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China Will Be Largest Cross-Border Investor By 2020

New research shows that China’s offshore assets will triple by the end of this decade.

Beijing currently holds global offshore assets of $6.4 trillion, which is set to increase to almost $20 trillion by 2020, writes Jamil Anderlini for The Financial Times.

Report predicts tripling of direct foreign investment

A joint report by the economic research firm Rhodium Group and the Mercator Institute for China Studies claims that while a large part of total will be made up of foreign exchange reserves and portfolio investment, a growing proportion will be due to direct investment in other countries.

The report claims that outbound foreign direct investment (OFDI), which encompasses corporate mergers, acquisitions and start-ups, will increase to almost $2 trillion by 2020 from its current level of $744 billion. China is now one of the top three providers of OFDI in the world after investment skyrocketed from next to nothing a decade ago to over $100 billion per year.

Europe has so far been a major recipient of Chinese investment, and the report stated that recipient markets need to do more to maximize benefits but contain risks.

“Characteristics such as the size, growth and complementarity of the Chinese economy create unique opportunities for Europe,” the report’s authors said. “At the same time, some specific concerns that are related to the nature of China’s political and economic system, for example subsidies, China’s authoritarian political system and lack of openness to [foreign direct investment], create particular challenges.”

China’s focus on developed economies

China is increasingly looking to developed countries to invest in. €46bn was spent on 1,047 direct investments in 28 EU countries between 2000 and 2014, and activity spiked after the financial crisis in 2008.

The UK has received €12.2 billion of Chinese direct investment in that period, Germany €6.9bn and France €5.9bn, with the energy, automotive, food and real estate sectors attracting the largest proportion of investment.

There is great potential for further increases in outbound investment from China, and the report claims that “it has the potential to become the single most important driver of global FDI growth over the next decade.”

China currently possesses 7% of global financial cross-border assets and liabilities, compared to 38% for the U.S. and 47% for Germany. Further growth may be restricted by the barriers that Beijing places in front of foreign companies who want to invest in China.

Another issue is the provision of state aid to Chinese companies bidding for assets in Europe, which European companies cannot receive from their national governments.