By The China Investor Staff
While some global Chinese outbound direct foreign investment may be facing headwinds, there are many bright spots for Chinese investors.
Chinese outflow investments around the globe in 2015 topped $116 billion. In 2016, that figure jumped more than 46 percent to a record-setting $171 billion, according to data compiled by the American Enterprise Institute for its China Global Investment Tracker. This year, in large part because of the acquisition of Switzerland’s Syngenta for $41.2 billion, investment totals could even outpace 2016, said AEI’s Derek Scissors, a resident scholar at the nonprofit organization who focuses on the Chinese and Indian economies and on U.S. economic relations with Asia.
The tracker documents more than 750 Chinese investments worldwide of $100 million or more since 2005, excluding bonds, and 800 construction and engineering contracts. The combined value of China’s global investment and construction since 2005 is $1.1 trillion, and could top $3 trillion by 2025, according to AEI.
Last year was a record year for Chinese FDI in the United States with Chinese firms investing $46 billion into the American economy, tripling the amount from 2015 and reaching a tenfold increase compared to five years ago, according to a 2017 report by the Rhodium Group and the National Committee on U.S.-China Relations. Chinese investors in the U.S. favored acquisitions, making more than $44 billion in asset purchases, and continued to expand through greenfield projects.
“Investment in 2017 is unlikely to reach the same levels as in 2016,” according to report authors Thilo Hanemann, Daniel Rosen and Cassie Gao. “Our best guess is a moderate increase in U.S. flows to China but a notable moderation in the other direction.”
TOP INDUSTRIES FOR CHINESE INVESTORS
The top five sectors in 2016 were energy, entertainment, technology, tourism and transport, which together received $120.5 billion in Chinese investment. Real estate, typically a top five sector, received investments of more than $14.5 billion.
“Energy investment, including gas and alternative energy, intensified over the course of the year, with more than $30 billion ultimately allocated,” wrote Scissors in a January 2017 China Tracker update. “While this is a return to the past, technology acquisitions touching $25 billion constitute a sharp change. Another new development was nearly $20 billion invested in tourism, primarily hotels.”
The Chinese invested the bulk of 2016 dollars in Europe ($60.4 billion) and the U.S. ($55.5 billion). In Europe, Britain and Germany led the pack, each with more than $11 billion in inflows, primarily in the alternative energy, entertainment, real estate construction, technology and telecom, tourism sectors.
In the U.S., one focus of investment dollars was on tourism, with HNA acquiring a 25 percent equity interest in Hilton from affiliates of Blackstone, and Anbang closing a $5.7 billion deal for Strategic Hotels & Resorts Inc., according to AEI figures.
Entertainment also figured in the deals, with the purchase of Legendary Entertainment by Dalian Wanda, as did technology, with HNA’s $6 billion acquisition of Ingram Micro.
For 2017, “by the amount of spending, the acquisition of Switzerland’s Syngenta means agriculture will probably lead all investment,” Scissors said. “By numbers of deals, however, transportation is newly popular while energy and real estate have always been popular.”
When it comes to two-way FDI between U.S. and China, real estate was the number one industry in 2016, driven by an increasing Chinese appetite for commercial real estate.
“Chinese investors have affinity for real estate investments and Chinese investors now make up the largest foreign investor group in U.S. real estate,” said Olof Akesson, managing director of Civitas Capital Group.
Real estate was followed by consumer products and services, information and communications technology, transport and infrastructure, and entertainment, media, and education.
THE OUTLOOK FOR 2017
Following Chinese regulators’ capital control changes, the number of outbound mergers and acquisitions by Chinese companies fell by 20 percent in the first six months of 2017 compared to the same period in 2016, the Rhodium Group reports.
AEI figures peg outbound investment at $97.1 billion from January to June 2017.
Chinese investment in the United States decreased almost 50 percent during this time versus the first half of 2016, despite hitting $17 billion and totaling more than $130 billion since 2011, according to AEI.
Scissors, who serves concurrently as chief economist of the China Beige Book, sees fewer large investment deals in the second half of 2017 given the Chinese government’s recent actions to discourage investment by private firms.
“Chinese state enterprises are still buying, and the total value of investment (for 2017) may rise (above 2016),” Scissors said.
Akesson also sees the trend increasing.
“Despite the tighter controls and slowdown in megadeals, we expect investments to continue,” he said. “The Yuan has strengthened slightly due to the recent capital control efforts, however a continued worry about a weaker yuan remains. The volatility in the domestic markets also contributes to investors seeking suitable investments abroad.”
When it comes to the second half of 2017, Chinese investment may pick up, said Li Qiang, Managing Partner of Shanghai-based DLA Piper LLP.
“I think there will be a recovery but it will not get to the 2016 level,” he said. “I think Chinese investors will be going out to buy overseas real estate as actively as they did in 2016.”
One recent large investment that will boost the numbers for 2017 is China Investment Corporation’s $14 billion private equity real estate acquisition of European warehouse firm Logicor in June. It is pegged as the biggest private equity deal in Europe on record, according to Reuters.
The capital outflow changes have also impacted what sectors investors select to put their money in. Even though activity decreased across all sectors in the first quarter of this year, Basic materials, Energy and Utilities has been one of the most resilient sectors. Five out of the top 12 deals since January have state-owned acquirers in this sector, including State Grid, Sinopec, Three Gorges, Shandong Gold and Yancoal, according to the Rhodium Group. Another sector that has stayed strong is Telecom, Media and Computing, however deals have come from more private firms closing smaller transactions.
While many uncertainties remain, foreign direct investment out of China still shows strength.
“I believe that Chinese capital has continued to invest globally and particularly in the U.S.,” said Mark Drumm, Chief Risk Officer with Stratford Land. “I believe that it will continue to be a significant source as investors within China are trying to diversify their holdings across global markets.”
(Editor’s Note: May vary slightly as published.)