This time, look wider

With its steady trade surplus and strong foreign investment, China sits on top of world’s largest foreign reserve. As the recent global slowdown has forced many foreign companies to spin off assets, Chinese companies are gaining opportunities to expand further.

China’s economic growth has essentially benefited from a high level of direct foreign investments (around 40 percent of GDP estimated by IMF) which concentrated in manufacturing and later moved into capital and property markets. Since 1990s, Chinese companies and investors were encouraged to “go abroad” for investment and Chinese outward investments spurred especially after its entry to WTO in 2001. In 2009, China’s non-financial outward overseas investment is to reach $42bn while it attracted $77.9 bn in foreign investment in the first 11 months, says a paper by China’s Ministry of Commerce on December 22^nd.

Together with its exports, overseas contracted projects and labor services, Chinese companies are searching for greater presence in international business. Overseas merger and acquisition accounted for 43.5 per cent of Chinese outward foreign investment in 2009.

According to the China’s 11^th Five-Year-Plan running to 2010, its outward overseas investment stock will reach $60bn, and the Chinese government has been active pushing companies to compete internationally with fiscal support, favorable regulation and educational trainings.

In short term, outflow of capital can at least reduce the appreciation pressure for its currency from long-term current account surplus.

Also, by investing in energy and raw material rich regions, such as Latin America and African, China is to secure resources for future developments. Early this year, Chinese Prime Minister Wen Jiabao announced another $10 billion concessional loans to 31 African countries, doubled the size of what Chinese had offered 3 years ago. Africa now accommodates a tenth of China’s total overseas direct investment whose return is to be granted from the region’s development. Some recent big deals have also proved China’s resource hunger was driving the direction of its overseas investment.

At same time, overseas investment contributes to China’s economic restructure and improves Chinese companies’ international competitiveness. From Swiss oil explorer Addax AXC.TO’s buyer Sinopec to Hummer’s new owner Sichuan Tengzhong Heavy Industrial Machinery, Chinese state owned enterprises so far are the leading forces investing overseas. But more private companies such as Lenovo and Huawei are gaining international comparative advantage by acquiring advanced technologies and marketing networks abroad.

However on general, the scale of China’s outward overseas investment is still regional as over half of its oversea investment locates in Asia, predominately in Hong Kong. And comparing with developed countries, China’s capital stock is still very extremely low: By the end of 2002, China’s outward FDI stock only equals to one per cent of Japan’s and half a per cent of US’s.

In addition, as the failure of China’s mining company Northwest Nonferrous in a deal to invest in a Nevada gold mine due t U.S. national security concerns this week just showed, Chinese companies’ over seas ambition is far from free to expand.