Recently, Spencer Lake, the Global Head of Capital Financing at HSBC, reported that China is positioned to overtake the United States in outward foreign direct investment (FDI) in the coming few years. The most widely-used rule of thumb for FDI is a 10% (or greater) investment in voting shares in a foreign-owned company, and thus, it includes foreign mergers and acquisitions. The significance of this statistic is that it can be used as an indicator of economic development. It comes as no surprise that the United States has been a leader in outward FDI over the past few decades – ranking first in this statistic in almost every year over this span. Currently, at approximately $337 billion, US outward FDI comprises nearly a quarter of the entire world's outward FDI; by comparison, China's 2014 outward FDI is only $116 billion. With respect to outward FDI, a key difference between the two nations, however, can be seen in their recent growth rates. Over the past five years, China's outward FDI has been booming at an average annual rate of 15% (Spencer Lake cites a growth rate of 19%, which appears to be an over-estimate). Compared to the US's growth rate over the same period (approximately 3%), China is quickly making up ground. If their respective growth rates are maintained, China would surpass the US as the world leader in outward FDI by 2024.
The first response to this proposition is that a 15% growth rate is unsustainable over a 10 year period. The explanation that Lake provides for this prediction, however, is persuasive. He argues that this trend has been the result of a deliberate, targeted effort on the part of the Chinese government: Firstly, China is currently sitting on approximately USD $3.7 trillion in foreign exchange reserves. Secondly, other foreign currencies are undergoing comparative depreciation. As a consequence, China is economically well-positioned to implement an outward FDI strategy. Through some recent deregulation in foreign investment, privately-owned enterprises (POEs) are further incentivized to ramp up investments abroad.
One of the observations that might support this hypothesis is the increase in both the number and total value of foreign M&A deals by POEs. From 2013 to 2014, the number increased 23% to 145 whereas the total value of the deals increased 29% to $14.7 billion. Indeed, Lake projects a continued strong foreign M&A presence from China for the foreseeable future. On the other hand, from 2012 to 2013, the number of Chinese foreign M&A deals by POEs decreased by 6% and total value decreased by 43%. As a result, it may be premature to conclude that the recent increases are a result of the Chinese government's strategy and that the outward FDI projections will ultimately be realized so quickly.
The author would like to thank Peter Georgas, summer student, for his assistance in preparing this legal update.
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