Vistra Insights

Turning tides: What does the future hold for China’s inbound and outbound investment?

China remains the biggest single driver of client origination for the corporate services industry. But important changes are underway that will affect its future role both as an outbound investor and an inbound destination.

Over the last decade, China has been viewed as the dominant source of client origination in Vistra’s global survey of corporate services professionals.

In the study – which began in 2010 – the balance of China-related business became stacked towards outbound, over inbound, in 2013. And the country has consistently ranked number one when respondents have been asked to forecast their top sources of business. 

It is with good reason, too. Encouraged by the Chinese government’s “go out and buy” agenda, Chinese enterprises’ foreign investment maintained rapid growth for 15 consecutive years, up to its peak of nearly $200 billion in 2016 [1].  Meanwhile, explosive growth in the country’s billionaire population made it a primary source of private client business. 

Today, however, the corporate services industry can expect a turning of the tide. The combination of a shift in government policy on overseas acquisitions, and continuing trade tensions with the US, may be a sign of more subdued outbound activity ahead. Meanwhile, with China’s affluent middle classes unable to travel and spend overseas as a result of Covid-19, more consumer spending will be concentrated domestically over the coming months, further boosting the country’s attractiveness for inbound investors. 

The outbound outlook 

Respondents to Vistra’s latest industry survey, conducted during April and May 2020, appear to sense a subtle shift in the global order where client origination is concerned. For the first time, the emerging markets are cited as a more important source of client origination than China. 

China remains a significant source of business – it sits in second place globally – but it suggests that other countries are becoming more prominent as industry professionals consider drumming up corporate outbound business over the next few years. 

Many commentators have emphasised the significance of the US-China trade dispute – and rising international concern about China’s increasing international footprint – when discussing the recent drop-off in Chinese FDI. 

These factors are not inconsequential. But it is the nation’s policymakers who will have greatest influence on the future outbound activity of Chinese enterprises. And, for now at least, Chinese officials seem committed to rein in outbound investment in some areas. 

Government concerns about the number of overseas acquisitions in recent years prompted restrictions on “irrational” investments that posed a risk to China’s financial system. 

Of course, no one is suggesting that China will disappear as an originating market. But, on the corporate side, we are likely to see a more targeted approach to foreign acquisitions going forward. Among private clients, the rapid accumulation of wealth underway is sure to continue driving huge demand to diversify into overseas assets. 

Tailwinds for inbound business 

While the pandemic may exacerbate some of the challenges facing Chinese enterprises that have amassed large overseas holdings, it could contribute to a boom for inbound activity. 

With prolonged restrictions on travel brought about by the pandemic, China’s huge domestic consumer market may be more appealing than ever for foreign companies. 

Recent research from law firm Baker & McKenzie and Rhodium Group found that newly announced foreign M&A into China totalled $9 billion in the first five months of 2020, surpassing Chinese outbound M&A activity for the first time in a decade. European and US multinationals were key drivers of this trend [2].  

Importantly, the Chinese government is supportive of this activity, continuing to relax restrictions on the foreign ownership of Chinese companies. In its 2020 National Negative List, which sets out areas where foreign ownership restrictions apply, it eased rules within asset management, insurance, manufacturing, agriculture, healthcare and education, among others. 

The extent to which this turning of the tide gathers momentum will depend upon the continued government support for inbound investment and the appetite of Western companies for Chinese assets, alongside the evolving impact of the pandemic. The corporate services industry will be monitoring these developments with great interest. 

 

Find out more about Vistra 2030 and download the report here

 

[1] Foreign direct investment (FDI) from China, Statista, August 2020

[2] No wave of Chinese buyers as investors stay home in 2020, Baker & McKenzie, June 2020

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