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China is fast approaching another watershed. Over the next three years, overseas investment by Chinese enterprises will overtake foreign direct investment into China. Last year the amount invested by Chinese companies abroad reached $77-billion, a 14 per cent increase on 2011 and equal to more than two thirds the amount of incoming spending by foreign companies. The volume of Chinese overseas spending is rising fast, according to A Capital, a Beijing private equity firm, which reckons that Chinese enterprises will spend another $800-billion making the People's Republic a net global investor by 2016.
We were used to the idea that China attracted foreign direct investment, yet we should not be suprised to see the balance shifting rapidly. It's not just the Chinese hunger for natural resources, well understood in Canada. It is also about investments in knowhow, services and technology. Last year's M&A harvest included investments by CIC (the sovereign wealth fund which manages part of China's $3-trillion hoard in foreign exchange reserves) in Eutelsat, a French company which operates satellites in the Middle East and Africa. The fund also purchased a stake in Heathrow Airport and another in Thames Water.
The big focus for Chinese companies, says A Capital, is Europe. The continent is now the top destination for Chinese overseas investment – a consequence, the firm says, of the more accomodating attitude of European governments towards the Chinese buyer. North America is not seen as welcoming, due to the negative scrutiny of America's Committee on Foreign Investment in the United States and the row that erupted in Canada over the takeover of Nexen by CNOOC. This may be true, but Chinese firms also appear to have toned down their ambitions. They are now focused on pursuing minority stakes, such as the purchase by Three Gorges Corporation of a 21 per cent stake in Energias de Portugal, sold by the Portuguese government. Europe looks cheap to Chinese investors who will no doubt have their cheque books ready for the next round of state sell-offs by fiscally-challenged Mediterranean governments.
China's investment driver is still state-owned enterprises, such as CIC or Sinopec, the latter of which acquired 49 per cent of Talisman Energy's North Sea portfolio last year. Yet there are other forces driving the rebalancing of the Chinese investment equation. China is not the cheap investment location it was even five years ago. Employee costs are soaring, and Chinese manufacturers are already shifting labour-intensive activities to Vietnam and Indonesia. There is a frantic scramble toward higher added value production, and minority stakes in utility and industrial companies struggling in a depressed European market may look very attractive. At the very least, they probably look more alluring than the debt-fuelled bubble economy of Chinese real estate.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.
Carl Mortished