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 Topic: Global Economics & Governance

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

Past Event

Past Event

14th Asia Europe Economic Forum (AEEF)

The 14th Asia Europe Economic Forum will be held in Seoul on 20-21 September 2017.

Topic: Global Economics & Governance Location: Seoul, Korea Date: September 20, 2017
Read article Download PDF

Policy Contribution

Capital Markets Union and the fintech opportunity

Fintech has the potential to change financial intermediation structures substantially. It could disrupt existing financial intermediation with new business models empowered by intelligent algorithms, big data, cloud computing and artificial intelligence. Policymakers need to consider four questions urgently: Develop a European or national fintech market? What regulatory framework to pursue? Should supervision of fintech be exercised at the European level? What is the overall vision for the EU’s financial system?

By: Maria Demertzis, Silvia Merler and Guntram B. Wolff Topic: Finance & Financial Regulation, Innovation & Competition Policy Date: September 15, 2017
Read article More on this topic More by this author

Opinion

Is China Deleveraging? Too Early to Cheer

This blog post was originally published on BRINK “Deleveraging” is the new buzzword in China. The leadership clearly wants to scale back its epic borrowing, but it is not necessarily ready to pay the price for it, namely, the price of having less support for growth. The question is whether the recent efforts of China’s leadership to […]

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 13, 2017
Read article More by this author

Podcast

Podcast

Surprising priorities for Europe and China

Bruegel’s Alicia García-Herrero and Robin Niblett of Chatham House discuss a new joint report on EU-China relations. How easy was it to find common ground with Chinese partners? And what should be the priorities for economic cooperation between Europe and China?

By: The Sound of Economics Topic: Global Economics & Governance Date: September 13, 2017
Read about event More on this topic

Past Event

Past Event

EU-China economic relations: looking to 2025

This event will see the launch of a report on EU-China relations and discuss issues such as trade and investment, industrial cooperation and innovation and global governance

Speakers: Victor Chu, Ian Davis, Alicia García-Herrero, Dame Clara Furse, Tony Graziano, Anatole Kaletsky, K.C. Kwok, Lawrence J. Lau, Ina Lepel, Hanna Müller, André Sapir, Robin Niblett, György Szapáry, Jean-Claude Trichet, Zhang Yansheng, H.E. Ambassador Yang Yanyi, Liu Xiangdong, Gunnar Wiegand, Guntram B. Wolff, Huang Ping and Elena Flores Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 13, 2017
Read article Download PDF More on this topic

Book/Special report

EU–China Economic Relations to 2025. Building a Common Future

The EU and China, as the world’s second and third largest economies, share a responsibility in upholding the rules-based, global free trade system and other forms of multilateral cooperation, especially on combating climate change. This report sets out the main conclusions of a research project between European and Chinese think-tanks, which addresses the prospects for the EU–China economic relationship. A Joint Report by Bruegel, Chatham House, the China Center for International Economic Exchanges and the Institute of Global Economics and Finance at The Chinese University of Hong Kong.

By: Alicia García-Herrero, K.C. Kwok, Tim Summers, Liu Xiangdong and Zhang Yansheng Topic: Global Economics & Governance Date: September 13, 2017
Read article More on this topic More by this author

Opinion

Hong Kong should add the euro to its dollar peg

Volatility offers an opportunity for the territory to rethink its strategy. With the economy now more synchronised with China than ever before, the dollar peg may no longer provide an accurate reflection of the real value of the Hong Kong dollar.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 12, 2017
Read article More on this topic More by this author

Blog Post

North Korea: sanctions and marketization from below

What’s at stake: despite Western sanctions, North Korea has been in the news all summer. The country was in the spotlight for the death of American student of Otto Warmbier in June, and for the frequent missiles tests in July and August. We review recent contributions on the impact of economic sanctions.

By: Silvia Merler Topic: Global Economics & Governance Date: September 11, 2017
Read article More on this topic

Blog Post

Should the EU have the power to vet foreign takeovers?

Should the EU have the power to vet foreign takeovers? André Sapir and Alicia Garcia-Herrero debate the issue, which has become topical in view of recent Chinese investment in Europe.

By: Alicia García-Herrero and André Sapir Topic: Global Economics & Governance Date: September 1, 2017
Read article More on this topic More by this author

Opinion

China is the world's new science and technology powerhouse

Chinese R&D investment has grown remarkably over the past two decades. It is now the second-largest performer in terms of R&D spending, on a country basis, and accounts for 20 percent of total world R&D expenditure, with the rate of R&D investment growth greatly exceeding that of the U.S. and the EU.

By: Reinhilde Veugelers Topic: Innovation & Competition Policy Date: August 30, 2017
Read article More on this topic More by this author

Blog Post

Africa and Chinese rebalancing

What’s at stake: China and Africa have developed close economic ties over the past 20 years. The need to rebalance the China-Africa relationship was also a prominent topic in the context of the recent Kenyan elections. But if the drivers will shift relatively more towards domestic consumption, what will the impact be on Africa? We review recent contribution to this debate.

By: Silvia Merler Topic: Global Economics & Governance Date: August 28, 2017
Read article More on this topic More by this author

Opinion

G20 climate commitments must be turned into action

The G20 is just about holding together in difficult times, but the world's leading economies need to make good on their climate promises. Major projects such as China's One Belt One Road initiative and the G20 Compact for Africa must incorporate sustainability criteria, or it will be impossible to meet the Paris goals.

By: Guntram B. Wolff Topic: Global Economics & Governance Date: August 17, 2017
Load more posts