Written by Yuhua Zhang, GEI Associate
With the slowdown and uncertainty of global economy and more and more developed countries accelerating their industrial restructuring – has brought opportunity for Chinese investors to create offshore business ventures. According to the report from Bloomberg, China saw the biggest capital outflow in the final quarter of 2014 since 1998, and is estimated to accelerate in the coming years.
There seems to be two main reasons which lead to the capital flow deficit.
- China has been facing the situations that economy slows and RMB weakens. Nevertheless, Chinese enterprises grow fast, they possess the strength and willingness to invest overseas – not only in emerging economies but also developed economies which are willing to accept investment from Chinese corporations.
- Chinese government has also been encouraging domestic companies to play a more important role in global markets. The Chinese government continues to improve policy supporting foreign investment. Also the government broadens channels for foreign exchange reserve allowing domestic enterprises to issue stocks and bonds abroad.
Is there any doubt that the growth of Chinese capital outflow presents win-win situation to both China and global economy? For foreign economies, investments from China effectively stimulate their economic growth and promote employment. For China, Chinese enterprises are able to learn advanced ideas and strategies of business management, promote brand awareness, resolve the problem of excess production capacity, and drive balanced development of international trade.
In recent several years, one of the most significant features of Chinese capital investment abroad is the expanding scope of industries. Finance, real estate, infrastructure, agricultural products and technology become the most popular industries which attract capital investment from China. Moreover, according to the latest news, Chinese capital investment has developed to international sports industry, Dalian Wanda scored a 20% stake in well-known world top soccer club: Atletico Madrid.
Although China’s foreign capital investments present booming development, China is cognizant of the possible risks they have to face.
- First, China’s foreign capital investments may encounter huge political risk. Base on the high percentage of government investment overseas, China must consider not only market return but also political interest. For example, China has quite high percentage of investment in Venezuela. However, due to the continuous lower oil price during the past year, Venezuela has announced default to several creditor governments, and China may be the next one.
- Second, China may also face the risks from foreign governments’ fiscal or monetary policy. Take real estate industry in British market as an example, British government executed quantitative easing monetary policy after financial crisis. Although the policy plays an important role in economic recovery, it pushed UK housing price higher. Currently the UK average housing prices have again reached historical highs. According to the prediction that Bank of England will raise interest rates in coming years, real estate market may encounter large volatility. Britain is the China’s largest foreign investment market in Europe.
