Chinese blockbuster deals worldwide are pushing up overseas direct investment

Recent figures show that Chinese overseas direct investment, made by Chinese companies in other countries, rose considerably last year and is projected to catch up and eventually surpass the amount of foreign direct investment, what foreign companies invest in Chinese companies.

With the help of quantitative easing and robust economic recovery, emerging markets have in general increased their overseas investment activities. When the real estate bubble in the US and several other Western economies burst during the financial crisis of 2007-08, companies in emerging economies found many businesses and projects in developed economies simply too good to resist. Some investment opportunities were attractive not only in terms of value, but were also important strategically for businesses in emerging economies wanting to expand their internationally.

At the same time, with the strong appreciation in the currencies of some emerging economies and the related appreciation of assets, many companies in emerging economies needed to seek investment opportunities overseas. International diversification and acquisition has thus become an important way of rebalancing the global economy.

Chinese companies have done many blockbuster deals around the globe. China's investment in Africa, much of it related to infrastructure and natural resources, reflects Chinese companies' long-term global plans, beyond their immediate need for raw materials. In addition, many Chinese companies have opted to move their operations to neighboring Asian countries with lower labor costs, defraying rising labor costs domestically.

Further, in the past two years Chinese real estate developers have snapped up prime properties and development opportunities in the US, Canada and Europe, further attracting global attention to Chinese overseas investment and expansion.

Among all the important overseas investment deals in recent years, Europe has stood out as a prime destination for Chinese companies. Europe, as China's largest trade partner, has drawn considerable investment from Chinese companies, and the trend seems likely to continue in the year ahead. With geographical proximity and historically close ties in trade and investment, many Chinese companies find investment in Europe a great complement to their domestic businesses. The goal of some Chinese companies' so-called China-themed investments is in fact to better develop and penetrate Chinese domestic markets with a European edge.

For example, as Chinese consumers become more enamored with European luxury brands and lifestyle, many European companies are taking increasing market share from China. As Chinese companies have climbed the design and manufacturing ladder, many have found it difficult to establish an internationally renowned brand in a few years. To distinguish themselves from domestic competition and gain international recognition, many Chinese businesses choose to invest in sectors and companies with great exposure to the increasing wealth of Chinese.

Of course, many Chinese investments are aimed at helping Chinese companies enter and expand in the huge European market. Investments in securing strategic partners, research and development capacity, patents and technology know-how and distribution channels all seem worthy investments to Chinese companies for their long-term growth in Europe.

Many Chinese companies in Europe are well placed to grab opportunities as the economies of many European countries continue to recover from the sovereign debt crisis. They need capital and investment from outside the region. With improved fiscal situations and a determination to jump-start their economies, many European countries are looking for help not only in the private sector, but also in rebuilding or upgrading their existing infrastructure, much of it completed after the end of World War II. There, Chinese companies' experience in infrastructure investment and construction over the past 30 years may well come in handy. Many of the investment projects are not only funded by Chinese companies, but managed and implemented by them, too. There are areas in which Chinese companies can turn their domestic expertise into global competitiveness.

As China's economy continues to grow, it inevitably becomes more international, and Chinese companies inevitably engage in more international investment. Local businesses worldwide are monitoring Chinese companies' international expansion and investment, some with enthusiasm and others with concern.

Regardless of the vested interests different parties have, it is important to note that Chinese economic growth brings opportunities not only to Chinese people but those of many other countries and other continents. After all, Chinese overseas investment is a necessary and healthy rebalancing of the persistent imbalances in trade and capital flow that have dogged the global economic and monetary system over the past decade.

Recent tapering off of quantitative easing in the US may break the balance that has been fueling the growth of emerging markets and China in the past few years. There have already been signs of capital flight out of emerging economies. If this trend were to continue, the ODI of many emerging economies could surpass their FDI simply as a result of the slowing in FDI growth, rather than increasing ODI.

If that happens, emerging markets are clearly not to blame.

The author is a faculty fellow at the International Center for Finance, Yale University; and deputy dean of the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 02/21/2014 page9)