Weekend Long Read: China Inc.’s Overseas Expansion Has Echoes of Japan

The ongoing debate on the international expansion of Chinese companies has intensified recently, especially in light of domestic economic pressures and international trade barriers [para. 1]. Drawing parallels to Japan's experience post-real estate bubble burst in the early 1990s, Chinese firms are accelerating their overseas ventures similarly [para. 2][para. 3]. However, overcapacity isn't the sole motivator for such expansion [para. 3].

**Lessons from Japan**

Economic development stage is crucial in predicting global expansion [para. 4]. Countries typically see increased outward foreign direct investment (OFDI) when their per capita GDP exceeds $10,000. For instance, as China's per capita GDP reached $13,000 in 2022, its OFDI stock-to-GDP ratio hit 16.3% [para. 5]. Additionally, the overall economic scale and trade competitiveness contribute to a country’s push for overseas expansion. In 1985, Japan's global GDP share was over 15%, with exports making up nearly 10% of the global total. Comparatively, China’s GDP accounted for about 18% of the global total in 2022, with exports at around 15% [para. 6].

Declining domestic capacity utilization is another factor, as it pushes companies to seek overseas markets [para. 14]. In the 1990s, Japan’s capacity utilization index fell significantly, from around 140 pre-1990 to 117.6 by 1993 [para. 13]. China faces similar overcapacity challenges, with capacity utilization peaking at 77.5% in 2021 but falling to 73.6% by Q1 2024 [para. 15][para. 16].

Trade tensions also encourage overseas expansion. In the 1970s and 1980s, Japan faced escalating trade tensions with the U.S., leading to a surge in overseas ventures [para. 24][para. 27]. China experienced a similar trend post-2018 trade war with the U.S., which saw tariffs affecting about $550 billion worth of Chinese goods, prompting Chinese companies to invest overseas to avoid high tariffs and supply chain disruptions [para. 35][para. 37].

**Overseas Expansion Dynamics**

Historical patterns show that significant domestic market saturation and external trade barriers are critical drivers for overseas expansion. However, overcapacity alone isn't enough [para. 48]. For instance, while some Japanese industries faced overcapacity and expanded, others like steel did not see significant overseas investments although they too suffered from overcapacity [para. 47]. China also remains a major draw for international capital due to its vast market and lower production costs, even amid domestic overcapacity [para. 48][para. 50].

**Four Key Differences**

China's expansion mirrors Japan's in several macroeconomic aspects, yet there are differences [para. 61]:

1. **Lower Domestic Production Costs:** China’s extensive manufacturing ecosystem and lower costs, such as for electricity ($0.088 per kWh), make it a favorable business environment [para. 62][para. 63]. Despite significant foreign direct investments (FDI), China remains attractive to global investors [para. 64].

2. **Globalization vs. De-Globalization:** While Japan benefited from the globalization wave in the 1990s, Chinese companies face a more challenging de-globalization environment. Regulatory scrutiny and investment barriers in developed economies have increased [para. 69][para. 72], impacting Chinese outbound merger and acquisition activities, which saw a significant decline in recent years [para. 74].

3. **Currency Dynamics:** Post-1985 yen appreciation favored Japan’s overseas investments. Conversely, the recent strengthening of the U.S. dollar puts pressure on the renminbi, making exports advantageous for Chinese firms [para. 78].

4. **Higher Tariff Barriers:** The U.S. imposes higher tariffs on Chinese goods compared to Japan. According to the Peterson Institute for International Economics, average U.S. tariffs on Chinese products are now 19.3%, affecting 66.4% of imports from China [para. 81][para. 82].

**Future Trends:**

Despite different macroeconomic environments, certain Chinese industries are more likely to expand overseas:

1. **Tariff-Sensitive Industries:** Sectors like automotive and consumer electronics are likely to move production abroad to bypass tariffs [para. 92].

2. **Brand Acquisition:** Companies will enhance global presence and competitiveness through brand acquisitions [para. 95].

3. **Lower Overseas Production Costs:** Labor-intensive and specific chemical industries will benefit from relocating production to regions with lower costs [para. 97].

4. **Resource Acquisition:** Industries dependent on key minerals will continue overseas mergers and acquisitions to secure supply chains [para. 99].