How will Chinese enterprises navigate new challenges when “going abroad” under the new global trade landscape?

China outward direct investment (ODI) has continued to rise in global rankings and has maintained an optimized structure and orderly development. In 2018, global cross-border investment regulations became increasingly stringent. Many developed countries implemented regulatory measures to limit foreign investment, resulting in profound impacts toward cross-border investment. Chinese enterprises face more challenges in overseas investment.

Chapter 1: China outbound investment demonstrates resilience and possesses significant growth potential 

In recent years, China’s ODI flows have continued to rise in global rankings, showing the trend of high-quality development. In 2018, China ranked second worldwide after Japan in terms of ODI flows and third after the US and the Netherlands in terms of ODI stock. China is now one of the world's top countries by ODI stock, however, its proportion of ODI as a share of GDP (only 12.3%) remains relatively low given that it is the world’s second largest economy, less than one third of the world average (38.6%) and far less than that of developed economies (50.7%).¹

Economic globalization is the trend and China will continue to see an increase in outbound investment in mid to long term driven by its growing capital strength. It is also expected that outbound investment will bring new impetus to China’s economy and create a virtuous cycle.” In the short term, although enterprises in developed countries such as the US will continue to dominate economic globalization and participate in the division of global industrial chain, the rise of protectionism in developed countries creates opportunities for the internationalization of Chinese enterprises – when the US withdraws its capital and focuses on its domestic market, Chinese capital will become one of the major sources of foreign investment in many overseas countries. Thus, Chinese enterprises should seize investment opportunities with a well-prepared strategy and deep understanding of the market, actively seek for continuous optimization in industries, supply chains and investments, and effectively prevent and control geopolitical risks”. 

During the past 40 years of reform, China has continuously pushed for opening up and innovation, and its outbound investment has experienced three important stages: exploration, rapid transformation and high-quality development. Despite the adverse global investment conditions in the past two years, Chinese enterprises continue to progress in the global value chain and continue to improve quality and efficiency in their international operations. These are inseparable from China’s economy’s resilience and its enterprises’ development determination. 

Looking ahead, China outbound investment will exhibit five major trends in the future: first, ‘going abroad’ and ‘bringing in’ will form a virtuous cycle and refashion the role of Chinese enterprises in the global value chain; second, the BRI development will further contribute to China’s export-oriented economy; third, enterprises will seize the development opportunities in digital economy era and accelerate the scope of foreign investment; fourth, a green approach will be promoted in going abroad and the sustainable development of foreign investment will be maintained; fifth, enterprises will urgently need to develop a talent strategy that matches their international development.

Chapter 2: Chinese enterprises face challenges in overseas investment as the international regulatory environment becomes increasingly stringent

Cross-border investment regulations are becoming increasingly stringent as many developed countries have strengthened foreign direct investment (FDI) screening and restricted FDI based on national security concerns, indicating that the trends of global protectionism and deglobalization are becoming increasingly prevalent. Statistics show that 49 restrictions or regulations relevant to FDI were introduced in 28 overseas countries (e.g., the US, Germany, the UK and Australia) between 2017-2018², directly causing the lapse or withdrawal of many China overseas M&As after announcement due to unsuccessful regulatory review. In 2018, the value of overseas M&As of Chinese enterprises that were lapsed or withdrawn after announcement reached US$37 billion with a total of 38 cases, reaching record highs in both categories³. The US had the largest number of lapsed or withdrawn overseas M&As of Chinese companies, up to 21 cases, mainly in TMT and financial services sectors.⁴

Although Chinese enterprises are facing challenges in overseas investment as the international regulatory environment becomes increasingly stringent, this has resulted in Chinese companies to be more cautious in response and to improve internal investment decisions, risk identification and management capabilities.

Chapter 3: Investment and trade stimulate and guide each other under the new global trade landscape

Investment and trade are two important drivers of economic development that stimulate and guide each other. China’s imports/exports are highly concentrated in a small number of industries. In terms of imports, the total imports of top five categories (electrical appliances, electronic products and mechanical equipment; mineral products; chemical industrial products; transport equipment; and instruments and apparatus) accounted for 75% of the total in 2018. Among them, the largest trade surplus lied on crude oil and integrated circuits.⁵

Chinese enterprises should, on one hand, actively seek overseas investment in high-quality mineral products, crude oil and integrated circuits to secure the supply of strategic resources and key technology products from a supply chain perspective. First, they should focus on relevant investment and industry cooperation opportunities in markets such as Taiwan (China), South Korea and Japan pertaining to electrical appliances, electronic products and machinery equipment, chemical industrial products, instruments and apparatus. Second, they should focus on investment opportunities in Australia, Russia and Brazil pertaining to high-quality mineral resources, further securing the supply of strategic resources. Third, they should focus on investment opportunities in the US, Germany and Japan in the advanced automotive and transportation industries, aiming for a deeper and wider presence in the industry supply chain. On the other hand, Chinese enterprises should also increase their R&D investment in fields such as integrated circuits, instruments and apparatus to gradually improve self-sufficiency and production capacity, while actively developing renewable energy and new energy-related industries, thereby reducing dependence on related imports.

Similar to imports, the total exports of top five categories – electrical appliances, electronic products and mechanical equipment; textiles and textile articles; base metals and articles of base metals; miscellaneous manufactured articles (furniture, toys, etc.); and chemical industrial products – accounted for 74.4% of all exports in 2018. Moreover, the electrical appliances, electronic products and mechanical equipment exports accounted for 44% itself (in 2014, the mentioned goods accounted for only 41.5%). This indicates that China’s industrial structure is continuously being refined, and that China’s international competitiveness in high-tech and high value-added sectors continues to increase. Taking import data into account, it can be seen that China’s textiles and textile articles, as well as miscellaneous manufactured articles such as furniture and toys can mainly meet domestic demand, represent a high trade surplus. Based on the analysis of the export destinations of China’s top five export categories, the US ranked first among all five categories⁶, explaining how trade frictions between China and the US have great impact on China’s export. 

Trade frictions put higher requirements on Chinese enterprises’ development, which will accelerate the integration of related industries and push companies to transform and upgrade. Enterprises need to pay closer attention to geopolitical risks. Chinese enterprises that are more dependent on the US market demand should adjust their supply chain timely to enjoy the preferential tax rates of trade agreements to safeguard the international competitiveness of their products. It is also necessary that enterprises actively explore the markets of other countries and regions to reduce their export reliance on a single market.

Many enterprises face the challenge of adapting to the volatile and rapidly-changing external environment. The China-US trade frictions will bring challenges to enterprises which are unprecedented both in size and scope. 

The enterprise will face: first, an increase in tariff-related costs on imported products; second, increased corporate currency risks; third, re-examination of supply chain arrangements; fourth, an increasingly uncertain external investment climate; fifth, tariffs containing more stringent compliance requirements. Chinese enterprises should be aware of both internal and external affairs and be resilient. Internally, Chinese enterprises should continuously improve their innovation capabilities and tap new growth drivers, build an industrial structure that meets development trends and manage the global trading system more efficiently in order to enhance their core competitive advantages. Externally, they should manage and recognize that there are differences between the enterprises of developed countries and themselves in technology and management. Chinese enterprises should also seize internationalization opportunities, continue to progress in the global and industrial value chain, enhance their presence, and deal with geopolitical risks effectively.