China’s Outbound Investment: Recent Developments, Opportunities, and Challenges

China’s outbound investment has been on the rise in recent years, as demonstrated by the official statistics released by the Ministry of Commerce and other departments. Over 60 percent of China’s overseas companies are situated in Asia, while around half of the investments occurred in the TMT, advanced manufacturing & mobility, and health care & life sciences sectors. To maximize the opportunities and mitigate political, cultural, legal, and financial risks, a measured approach is necessary. 

In recent years, the surge in outbound direct investments (ODI) from China has become a prevalent trend. The allure of new global markets and evolving business models are driving Chinese enterprises to venture abroad and expand their presence on the global stage.

While this trend opens doors to promising opportunities for Chinese firms, the complexity of navigating diverse regulatory landscapes in different countries can be challenging to their global endeavors. In this article, we examine the recent updates, opportunities, and challenges faced by China’s outbound investors.

China’s outbound investment: Recent statistics

On October 9, 2023, China’s Ministry of Commerce (MOFCOM), the National Bureau of Statistics (NBS), and the State Administration of Foreign Exchange (SAFE) jointly released the Statistical Bulletin on China’s Outbound Direct Investment (ODI) in 2022 (《2022 年度中国对外直接投资统计公报》). This comprehensive report offers a detailed overview of China’s ODI activities in 2022, covering various aspects such as China’s outward direct investment flow stock, its investment in major global economies, the composition of ODI investors, and the makeup of ODI enterprises.

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In 2022, China’s ODI reached an impressive US$163.12 billion (RMB 1.192 trillion), securing its position as the world’s second-largest contributor to global outbound investment. By the end of 2022, China’s cumulative ODI stock had reached US$2.75 trillion (RMB 20.10 trillion), consistently ranking among the world’s top three. Over the past two decades, China’s outbound investment has displayed robust and sustained growth, a dramatic increase from its modest US$2.7 billion (RMB 19.74 billion) in 2002.

So far in 2023, China’s ODI has maintained its momentum. Recent data from the MOFCOM highlights this continued growth, with China’s non-financial ODI reaching RMB 585.61 billion (US$80.11 billion) in the first eight months of the year, marking an 18.8 percent year-on-year (y-o-y) increase. Furthermore, the value of China’s outbound contracted projects amounted to RMB 648.62 billion (US$88.73 billion), a 6.1 percent y-o-y increase, while newly signed contracts reached RMB 863.34 billion (US$118.10 billion), up by two percent y-o-y. Additionally, in the first seven months of 2023, China established a total of 5,100 enterprises in 152 countries and regions across the globe.

On the other hand, however, it is worth noting that the value of announced China overseas merger and acquisition (M&A) deals dropped by 14 percent to US$11.7 billion (RMB 84.14 billion) in H1 2023, marking a ten-year low.

Geographical analysis: Where are China’s outbound investments located?

By the end of 2022, Chinese domestic investors had established a robust global presence, with 47,000 offshore enterprises spanning 190 countries and regions worldwide. Among these enterprises, over 60 percent are situated in Asia, 13 percent in North America, and 10.2 percent in Europe. Notably, about 16,000 overseas enterprises, around 34 percent, are set up in the “Belt and Road” countries.

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In recent years, the “Belt and Road” initiative, covering more than 70 countries, has presented tremendous opportunities for China’s ODI investors, leading to a significant uptick in the number and value of investments within these nations. According to the China Daily, the combined turnover,  in countries that involved in the BRI, reached RMB 529.52 billion (US$72.44 billion) in the first eight months of 2023, marking a 4.8 percent y-o-y increase. Moreover, newly signed contracts reached RMB 725.35 billion (US$99.23 billion), signifying a substantial 5.6 percent y-o-y boost. In the first eight months of 2023, the non-financial ODI in Belt and Road countries totaled RMB 140.37 billion (US$19.20 billion), representing an impressive 22.5 percent increase y-o-y.

China’s engagement with Latin America has also been expanding rapidly. A substantial catalyst for this expansion was a US$2.9 billion (RMB 21.20 billion) transaction in Peru, where China Southern Power Grid International acquired two Peruvian assets from Enel, Italy’s largest utility company. Latin America emerged as a remarkable hub for M&A deals for Chinese enterprises.

However, new Chinese investments in the US have sharply declined. Official and alternative data reveal a continuous drop in Chinese ODI in the US since 2017, with annual investments shrinking from US$46 billion (RMB 336.35 billion) in 2016 to under US$5 billion (RMB 36.56 billion) in 2022. This decrease in investment coincides with diminishing assets, revenues, and employment within Chinese companies in the US. It suggests that Chinese firms are withdrawing from the US market due to restrictive policies fostering an economic decoupling over the last five years.

China’s overseas M&A activities can be geographically broken down as below:

Sectoral analysis: What industries are invested by China’s outbound investment?

In 2022, China’s ODI covered 18 major economic categories, including leasing and business services, manufacturing, finance, wholesale and retail, mining, and transportation.

By deal value, 55 percent of total investments in 2022 concentrated in the TMT, health care & life sciences, and real estate, hospitality & construction sectors. The mining & metals sector also stood out with a 33 percent growth y-o-y to US$3.5 billion (RMB 25.59 billion), particularly in lithium mining and gold mine operations.

In terms of deal volume, half of the investments occurred in the TMT, advanced manufacturing & mobility, and health care & life sciences sectors. Many sectors displayed y-o-y growth, notably mining & metals with a substantial 111 percent increase. The real estate, hospitality & construction (38 percent), advanced manufacturing & mobility (20 percent), and consumer products (17 percent) sectors also saw various degrees of growth.

Regional distribution patterns were also evident in this aspect. For instance, 75 percent of health care & life sciences deals were in North America, while 64 percent of consumer goods investments occurred in Asia, and 32 percent in Oceania. Furthermore, approximately 80 percent of outbound power & utilities investments made by Chinese enterprises took place in Asia, predominantly in the renewable energy sector. Additionally, despite a 53 percent drop in advanced manufacturing & mobility investments, there was a notable increase in North America (178 percent) and Europe (43 percent), particularly in transport infrastructure, automobiles, related components, and chemicals.

What are the opportunities and challenges for China’s outbound investors?

The impetus for Chinese companies to expand internationally has grown stronger. China’s initiatives to support the country’s private sector and a lineup of upcoming expo events have further fueled this momentum.

China considers these enterprises’ strategies to “go out” as mutually beneficial and can create win-win outcomes, contributing significantly to the economic progress of host countries. This proactive approach fosters smoother trade, financial integration, and people-to-people connections, subsequently boosting economic development.

In 2022, official data show that overseas enterprises contributed US$75 billion (RMB 548.26 billion) in taxes to their host locations, marking a 35.1 percent increase. These overseas investments catalyzed US$256.6 billion (RMB 35.1 billion) in goods import and export. Furthermore, non-financial overseas enterprises achieved a sales revenue of US$3.5 trillion, a substantial 14.4 percent increase. By year-end, these enterprises employed over 4.1 million people, including nearly 2.5 million foreign employees.

However, Chinese enterprises embarking on outward foreign direct investments also face a range of challenges, including political, cultural, legal, and financial risks, both internal and external. On a global scale, the withdrawal of Chinese investments from the US and its allies underscores the growing threat of a fragmented global economy, particularly in high-tech domains of national and economic security significance, like telecommunications equipment, semiconductors, and clean technology, where strict regulatory and political oversight prevails.

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In certain countries, the political environment for Chinese companies has become more hostile over recent years. US restrictions on Chinese investors, especially in sectors vital for outbound FDI, such as technology assets, harm the bilateral investment scope tremendously. For example, banning the use of Chinese telecommunications equipment over security concerns keeps shutting Chinese companies out of certain markets. Further, the Biden administration’s increasing controls and sanctions against Chinese firms have further stifled Chinese FDI in the US.

Nevertheless, a significant disparity has emerged in Chinese ODI in the electric vehicle industry between Europe and North America. Chinese investments in Europe exceeded US$30 billion (RMB 219.30 billion), including large manufacturing facilities like Envision AESC in France and the UK and CATL in Hungary, while North America received less than US$7 billion (RMB 51.17 billion).

Currently, over 300,000 Europeans work for Chinese firms, whereas the number of US employees under Chinese employers has dropped to below 140,000. If this divergence persists, it could become a source of transatlantic tension, particularly if Europe’s embrace of Chinese green technology suppliers gives its home-grown manufacturers a leg up on US rivals that do not have access to the same critical inputs.

At home, a tightening of capital controls and a crackdown on highly leveraged private investors by the Chinese government also led to a sharp drop in China’s global ODI. This was felt in the US in 2017 and in following years, especially in real estate, entertainment, and other industries scrutinized by the Chinese government.

Looking forward

Looking forward, Chinese enterprises are directing their investments into overseas projects centered around green initiatives, digital advancements, and new infrastructure. The underpinning support for China’s ODI is fortified by the combination of lower RMB interest rates and the continuous policy shift towards de-dollarization. This heightened ODI emphasis is poised to play a pivotal role in expediting urbanization and industrialization, particularly in the global south.

While a gradual rebound in cross-border investments by Chinese enterprises is anticipated, it is essential to acknowledge associated risks. These risks emanate from geopolitical intricacies in specific regions and the mounting uncertainties within the macroeconomic landscape. Thus, a measured approach is advised to navigate potential challenges amid the projected uptick in ODI activities.

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