China Firms Show Voracious Appetite for Bargains in West
China’s outbound direct investments (ODI) surged 72.8% to $23.16 billion during the first four months of this year over the same period last year, according to the Ministry of Commerce. That brings China’s total ODI to $345.1 bil.
By comparison China’s ODI grew only 1.8% ODI in 2011 to $60 bil. for the whole year.
While the pace of growth seen in the first part of 2012 isn’t likely to continue for long, ODI is expected to sustain an average 17% annual growth rate between 2011 and 2015, according to a Ministry projection. That would put ODI for 2015 at about $180 bil., likely to be among the world’s top two or three.
“The trend is clear. ODI is on a fast-growth track which will probably continue for some decades,” said Chen Runyun, commercial counselor at the Ministry’s department of outward investment and economic cooperation. “Various factors, including the increasingly appreciating yuan, China’s large foreign exchange reserves and domestic companies expanding abroad, are driving the fast growth.”
In 2010 China passed Japan and the UK — itself Europe’s leading ODI nation — to become the world’s fifth-largest global investor. Among developing nations China was at the top in 2010 and 2011.
China’s ODI patterns have changed dramatically since the end of 2010 when they went mainly to manufacturing, retail, wholesale, commercial services and mining. Going forward China will direct its state-owned firms to buy, invest and merge in what it perceives to be the key sectors of energy, raw materials, agriculture and manufacturing, according to Premier Wen Jiabao’s work report. It was the first time target sectors were specified in an official central government government report.
China’s firms have begun to see the advantages of owning foreign brands that can help boost their standing with China’s increasingly sophisticated consumers as well as help expand globally. In May the Dalian Wanda Group — China’s largest entertainment group — agreed to buy AMC Entertainment Holdings — the second largest cinema chain in the US — for $2.6 billion. Wanda is now looking to buy a European cinema operator.
Asia, Europe and Africa are the top three destinations for Chinese ODI, with Latin America becoming increasingly attractive.
The biggest ODI jump has been to the European Union with a 94% surge in 2011, year-on-year, to $4.28 billion. Africa was second with a 59% year-on-year growth.
China’s strengthening yuan and a depreciating euro have helped bolster the capital strength of China’s firms, especially the large state-owned ones. But not every Chinese investment is welcomed. Firms seeking western technology are stymied by legal blocks imposed by the EU and the US.
More ODI is placed through mergers and acquisitions. The total value of China’s M&A deals in 2011 totaled $154 billion, a 74% jump over 2007. From January through April the value of overseas M&A completed by Chinese firms was $26.77 billion.
Many large Chinese manufacturing firms see M&A’s as one strategy for getting around the protectionism they face in some overseas markets. This is especially true for state-owned firms who account for two-thirds of Chian’s ODI.