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Source: ANBOUND
Wednesday, January 23, 2019

A Study on Chinese Overseas Investment Opportunities in the Context of U.S.-China Trade Spat

by ANBOUND

January 2019


Globalization has reshaped the world economic order. Through the economic globalization, globalization of investment activities and international production as well as, the global flow and allocation of commodities, capital, technology, and information bring about the new international division of labor and industrial transfer. It also promotes economic and technological exchanges, as well as cooperation among different countries. At the same time, it also brings new opportunities and challenges to the development of these countries.


Since 2018, the United States-China trade frictions have deteriorated significantly, and the trade friction's impact on the two countries and the global economy has become increasingly apparent. With trade protectionism and the mutual increase of tariffs by the United States and China, elements such as trade and consumption and investments are affected. This led to the partial transfer of the global industrial chain and stimulated it to make adjustments. With the continuous development of the trade frictions, the global industrial layout and supply chain may be reconstructed, showing a series of changes in the value chain. Facing fluctuations in the international economic cooperation environment, policymakers in China and Asia must pay attention to the impact of trade frictions on industrial relocation and corporate foreign investment.


At present, China and the United States have reached an interim consensus to ease trade disputes, and talks conducted by both sides have brought about short-term reliefs. However, Anbound believes that the trade disputes between the United States and China will not end in the short-term. International geopolitics and changes in the geo-economics will exert a profound impact on the global economic landscape of the future. Chinese enterprises and foreign enterprises investing in China need to meet the challenges caused by the trade frictions and obstruction of investment. A large number of enterprises may adapt to changes in the external environment through active adjustments such as foreign investment transfer and industrial relocation.


The international situation in 2019 is complicated and liable to changes. From a comprehensive standpoint, the global production layout of today's enterprises is no longer simply moving from high-cost to low-cost areas. Cultural integration, institutional and security risk, as well as other hidden costs, should be included in operating costs. Chinese enterprises investing in other countries must calculate overseas operating costs from the division of labor in the supply and value chains, attach importance to technological innovation, and achieve mutual benefits with the host countries.



Anbound researchers have key findings as below:

1. In overall, China's outbound direct investment (ODI) in 2019 will continue its slowdown since 2017. Based on the statistics, the actual transaction volume of Chinese enterprises' cross-border mergers and acquisitions has significantly reduced in 2017-2018. This may link to the external factors such as the high uncertainty of international trade environment, some European and American countries have more rigorously reviewed investment from China, and the political risks in some emerging countries, which have led to the increase of investment risk. Besides, China has been actively improving the domestic business environment. The government has introduced a series of policies and measures to attract foreign investment and encourage the private economy, whereas, in terms of outbound investment, the government has tightened restrictions on large-scale capital outflows and strengthened the supervision over the financial risks. Over the past 40 years of Chinese economic reform, the Chinese government has generally encouraged enterprises to invest abroad, but the characteristics of policy in different stages of development are different. According to data released by China's Ministry of Commerce on January 16, 2019, China's ODI in 2018 dropped to US$ 129.83 billion, which is lower than the minimal ODI (US$ 134.97 billion) since 2015.


2. Based on the trend of China's ODI, compared with that in 2018, the trend of China's direct investment in ASEAN markets in 2019 is generally flat or slightly increased, which mainly depends on the trend of RMB exchange rate and the market access policy of the host country. On the other hand, China's direct investment in North America as a whole has dropped sharply since 2017, whereas, countries along the Belt and Road initiative are still the focus of China's ODI, especially the ASEAN emerging economies are becoming more attractive to China's investment. In 2017, China's ODI in ASEAN increased by 37.4% y.o.y to US$ 14.119 billion, and the ODI stock has reached US$ 89.014 billion. In November 2018, the upgraded version of the China-Singapore Free Trade Agreement (CSFTA) and the upgraded ASEAN-China Framework Agreement (ACFTA) was signed, and the Regional Comprehensive Economic Partnership (RCEP) negotiations is in the progress and actively promoted by the host ASEAN countries. Thus, China's investment in ASEAN is expected to increase steadily. In addition, some Chinese enterprises are considering gradually shifting or increasing their investments to Singapore, Indonesia, Vietnam, Thailand, Malaysia and Cambodia due to the impact of U.S.-China trade frictions. However, it is particularly important to point out there were some investment projects of Chinese enterprises in ASEAN (for instances, the Philippines, Myanmar, and Malaysia) have been canceled or suspended in recent years due to the country risk such as political risk and cultural risk. Moreover, the emotional and misinformed coverage of Chinese investment in some countries' media has shaken the confidence of Chinese investors. In particular, private enterprises are generally worried about the "politicization" tendency of their investment in ASEAN. Generally, the stability and continuity of the host country's policies are the basic guarantee for the state's credibility and also the key indicators for the investment environment of a country. For any trade or investment issue in the market economy, it should be resolved by the power of laws and regulations, rather than the government intervention for political interests.


3. Over the past 40 years of Chinese economic reform and opening-up, there are more and more Chinese enterprises investing abroad; this has become an irresistible trend in China. It is not hard to observe this phenomenon from the increasing number of Chinese enterprises in the list of multinational enterprises. In addition, there is still a big group of private enterprises that have grown up actively looking for the overseas development opportunities, and the SMEs will soon and gradually become the main force of "going out" in recent years. On the other hand, among overseas China's enterprises, there are almost even scale of state-owned enterprises (SOEs) and private enterprises, where the quantity and scale of private enterprises' investment are in an increasing trend. In 2018, China's non-public economy holdings made US$ 55.42 billion of outbound investment, accounting for more than 50% of the proportion, reaching 57.4%. In the ASEAN region, compared with the heavy investment in energy, metals, transportation and other massive projects by China's SOEs, private enterprises are mainly concentrated in the middle and lower reaches of the industrial chain and the service industry. By the end of 2017, there were more than 4,700 Chinese enterprises invest in ASEAN which had been employing about 353,000 foreign employees.


4. The economic development level and industrial structure among the emerging ASEAN countries are similar. The governments of Malaysia, Indonesia, Thailand, and the Philippine have included the industries such as agriculture, chemical, automobile, electronics, logistics, business services, science, and technology innovation, into their key development plans. In order to effectively formulate the investment strategies and systematically prepare for industrial docking in ASEAN countries, it is important that the Chinese enterprises in-depth understanding of industrial policy guidelines and local market advantages of different countries. In addition to political risks and exchange rate fluctuations, industrial supporting conditions and skilled labour are also the important factors that Chinese enterprises to consider before investing overseas. There is a competitive relationship among the ASEAN countries to attract foreign investment. The investment from China, Japan, and South Korea allied in the ASEAN region will form a new driving force for ASEAN's industrial development.


5. The international situation in 2019 is still complicated and variable. In general, the RMB exchange rate will face a divergent trend. In the absence of a major financial crisis, a reasonable expectation of the USD/RMB exchange rate would be around 6.7; that is, there is a strong trend along the edge of the new window period. Otherwise, the USD/RMB exchange rate will return to 6.8. A stable USD/RMB exchange rate will be more conducive to Chinese enterprises' direct investment in the ASEAN region.


6. In recent years, China has accelerated the process of RMB internationalization, the overseas layout of Chinese financial institutions and the cooperation with international financial institutions. Meanwhile, China also actively participated in the formulation and implementation of international financial rules, joined the reform of international investment agreements and treaties, and actively integrated into the global financial system. However, China's cross-border financial services system is inadequate, and there is insufficient support for Chinese enterprises' overseas business. The main manifestations are few financing channels, high financing costs, difficult RMB settlement, and poor convenience of the cross-border transaction.


7. The negative impact of the trade war leads to the possible increase in the import prices of raw materials and components which has in turn affected the supply chain in the short run. Some factories in China are therefore considering relocation. However, Chinese enterprises nowadays are becoming more rational in their overseas market layout, they will not simply change their systematic investment strategies just because of geopolitical events. On the one hand, Chinese enterprises have actively enhanced their overseas investment information and pay close attention to the changes in overseas market trends. On the other hand, they will also listen to the professional assessment and advice from external institutions, timely adjust business strategy and control of its investment risk.


8. Nowadays, the strategy of industrial relocation is no longer simply shifting from high labor cost regions to the regions with lower cost. The cost of political risk, cultural integration, and other implicit costs should also be included in the operating costs of overseas business. In addition, the Chinese enterprises should calculate their overseas operating costs according to the division of supply chain and value chain, attach importance to technological innovation, and achieve a win-win goal with the host countries.


9. In order for Chinese enterprises to successfully invest or expand business overseas, it is necessary to attach great importance to the power of the social organization, to establish the international industrial ecology, enhance the business resilience, and promote the continuous optimization of global value chain through the power of enterprise alliance. Creating a common market to be benefited from open development should be the choice of more and more Chinese enterprises.

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