Chinese OFDI

Chinese FDI inflow in Pakistan is on the rise. But the Asian dragon’s outward investment elsewhere in the world had been tapering off since the start of fiscal year 2017. That trend, according to a recent report by Rhodium Group, a US-based consultancy that tracks direct investment from China, has begun to reverse.

Latest Chinese outbound foreign direct investment (OFDI) numbers are not available thanks to China’s statistical darkness; for instance, its statistical website doesn’t have OFDI numbers beyond calendar year 2016. This is why analysis by the likes of Rhodium provides the main fodder for observers across the world.

Anyway, last year, China had started tightened administrative measures to curb capital outflows in general and OFDI in particular. According to Rhodium Group, those measures “slowed down the pace of new Chinese outbound M&A activity” and “re-shaped the composition of deal flow in terms of investors, industries and other characteristics.”

Rhodium reports that capital controls has led to a decline in Chinese OFDI in most industries but there are “marked differences as to the patterns and magnitude of the declines,” where basic materials, energy, & utilities have been one of the most resilient sectors. Another visible trend is that sovereign and state-owned companies are back in the driver’s seat, whereas in recent years it was the Chinese private sector that was leading its global OFDI.

The recent reversal in Chinese recent OFDI trends can be attributed to easing of renminbi capital controls. But according to global media reports, such as the Financial Times, the Chinese are still concerned with what its official have called “irrational” outbound investment.

Learning from the Japanese 80s’ OFDI experience in America, the Chinese regulators are only approving deals on the condition that they make economic sense. For example, a steel manufacturer buying a soccer club “is unlikely” to be approved. Likewise, “if outbound FDI shows an extraordinary change within a relatively short period, these needs to spark our close attention,” Pan Gongsheng, deputy governor of the People’s Bank of China was recently reported to have said.

There is no doubt that the “going out” policy of encouraging outbound investment by Chinese companies is crucial to achieve success in the One Belt One Road dream. This is why Chinese regulators have eased some of the restrictions on OFDI and capital outflows. But observers say that Chinese macroeconomic outlook remains fragile. Monetary growth is slowing as the central bank is trying to prevent further expansion of a credit bubble which could hurt its real economy, whereas the recent US rate hike can put pressure on exchange rate and stoke capital outflows from China, which in turn can bring back the regulations on OFDI. The impact of slowing Chinese OFDI on CPEC may be none or insignificant in the short term, since a decent size of CPEC deals are backed by Chinese state-led firms. But if Chinese private sector is indeed put under strict deal-specific or firm-specific administrative reviews then the so-called private sector spillover of CPEC may not be as high as is being hoped for by certain quarters.