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The Next big China investment trend: Outbound

By Jim Trippon

Although Washington has been complaining mightily about China stealing American jobs, the evidence is quite compelling that the Chinese bear little blame. While U.S. firms struggle to find capital, foreign investment into China is recovering at a healthy rate.

China attracted $14.02 billion of foreign direct investment in the first two months of this year, up 4.9% from a year ago. Although China did experience a slump in foreign direct investment (FDI) during the height of the global financial crisis, that trend has definitely been put into reverse.

As Beijing often points out, many exporting jobs in China are created by foreign firms seeking to take advantage of China’s inexpensive labor, skill, and organization. There are other countries poorer than China but cheap labor alone doesn’t make for a worthwhile investment target.

Even more important than FDI is the investment flow coming from China to the rest of the world. This is a growing and noteworthy trend.

Beijing has become increasingly eager to encourage Chinese companies to expand abroad with new acquisitions. With prices of copper and iron ore rising, it has become a national priority to secure supplies of raw materials such as oil and natural gas, which are vital to the economy's growth. China has always been interested in picking up advanced technologies but has been frustrated by many countries which are afraid of losing intellectual capital and have put restrictions on such purchases.

Economic considerations driven by the global financial crisis may hold greater sway in the future. Outward investments by Chinese nonfinancial sectors totaled $4.66 billion during the January to February period, more than the total during the entire first quarter of last year.

The Wall Street Journal estimates that China is targeting outward investment in nonfinancial sectors of $46 billion this year, an increase of 6.2%. Outbound investment rose to $43.3 billion last year. China's investment in overseas markets grew by 6.5 percent from the year before despite the global financial implosion during 2009. Once again, China is showing itself to be a resilient economic power, even in times of huge stress.

With marathon negotiations still continuing over iron ore prices, Beijing is complaining that foreign mining companies are looking for a 100% price increase. Developments like this mean that investors can expect China to go shopping for even more foreign resource companies in order to ensure supplies at a price Beijing can control.

Jim Trippon,
China Stock Digest Editor-in-chief

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