Beijing steps up ODI

ODI (outward direct investment) from the PRC is again picking up, as shown in recent trade figures and debate among the PRC commentariat.

'Going global’ (setting up shop overseas) reemerged as a potential counterplay to recent trade setbacks: US and EU trade friction, lacklustre growth, falling FDI, etc. Global ventures are advised for PRC firms in the next five years or so, argues Xu Bin 徐宾 UBS equity. 

The PRC may soon find itself exporting capital instead of goods, editorialises Yicai. Can this be effective or is it misguided optimism?

‘going global’ speeds up

Total ODI across industries rose some 6 percent in 2023, reports MofCOM (Ministry of Commerce). Non-financial ODI rose some 17 percent in total and over 28 percent in BRI (Belt and Road Initiative) states. The real estate sector fell seriously in 2023, while mining, manufacturing, transport, storage and postal services got a boost. Pivoting away from real estate dependence to services and manufacturing, post-2018 trends largely echoed ‘encouraged industries’ as set out in earlier top-level ODI guidance. This had aimed to stem the use of cheap PRC credit to buy assets abroad and evade capital controls.

PRC investments now, indeed, appear to be altering course—building more production facilities abroad and seeking greater integration with local economies. 

A range of business, policy or strategic considerations are behind the uptick

• external drivers
  • 'sharing' PRC manufacturing capacity abroad may counter protectionism or overcapacity criticism from rising trade unilateralism
  • building offshore production may help PRC firms
    • stay closer to their Western customers, meeting their demands
    • circumvent trade barriers targeting PRC exports
• domestic drivers
  • as Beijing wrestles with falling FDI and US tech decoupling, ODI promises ‘indirect’ paths to leverage global capital and upgrade PRC tech standards
    • ODI helps access mature tech, management savvy, production gear and global marketing networks, says Sheng Songcheng 盛松成 China–Europe International Business School
  • overseas markets are more attractive, given rising competition crowding out the domestic scene
  • offshoring low-end production eases industrial upgrading in-country
  • more mining operations abroad allow access to developing countries’ natural resources

the ODI advantage

Beijing is a keen promoter of large-scale ODI. Policy-oriented, state-owned insurer Sinosure’s risk products have, reports the London-based Overseas Development Institute in 2023, converted some of the largest BRI infrastructure projects from ‘unbankable to bankable’. Such coverage is a credit enhancement tool, enabling other creditors, e.g. China Eximbank and other financiers, to lend more liberally. PRC financing, free of conventional ‘aid and trade finance’ rules, offers more flexibility and better terms than Western counterparts.

ODI insurance cover supported by Sinosure nearly doubled 2014–22. Given its rising importance, overseas investment cover is far more prominent in joint MofCOM-Sinosure priorities in 2024 than in the past (2020, 2021 and 2022). The document underscores 

• supporting high-quality development of outward BRI investment
  • improving underwriting conditions for overseas investment insurance
  • safeguarding ‘landmark engineering projects of great strategic significance’ and ‘small and beautiful’ BRI projects
  • bolstering overseas investment projects in ‘new tracks’ 新赛道: green development, digital economy, blue economy, new infrastructures, energy and automobiles

While calling for more investment, the 2024 text places more weight on mitigating risk than previous editions, showing awareness of investment setbacks. In any case, Sinosure is expected to play a greater role in helping PRC firms.

Another advantage of overseas PRC production bases lies in strong home support, not least in supplying cheap and quality intermediate goods (goods or services used to produce final finished products). 

Much of PRC exports in such goods are based on the growing need from PRC firms undertaking final production overseas, notes Shi Huimin 石慧敏 Renmin University National Academy of Development and Strategy. Expanding ODI has created many openings for PRC intermediate goods overseas, enthuses Bai Xuejie 白雪洁 Nankai University’s Institute of Economics and Social Development.

The largest exporter of intermediate goods for 12 years (according to MofCOM), the PRC exported C¥ 11 tn of them in 2023, nearly half of its total export value. They were included in the 2024 Government Work Report for the first time and are set to grow.

Host country needs also ideally set the scene for PRC investment. Drawing on complementarity with the Gulf States, the PRC tapped Saudi Arabia’s need to develop sustainably, offering its edge in manufacturing, tech and green development via separate trade deals. Some offshore PRC firms, e.g. SHEIN and BYD, are adapting to local consumer and management styles.

forward march: ‘overseas indirect investment’

Facing EU and US tariffs, momentum is building to step up outward investment. PRC firms should mesh more with Europe, creating jobs and sustainability, advises Cui Dongshu 崔东树 CPCA (China Passenger Cars Association). Decoupling calls for re-coupling, adds Zhang Yansheng 张燕生 China International Economic Exchange Centre. 

Exporting need not be deemed the sole road to market share; the PRC should seek greater cooperation via investment, declares trade pundit Tu Xinquan 屠新泉 UIBE (University of International Business and Economics) WTO Research Institute. Heeding these voices, ODI has been growing by diversifying: cases in point include battery firms and vehicles.

The current round of US and EU tariffs is politically motivated, claim Zhang Yansheng and Ma Xue 马雪 China Institute of Contemporary International Relations US Research Institute Economic Research Department. The West's new wave of globalisation is, adds Zhang, marked by politicising economic and trade issues.

Offshoring production plant abroad is a short-term solution, as experts warn of more trade restrictions targeting the PRC. These may include more tariffs on goods produced in new workaround PRC bases abroad, tightening rules of origin, or cracking down on re-export trade.

PRC exporters now need different ‘go global’ models, e.g. joint ventures, argues Yang Lei 杨雷 Peking University Energy Research Institute. With ever more scrutiny, PRC firms will find it harder to mask their corporate identity, warns Gong Yamin 贡亚敏 Ruimin Law Firm: tweaking shareholding structures or signing JVs may be insufficient. Firms need more flexible investment modes, indexed to host country ‘friendliness’, advises Wang Qing 王庆 Freshfields Bruckhaus Deringer Global Transactions Group. He suggests such indirect modes as non-direct equity investment, technology licensing or operations and management agreements. 'Overseas direct investment' may become ‘overseas indirect investment’: stealthier and more opaque.

focus on emerging economies

A pivot to emerging economies redoubled in recent moves, e.g. MofCOM’s greenlighting overseas credit insurance (see above) and guidance on leveraging RCEP. Experts are climbing on the bandwagon. Emerging economies will be the next growth point for ODI, CASS (Chinese Academy of Social Sciences) enthused in 2024. More PRC firms should explore the massive, young, middle-class population driving consumption in Mexico, urges Wen Bin 温彬 Minsheng Bank. Actively developing BRI markets, insists Lu Zhengwei 魯政委 Industrial Bank, would offset exports to the US declining post-trade war. Youth and rapid industrialisation in these economies will, he argues, propel their GDP growth, allowing them to import much more from the PRC. 

The PRC, as the engine of the global economy, is shifting gears, building up international bases for its manufacturers. The geoeconomic consequences could be serious.

spooky action at a distance

Mitigating risk has become Beijing's top priority, all the more so with growing pressure from advanced economies and deeper exposure to riskier emerging markets. More action is expected to offset BRI and other ODI risks at both domestic and multilateral levels. High-level South-South cooperation will also be at a premium.

At the firm level, PRC enterprises are again advised to avoid disrupting local markets, they are urged to adapt to local conditions and respect local rules. They need to be more cautious, strategic and able to think long-term, says Wang Gao 王高 China Europe International Business School. They must reduce reliance on price advantages and focus on quality and brand building.

More help with financing for firms 'going global is pledged. Seeking support from other financial resources and greater international cooperation are potential solutions. Chinese commercial banks are urged to play a greater role in supporting PRC companies overseas. Offshore use of RMB is to be promoted.

As overseas markets become more entangled with PRC state interests, Beijing may bring local PRC discipline to its offshore enterprises, e.g., penalising ‘disorderly competition’. Large and well-connected firms already doing well globally may benefit more from this round. Helping firms navigate the many challenges of exploring new markets may be an irresistible focus for Beijing.

Such entanglemenț may come at a cost. To borrow quantum mechanics jargon, host countries, even BRI partners, are sensitive to ‘spooky action at a distance’.

profiles

Zhang Hong 章弘 | China Automobile Dealers Association Expert Committee member (中国汽车流通协会专家委员会委员)

Faced with the latest EU trade restrictions on EVs, Zhang advises more ODI. Firms should set up plant in Europe to lower tariff risks. They should also boost cooperation in R&D production and sales with local firms. Zhang advises bolstering liaison and negotiation with the EU toward win-win trade and investment deals. Trade strategy needs to lower dependence on Europe, finding other export outlets, he adds.

Frequent domestic media commentator on industry and policy related to autos and new energy vehicles, Zhang sits on the China Automobile Dealers Association’s expert committee, a national trade industry association headquartered in Beijing.

Zhang Yansheng 张燕生 | China International Economic Exchange Centre chief researcher

As strong as PRC firms have become, Zhang cautions that Beijing must eschew zero-sum games by flooding overseas markets. Dialogue with the EU, boosting mutual investment and cooperation in capacity, is the wiser path.

Given EU and US trade conflict, Zhang urges deepening commercial ties: more ODI via joint ventures or sole proprietorships. Also indicated are more bilateral investments with the West and expanded PRC imports.

Zhang is a former director of the NDRC (National Development and Reform Commission) External Economic Research Institute and receives a prestigious State Council stipend. He taught at the Central University of Finance and Economics from 1984 to 96 and was an exchange scholar at the University of Toronto and the World Bank from 1986 to 1988.

Lu Ming 鹿鸣 | Guancha.cn financial commentator

Boosting ODI helps leverage PRC comparative advantage, exporting its production capacity, argues Lu Ming (‘deer cry’). It is no less vital than attracting FDI to the PRC, he adds.

• Horizontal ‘OFDI’ (outward foreign direct investment: firms investing in similar sectors abroad) may, claims Lu, substitute domestic products, but its harm can be addressed by adjusting product categories. 
• Vertical OFDI, where firms invest in suppliers or other distributors, may boost PRC intermediate goods exports. Lu urges ‘rationality’: industrial transfer abroad demands an economic rather than political calculus.

Lu Ming is a freelance columnist on Guancha.cn, the Shanghai-flavoured current affairs platform of Eric X. Li (Li Mohan 李莫汉), and may be Li himself. A self-proclaimed political and financial insider, he/she writes op-eds on a wide range of topics. A recent text urges lowering debt costs to boost consumers' ability to pay, furthering state support for industry restructuring and improving the market environment.

context

12 Jun 2024: The EU Commission announced new duties on PRC electric vehicles

24 May 2024: MofCOM and Sinsoure issued 'Notice on leveraging export credit insurance to promote high-quality trade development and accelerate the transformation to a strong trading nation'

14 May 2024: The US Biden Administration announced new tariffs on PRC ‘new three’ exports

10 Oct 2023: MofCOM issued 'Notice on improving communication service platforms with overseas enterprises and outward investment'

18 Aug 2017: State Council laid out an ODI guidance framework, classifying sectors into ‘encouraged, restricted and prohibited’