The summer of 2010 was a season of rankings. China was labeled the world’s top consumer of energy and its second-largest economy. Beijing disputed both achievements, but enthusiastically affirmed another one issued by the United Nations Commission on Trade and Development (UNCTAD): In 2009 the country became the world’s fifth-largest outbound direct investor, leaping from 12th place in 2008. The improvement was linked with another semi-superlative: UNCTAD said China is now the world’s "second most promising investor home country" behind the US.
In some ways the improvement is less significant than it seems. Mainland outbound direct investment (ODI) volumes in 2009 increased just 1.1% year-on-year, to US$56.5 billion. Whether China is the world’s second- or third-largest economy, its ODI made up only 5.1% of global ODI flows last year. Much of the move up the rankings is attributable to plummeting ODI from countries in the throes of the financial crisis. Global ODI flows declined 43% in 2009.
However, hidden in the statistics is an important change. ODI’s relative share of China’s GDP jumped 30% in 2009, from 3.4% to 4.9% of the total, after increasing by 14% in 2008; volume increased 52% in 2008 to US$55.91 billion. It is this statistic, not the increase in relative rankings, that explains China’s new promise.
China has always invested a relatively low share of its GDP abroad, averaging below 2.8% over the last decade. Beijing’s "going outward" movement was more sound than money – Chinese companies were generally happy to take minority stakes and make the odd portfolio investment. But starting in 2008, firms began to see more value in investing for control, especially given the abominable returns of many earlier investments.
China may decline again in the relative standings as the dowturn eases, but ODI’s share of Chinese GDP will grow, and both the targets and sources of investment will diversify. While 2010 has featured the usual state-driven natural resource acquisition deals – notably Sinopec’s (SNP.NYSE, 600028.SH, 0386.HK) planned US$4.65 billion purchase of Canada’s Syncrude and a possible Chinese bid for Potash Corp of Saskatchewan (POT.NYSE, POT.TSE) – there are complex private deals in the works.
Automaker Geely (0175.HK) made headlines by buying Volvo from Ford (F.NYSE) for US$1.5 billion, and Alibaba.com (1688.HK) is on a US$100 million shopping spree for US B2B platforms. Should these investments pay off, they will attract more domestic firms into the fray, and China’s position as an outbound investor will grow rapidly in relative and absolute terms.