Chinese Companies Are Investing Abroad at the Fastest Rate in Eight Years

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(Bloomberg) — China’s foreign investment is heading toward an eight-year high as its dominant companies build more factories abroad, a shift that could blunt criticism of Beijing’s export efforts.

Chinese companies made 243 billion yuan ($33.5 billion) in foreign direct investment from January to March, data released last week showed. That was the highest first-quarter reading since 2016 – before a crackdown on capital outflows – and an increase of almost 13% from a year earlier.

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Leading the push are companies in industries where China is ahead of its competitors, such as electric vehicles and solar energy. These investments can help ease trade tensions – creating jobs and economic growth in overseas markets, rather than flooding them with exports that threaten to drive local producers out of business.

“China wants to produce abroad so that the trade surplus and especially excess capacity is reduced,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA. “I expect this pace to continue very aggressively. But they will still face protectionism.”

Due to geopolitical competition – particularly with the US and Europe – investments from China may not always be welcome.

“Huge suspicion”

Japan was able to use foreign investments by its world-leading automobile manufacturers to smooth diplomatic relations in the 1980s. But it was not a strategic competitor to the US like China is today. That means Beijing may not be able to follow suit, according to Bert Hofman, a professor at the National University of Singapore and former World Bank country director for China. “There is a lot of distrust of Chinese investment” in the U.S. and Europe, he said.

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There is still no official breakdown of where investments went this year or last.

In 2022, Asia accounted for about three-quarters of Chinese foreign direct investment – although this figure is skewed as much of it goes to Hong Kong and is then redirected to other countries or even back to the mainland in a so-called “round-trip.” Nearly 17% of investment was in manufacturing, the second largest single sector.

A separate report released this week showed a surge in Chinese manufacturing investment in the ASEAN bloc of Southeast Asian countries, almost quadrupling over the past year. At $26 billion, it was almost twice the combined total of U.S., South Korean and Japanese companies.

Chinese companies have poured money into processing key materials, such as in nickel mines and smelters in Indonesia. They also make downstream investments. Chery Automobile Co. this week announced plans to become the latest Chinese automaker to build a factory in Thailand, with the aim of starting production of electric vehicles next year.

Chery signed another deal this month to take over an old Nissan factory in Spain and produce electric cars there. BYD Co., the world’s largest electric vehicle maker, started work last month on a factory in Brazil – its first outside Asia – and plans to start production in early 2025. Also, there is a large project in Hungary that has become a center of Chinese business activity in Europe.

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Tariff avoidance

In the solar industry, Chinese manufacturers that dominate global production are looking to invest more abroad after many countries became uncomfortable with relying on a geopolitical competitor for equipment crucial to the energy transition.

Longi Green Energy Technology Co. and Trina Solar Co. have announced plans for factories in the U.S., where generous government subsidies are available as part of the Biden administration’s efforts to develop renewable energy.

According to Hofman, some Chinese investments were aimed at gaining access to the US market without tariffs. Now “something similar is happening to the European market,” he said, and more China tariffs are expected to be imposed there too. Companies may also be factoring in weak domestic demand as China’s housing slump weighs on consumer spending.

The increase in factory construction marks a shift away from the infrastructure investments that until recently formed the core of Chinese spending abroad. This isn’t necessarily a geographical shift, as investment in countries that are part of Beijing’s Belt and Road Initiative reportedly hit a record last year.

Read more: Chinese investment in BRI countries reaches highest level since 2018

But since the pandemic downturn, many Chinese loans to finance infrastructure have gone sour – while countries in Africa and Asia are trying to restructure and reduce their debt. This has led to a reversal of the inflow of Chinese labor for construction investment. According to the International Monetary Fund, the number of Chinese workers in Africa fell by almost two-thirds between 2015 and 2021.

– With assistance from Tom Hancock and Dan Murtaugh.

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