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A pivot to new frontiers

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China’s outbound direct investment

  • China’s outbound direct investment is set to accelerate sharply…
  • ….as the private sector increasingly takes the lead…
  • …and investment in manufacturing rises steadily

China’s outbound direct investment (ODI) has risen substantially since the turn of the millennium. Only starting to venture out into the international investment landscape in the mid-2000s, China was, in a sense, ‘late to the game’. However, after rapid increases in the first half of the 2010s, China’s stock of outward direct investment now surpasses that of Japan, Germany and the UK.

But there is still plenty of room for China’s overseas investment to grow. Its overall stock of outward investment is only one-third that of the US, and still small relative to the size of the economy. At 15.7% of GDP, it is well below that of the major developed economies and the world average of 34%.

Chinese firms have strong incentives to “go out” to explore the global market. ODI is an important channel to secure access to resources, markets and trade routes. While a change in the government’s ODI policy in 2016-17 and the pandemic led to a moderation in China’s outbound investment flows, an increase now would align with broader Chinese economic and political development priorities.

We think that Chinese ODI flows are set to accelerate. In our baseline scenario, which envisages ODI rising in line with its recent trend, annual flows could rise by over 50%, with at least USD1.4trn to be invested abroad between now and 2028. In a more dramatic upside scenario, in which China’s ODI rises in line with its per capita GDP, flows could potentially rise up to three times their recent annual pace to well over USD400bn per annum.

USD1.4trn
Potential incremental China ODI by end-2028 (baseline scenario, HSBC)
USD2.97trn
Potential incremental China ODI by end-2028 (upside scenario, HSBC)

There is also a shift under way in the type of key players pursing ODI. The private sector is increasingly taking the lead. In 2020, the proportion of non-financial ODI stock owned by state-owned enterprises (SOEs) was 46.3%, down from 66.2% in 2010. 2017 was the watershed: since then, non-SOEs have owned more than half of the ODI stock.

The mix of sectors that Chinese ODI focuses on has changed. Investment in manufacturing has been rising consistently in recent years, alongside transport, storage and postal services. By contrast, mining and real estate ODI have declined. Looking ahead, we see an active and growing outbound role for Chinese companies in the technology, renewable energy and EV sectors. Meanwhile, China is prioritising projects that focus on digital and green infrastructure, rather than the large-scale transportation projects that shaped the initiative’s early stages.

We anticipate a shift in geographic focus, too. The proportion of China’s outbound direct investment to Southeast Asia, Latin America and the Middle East is likely to increase, while other regions, such as the US, and to a lesser extent Europe, are set to see a proportional decline.

In sum, fresh actors, different sectors, shifting destinations – a pivot to new frontiers indeed.

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