China’s investment balance nears turning point

Illustration: Chen Xia/GT

Outbound capital movements on track to exceed country's utilized FDI

Outbound direct investment (ODI) from China has grown steadily this year, in stark contrast to the amount of foreign direct investment (FDI) utilized by the country. Specifically, China's ODI totaled $65.17 billion in the first eight months of this year, up 15.3 percent year-on-year. Over the same period, China utilized $78.34 billion in FDI, down 1.8 percent.

Looking at this situation by month, we can see that utilized FDI in China exceeded ODI by volume from January to June. Things changed suddenly though in July and August, when Chinese outbound investment outweighed utilized foreign investment over a span of two consecutive months for the first time ever.

In terms of pace, Chinese ODI also expanded faster than utilized FDI during the first eight months of this year - with the exception of February. This was particularly apparent in July and August, when Chinese investment into overseas targets jumped by 84.9 percent and 112.1 percent year-on-year respectively during these two months, a period when accumulated FDI growth actually contracted.

Recent changes in China's investment balance mean that it may be on the verge of a turning point, one which could see the country shift away from being a net consumer of FDI to a net capital exporter. China's ODI total has historically fallen short of its utilized FDI, but the gap between the two has been gradually narrowing over the years.

In 2013, international direct investment slowed worldwide. Amidst this backdrop though, China's own ODI hit an all time high of $107.84 billion last year, up 22.8 percent from 2012 and making China the world's third-largest foreign investor for the second straight year. Over the same period, China utilized $117.59 billion in FDI, up just 5.25 percent.

According to modern theories of international business economics and development, once a country's ODI exceeds its FDI, it's hard to reverse this situation. If recent trends hold, China could soon find itself in such a situation within the next few years.

Indeed, we see several factors spurring China's ODI to overtake its utilized FDI.

Many Chinese enterprises are now more willing to invest overseas thanks to the appreciation of the yuan, improvements in their global management abilities and over-investment in several key domestic industries. On the other side of the investment coin, returns on FDI into China are dwindling thanks to rising Chinese labor costs, upswings in domestic resources and commodities prices, stricter environmental protection standards and volatility in global currency markets. Similarly, tougher enforcement of local anti-monopoly laws may compel some foreign enterprises to downsize their investments in China. Other enterprises might even shelve their plans to enter the Chinese market altogether. Indeed, US Treasury Secretary Jacob Lew recently wrote to Chinese Vice Premier Wang Yang that a string of antitrust probes into US companies could have an adverse impact on Sino-US trade and economic ties.

From a macroeconomic point of view, many Chinese investors are now looking for opportunities overseas due to increasingly fierce competition within their home market as well as long-standing overcapacity problems in certain industries. Some export-oriented companies have also wisely chosen to directly invest in manufacturing projects overseas in order to avoid trade disputes and penalties.

According to empirical analysis done by famed British economist John Dunning, as a country develops, its international investment balance will usually follow a predictable course that corresponds with per capita GDP growth. Countries where per capita GDP is below $400 will generally register negligible investment inflows or outflows. When per capita GDP climbs to between $400 and $1,500, foreign capital will start rolling in although ODI will remain low or virtually nonexistent. Next, once per capita GDP climbs to between $2,000 and $4,000, investment outflows will begin to overtake inflows. According to data from the International Monetary Fund, China's per capita GDP hit $6,629 in 2013, putting it on track to become a new outbound investor.