Overseas Chinese investment set to fall 9pc this year

Companies' foreign spending set to drop9 per cent this year, according to report

PUBLISHED : Friday, 11 July, 2014, 1:31am
UPDATED : Friday, 11 July, 2014, 1:31am

The amount of money invested by Chinese companies overseas dropped for the first time since the financial crisis, according to a new report by the American Enterprise Institute (AEI). The Washington-based research and policy group ascribed the fall to declining Chinese interest in the capital-intensive energy and mining sectors.

"It is a useful reminder that China is not buying the world," wrote Derek Scissors, the report's author and an AEI scholar. However, the apparent slowdown in transaction flow could be reversed by "a single large deal".

The Chinese government has encouraged ambitious companies to "go out" for over a decade. Many are now answering that call in the search for fresh markets, intellectual property, and international talent. Corporate investment has surged eightfold in under a decade, according to AEI data, as Chinese executives snap up opportunities in a post-crisis global economy.

For the first half of this year, outbound investment totalled US$39.2 billion, according to the AEI. This compared to US$86.3 billion reported for the whole of 2013, suggesting a 9 per cent annualised decline. Using a different methodology, China's Ministry of Commerce reported US$40.6 billion in 2014 first-half deals and US$90.2 billion in 2013 transactions. The annualised percentage drop is almost the same.

Chinese companies need to be wary of potential push back from national governments worried about cyber espionage and overreliance on a single trading partner, the report suggested.

"While China's US$4 trillion pile of foreign reserves, with perhaps US$800 billion more at state banks, suggests an unstoppable tide, investment cannot occur without opportunities in foreign markets. And the availability of these opportunities ebbs and flows," wrote Scissors.

The AEI's China Global Investment Tracker recorded over US$500 billion in Chinese overseas deals since 2005. US firms invested US$2.2 trillion in foreign markets during the same period.

Since 2005, there were a further US$236 billion in impaired transactions that were never completed, usually because of regulatory hold-ups or a shift in national policy. Libya's civil war and US sanctions on Iran were contributing factors to why some Chinese investments collapsed, reported the AEI.

Chinese executives are learning from past mistakes and becoming smarter at deal making, said John Poulsen, partner at law firm Squire Sanders. Poulsen referenced several Australian mining transactions that were initially based on erroneous assumptions, including an ability to import cheap labour. Chinese investors now partner with local players who understand the regulations and laws, said Poulsen.