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5 February, 2008 Mainland China's Overseas Investment Escalating |
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| Over the past few years, mainland China's overseas investment has increased considerably as the government gradually relaxed its control over capital outflows. In view of rising foreign reserves, the move would ease strains on the Chinese renminbi's appreciation and contain inflationary pressures. Moreover, the Mainland authority could preserve the value of foreign reserves by investing in higher return assets overseas amid broad US dollar weakness. As a consequence, mainland China is likely to continue relaxing its rules on the capital account further, and more overseas investment can be expected in the years ahead. |
Statistics on mainland China's overseas investment could be dated back to the 1980's, but it was not until a few years ago that we saw more meaningful outward investment from the Mainland in terms of value. The rise was largely a result of the country's growing wealth after three decades of opening. The government's relaxation of capital control, notably the introduction of the Qualified Domestic Institutional Investors (QDII) scheme in 2006 and the establishment of China Investment Corporation in 2007, also accelerated the outflows. As the moves could ease inflationary pressures and help offset the adverse effects of the broad dollar weakness on foreign reserves, mainland China is expected to relax its restrictions further.
From foreign direct investment to portfolio investment
In the 1980's, mainland China's outward investment was mainly in the form of Foreign Direct Investment (FDI). According to the United Nations, FDI refers to an investment that involves a long-term relationship and reflects a lasting interest of an investor in an enterprise operating in an economy other than that of the investor. The investor's purpose is to exert a significant degree of influence on the management of the target company. FDI usually takes the form of greenfield investment, which means an establishment of subsidiaries or joint ventures, or mergers and acquisitions (M&A).
For many years, mainland China's outward FDI has been dwarfed by FDI from abroad. In the period of 1979-2006, utilized FDI flows to the Mainland totalled USD692 billion, compared with an outward FDI of less than USD80 billion for the same period. However, as the growth of inward investment has slowed significantly in recent years, that of outward FDI has accelerated. It rose over 600% in the period of 1999 to 2006, compared to the 131% increase of the inward investment for the same period (Exhibit 1).
Likewise, on a global perspective, mainland China's outward FDI is minimal, accounting for about 0.6% of the world total in 2006 in terms of FDI stock. Nevertheless, mainland China has risen to be a main source of direct investment over the past few years. Its outward FDI stock grew by 28% from USD57.2 billion in 2005 to USD73.3 billion in 2006, being the sixth largest in the developing world.
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Economic Focus (February 5, 2008). Hang Seng Bank Limited. All rights reserved. Reproduction of article(s) in whole or in part is permitted provided the source is quoted. Please direct any inquiry to Treasury, Planning and Research Department, G.P.O. Box 2985, Hong Kong.
