As far as the long-term impacts of the Covid-19 on China's economy is concerned, ANBOUND believes that it could cause further problems for the already suffering Chinese economy. Fazed by the tremendous pressure from the outbreak, it is very likely that China will soon direct its future development strategies and priorities towards improving its domestic economy instead. Consequently, this also means that the country's plan of “going out” into the international economic and geopolitical scene would have to be put on hold for the time being.
In fact, prior to the outbreak, China's outbound investment had already came to a slowdown as a result of international trade frictions intensifying, particularly the U.S.- China Trade War. Despite having reached the first phase of the trade deal with the U.S., China's attempts at retaining its foreign investors have not eased up the slightest bit, and the U.S. government's increasingly stringent scrutiny and restrictions on Chinese investments have hurt China's overseas investments. In fact, China's outbound investment had already begun to show a gradual decrease in its trend back in 2019, evident from the data published by the Ministry of Commerce, which showed that China's industry-wide outbound direct investment in 2019 was US$ 117.12 billion, a 9.8% decline year-on-year, and non-financial outbound direct investment was USD 110.6 billion, a 8.2% decline year-on-year too. According to Ernst & Young’s published report detailing the“Overview of China outbound investment in H1 2019”, the trend of Chinese companies' overseas investment continued to decline in 2019, with the country suffering a 9.8% and 31% loss in both outbound direct investment and the amount of announced overseas mergers and acquisitions (M&A) respectively.
From a micro-level perspective, the trade war between China and the United States has caused China’s external economic to deteriorate, with many countries rejecting investments from the country out of doubt, what’s more, Chinese regulators have been tightening the approval of outbound investment in the past two years, all of which points to an even more obvious slowing trend in China's outbound investment. It is also believed that the reason for the decrease in China's outbound investment is not only caused by the fact that Chinese enterprises face more stringent regulatory approval for outbound investment, but that the trade war between the United States and China has reduced the latter's foreign currency supply. With a more balanced trade relationship with the United States, further expansion of Chinese imports would reduce China's foreign exchange reserves, which in turn reduces the capital needed for investment.
On a regional level, China's outbound investment have shown very obvious changes too. According to Ernst & Young's data, Asia has risen to become China's largest overseas M&A destination, accounting for nearly 30% of total investment. In addition to bucking the trend in Asia and Africa, Chinese companies' M&A in other continents have declined with varying degrees, particularly in Europe and North America, where M&A fell by nearly 60% and 30%, respectively, to the lowest levels since 2014 and 2012. While competition in European and American countries remains fierce, the degree of marketization is relatively high, and the investment risk is relatively low, which means to some extent, the return of the investment in European and American countries is still guaranteed. At present, regions under the Belt and Road Initiative that are experiencing rapid investment growth are still within the market development phase, though large investment risks are nonetheless expected, such as the large number of previous infrastructure investments which had a long investment cycle and low returns and threatens the continuation of subsequent investment.
The recent outbreak of the novel coronavirus posed a significant impact on overseas investment and China's external strategic development. Ernst & Young stated that the increase in trade barriers and geopolitical uncertainty in 2019 will affect business confidence and economic activities globally. Overseas uncertainties were somewhat lessened when the British confirmed its stance on Brexit early 2020 though with the impact of the novel coronavirus outbreak in the picture, the world is still assessing the market situation concerning China’s overseas investment and monitoring the country’s progress at containing the outbreak. As such, the suspension of economic activities brought by the preventive and control efforts of the outbreak will inevitably delay any activites relating to outbound investment. In fact, the slowdown in outbound investment will be further exacerbated by China’s decision to direct its focus “inwards”, or to improve its domestic economy, which will certainly hurt the "Belt and Road Initiative" as well as the construction of the Guangdong-Hong Kong-Macao Greater Bay Area (Greater Bay Area). ANBOUND pointed out that the reason for that is that the domestic market needs to “recuperate” and replenish its resources following the outbreak. Thus, it makes sense to halt all of China’s outbound investments in response to the outbreak’s impact, not forgetting the slowdown and prolongment of overseas investment too, which is a byproduct of the outbreak forcing China to shift its focus “inwards”.
China’s act of shifting its attention“inwards” does not necessarily mean that the country is shying away from opening up once more. Regardless of the situation, China still has to explore the depth and breadth of its market to attract overseas investment and commodities, especially since it intends to strengthen the attractiveness of its domestic market to the Belt and Road Initiative countries. Currently, China's actual use of foreign investment is maintaining a steady growth. Figures for January showed China's actual use of foreign capital (excluding financial sector investment) reached US$ 12.68bn, up 2.2% year-on-year. Among the major sources of investment, Singapore, South Korea, and Japan saw year-on-year growth of 40.6%, 157.1%, and 50.2%, respectively. Meanwhile, the actual amount of foreign investment invested by countries along the Belt and Road Initiative and ASEAN increased by 31.3% and 44.8% respectively. Clearly, the development of the domestic market is still of great significance to the act of opening-up and "going out" for Chinese enterprises.
Final analysis conclusion:
From ANBOUND’s perspective, the changes within the novel coronavirus outbreak has worsened the slowdown of outbound investment, which is directly attributed to China redirecting its attention “inwards” to focus on its domestic policies and economic activities. In the post-epidemic reconstruction process, China's outbound investment would continue to decline, and is expected to stay that way, at least for the remainder of the year.
