s ultimate objectives, but one objective is clear. The belt and road scheme will bring huge improvements in regional and international connectivity through infrastructure upgrades and trade facilitation across a massive geographic area.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: September 20, 2016
Load more posts