March 27, 2016

China's Emerging ODI Focus: Agriculture, Financial Services and Real Estate

Photo: EIU
In the previous post, I discussed a few key points from a webinar produced by The Economist Intelligence Unit (EIU) that focused on China's recent economic developments, regional opportunities and risks, overseas investment, and an overview of the EIU's Access China service. Some key points from EIU's report, China Going Global Investment Index or GGI, which was first published in 2013 and updated annually "to help Chinese investors to understand the evolving opportunities and risks ahead," are included in the webinar. The latest update to the index ranks the attractiveness of 67 major economies to Chinese firms and provides a framework to evaluate investment prospects on the country level based on 70 indicators. This post explores certain findings from the GGI for 2015, which the EIU makes available in English and Chinese through its website.

The report's introduction explains: "Since Chinese outbound direct investment (ODI) took off in 2005, annual outflows have grown at an average rate of 35% per year, reaching US$123bn in 2014" making China the world's third largest investor, only behind the United States and Japan. "China's share of global ODI stock remains small as it is still in early stage (China 2.3%, US 22% and Japan 4.5% in 2013)," according to the Organisation for Economic Co-operation and Development (OECD). "Fast growth," however, "is expected in the coming years with strong government support, which should increase China's share rapidly."

The GGI notes that agriculture ODI grows rapidly despite being in a early stage. "As China becomes a major food importer, its food security strategy requires securing sources of import." This is exemplified through WH Group's acquisition of U.S.-based Smithfield Foods, Inc., the largest pork processor and hog producer in the world, for US$4.7 billion in 2013, which is the biggest agriculture ODI to date by a Chinese company.

Additionally, according to the report, "Agricultural ODI has been diverse, ranging from small demonstration rice fields in Africa, to massive soybean plantations, processing facilities, and ports in Brazil. Adding new indicators for agriculture has gained scores for countries with abundant agricultural resources and sophisticated farming production processes, such as US (corn), Australia (beef), Argentina (soybean), and New Zealand (dairy)."
 
The EIU webinar produced on Feb. 25, 2016 said China's emerging ODI focus include financial services and real estate. These sectors, according to the GGI, "have attracted new interests from Chinese investors." Moreover, "Chinese ODI in financial intermediations was five times as much as that in real estate in 2012, but the latter sees faster growth and closes the gap quickly," which is reflected in the chart to the right.

What is causing an increased interest in foreign property by Chinese investors? The slowdown in China's domestic real estate market. "A report by MSCI, a US-based finance company, shows that global property market delivered a return of 9.9% in 2014, and that in the US was 11.6%, when the return in Chinese property market was only 7.1%," the GGI explains. Furthermore, "Chinese investors usually avoid emerging markets in this field due to high currency risks, and their favorite objectives are office buildings, retail stores and hotels, according to a 2014 study by Cushman & Wakefield, a US real estate services company. US is one of the most popular destinations for property investments."

The report recommends that in order "for Chinese ODI to keep up its momentum, firms will need to approach investment in a more sophisticated manner. In the past, Chinese investment exhibited a strong pro-cyclical pattern—firms bought natural resources when its economy was growing fast and, as a result, they found themselves often paying peak prices for commodities. A counter-cyclical approach and long-term thinking will be the key to success for future ODI."

I also support the suggestion that "Chinese investors and authorities ought to be aware of challenges lying ahead. Although more markets are opening to Chinese investors, anti-China sentiment has also been observed. Poor labor conditions and a reliance on imported Chinese workers have caused tensions in some countries, while a less-than-stringent approach to environmental management has also caused problems for Chinese companies." In addition, the report accurately states that "a failure to mitigate national security concerns has thwarted Chinese investors in some markets."

The GGI's concluding paragraph says: "This means that investors should have a well-thought-out plan before making the ODI decisions and be sensitive to the contours of the market in which they are investing. The scope for an increase in market access is limited, with bilateral investment treaty negotiations with the US and EU yet to bear fruit, and an international debate still ongoing over whether China should be given market economy status."

Finally, the report correctly advises that "Chinese companies need to focus clearly on the opportunities and risks already available. A better investment promotion regime is needed, along with diplomatic efforts."

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

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