Growth of Direct Overseas Investment in Nonfinancial Sectors Hits Eight-Year High

(Beijing) — China’s direct overseas investment in nonfinancial sectors in 2016 grew at its fastest pace since 2008, but analysts believe the expansion will lose steam this year as the government increases control over capital outflows.

Total outbound direct investment (ODI) in nonfinancial sectors soared more than 40% year-on-year to $170.1 billion, according to a statement by the Ministry of Commerce on Monday.

The amount of China’s ODI has continued to hit new highs since official data became available in 2002, as Beijing has encouraged companies to “go out” to acquire cutting-edge technologies and the energy and resources to power the country’s economic growth.

ODI exceeded the foreign direct investment (FDI) China received for the first time in 2015. Last year, FDI was up 4.1% to 813.2 billion yuan, or $123 billion according to a Caixin calculation based on the average exchange rate in 2016.

The ministry said Chinese investors spent $107.2 billion on 742 merger and acquisition (M&A) deals last year, more than double the $54.4 billion in 2015.

The number of takeovers in the manufacturing and information industries accounted for a combined 41.3% of total M&A deals, as Chinese companies sought to upgrade on the value chain, the statement said.

Chinese home-appliance maker Haier Group Corp. bought General Electric Co.’s appliance unit for $5.6 billions. The deal, which closed on June 7, was the third-largest Chinese acquisitions of 2016. The largest deal was HNA Group's purchase of $6.5 billion worth of stake in Hilton Worldwide from the Blackstone Group.

However, a recent report by the Chinese Academy of Social Sciences (CASS), a government think tank, forecast a slowdown in China’s overseas investment from this year, citing concerns such as government tightening of capital flowing out of the country amid rising pressures on the yuan to depreciate.

Beijing has announced a string of measures to stem capital flight and support the yuan since the second half of 2016, including strict control over international M&A deals worth over $10 billion and investment worth more than $1 billion in overseas real estate.

China’s foreign exchange reserves fell to $3.01 trillion at the end of last year from an all-time high of $3.8 trillion in 2014 as the central bank sold the dollar to keep the yuan’s value stable.

The dwindling holding of foreign exchange reserves could diminish the country’s capability to invest in the One Belt, One Road initiative led by Beijing, said Zhang Ming, a researcher with the Institute of World Economics and Politics of the CASS, which published the report.

He also said the overseas buying spree faces rising risks linked with a possible surge in frictions with major trading partners, including the U.S., after Donald Trump — who has publicly favored a protectionist stance — assumes the country’s presidency on Friday.

Contact reporter Fran Wang (fangwang@caixin.com)