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China’s Foreign Investment Focus Shifts to Manufacturing

By Sun Wenjing and Coco Feng
Workers assemble engines on the production line of Mitsubishi Motors Corp. plant in Shenyang, Liaoning province, on Feb.20. A new report says that the manufacturing sector and information technology are replacing natural resources as favorite overseas investment targets for Chinese state-owned and private companies. Photo: IC
Workers assemble engines on the production line of Mitsubishi Motors Corp. plant in Shenyang, Liaoning province, on Feb.20. A new report says that the manufacturing sector and information technology are replacing natural resources as favorite overseas investment targets for Chinese state-owned and private companies. Photo: IC

(Beijing) — The manufacturing sector and information technology are replacing natural resources as favorite overseas investment targets for Chinese state-owned and private companies, according to a new report.

But this new investment focus, which reflects an economic transition that’s moving China toward more high-tech services and manufacturing, may slow in the future amid domestic regulatory restrictions and global uncertainties.

Most overseas manufacturing investment involves lending money to and buying stakes in foreign companies, according to the report co-authored by the Chinese Academy of Social Sciences (CASS) and China Bond Rating Co. Ltd. In many lands, Chinese companies have formed joint ventures with local manufacturers to produce goods as diverse as shoes to cars.

China’s total outbound investment accelerated 44% between 2015 and last year to $170 billion, the fastest year-on-year expansion since 2009, according to the Ministry of Commerce. Of that amount, the manufacturing sector attracted $31 billion worth of Chinese investment last year, the ministry said.

That compares with $20 billion invested by China in foreign manufacturing in 2015, a spending level that the CASS-China Bond report said was the fastest-growing among all targeted sectors overseas and double the amount invested by on manufacturing-related targets in 2014.

Chinese outbound investment in the information technology sector, which includes telecom and software services, grew even more rapidly than manufacturing spending growth in 2016, data from the Commerce Ministry said.

Information technology investment tripled to $20.4 billion in 2016 from the previous year.

Mining companies once were a major target of Chinese outbound investment activity as natural resources such as iron ore and copper were key to domestic economic growth, said Zhang Ming, director of the international investment office at the CASS Institute of World Economics and Politics, which released the report Monday.

But overseas investment in mining fell 32% year-on-year to $11.3 billion in 2015, partly due to falling demand for commodities complementing China’s shift to technology-driven and away from resource-intensive economic growth, the report said.

Zhang warned that Chinese companies now looking abroad are facing investment risks stemming from political conflicts and terrorism that could jeopardize economic stability, as well as various uncertainties for the world’s economy and threats of trade protectionism.

Indeed, China’s outbound manufacturing sector investment would have been higher in recent years if not for the fact that numerous proposed deals had to be scrapped.

The report said more investment deals were killed than ever before over the past two years, especially in the high-end manufacturing sector. Governments in destination countries were to blame for most of these scrappings on grounds that Chinese investment posed a “national security risk,” the report said.

But the report said the Chinese government also influenced deal-making by stepping up scrutiny of proposed asset transfers as part of an effort to prevent speculation and control outbound currency flows.

Chinese companies topped Japanese companies’ combined foreign spending for the first time in 2015. As a result, China now ranks second to the United States.

Investment targets in advanced economies, such as Europe and North America, are among the most popular for Chinese companies due to high-value assets and low risks, the report said. Nevertheless, Chinese investors are also expanding in less-developed countries through the government’s Belt and Road overseas commerce initiative.

Contact reporter Coco Feng (renkefeng@caixin.com)

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