Slower pace of outbound investment could be beneficial for Chinese companies

While China’s outward foreign direct investment ( FDI) has entered a stage of rapid growth, an easing in the investment pace could be beneficial for Chinese companies in terms of the prevention and control of overseas risks in the long run.

According to the World Investment Report 2017 released on Wednesday by the United Nations Conference on Trade and Development ( UNCTAD), Chinese outward FDI surged 44 percent year- on- year to hit $ 183 billion in 2016, making China the second- largest source of FDI for the first time, just behind the US. And the high growth in China’s FDI was recorded against a background of global FDI flows declining by about 2 percent to $ 1.75 trillion last year.

To a certain extent, China’s rapid FDI growth highlights the necessity for Chinese companies of going global and participating in international competition. Given the excess capacity and technology bottleneck in the domestic market, Chinese companies, particularly private ones, generally have strong mo- tivation to make investments overseas.

But this interest in overseas investment doesn’t necessarily take into account the risks involved in such deals, especially when the risks are rising these days. The UNCTAD also pointed out that weak economic growth, elevated geopolitical risks and significant policy risks may affect global cross- border investment in the future.

Some large- scale Chinese companies appear to have already sensed the headwind and intend to slow the pace of their outward investment. For instance, HNA Group CEO Tan Xiangdong said in a recent interview with Reuters that this year the international market is a bit more complicated than before, and tensions between China and the US are the biggest risk. He also mentioned that HNA – one of the most active Chinese buyers in global markets – would slow down its overseas investment this year.

Meanwhile, China’s curbs on cross- border capital outflows, which were put in place late last year, may also restrain the size of outward FDI to a certain extent.

In fact, a slowdown in China’s overseas M& A splurge will do no harm to its companies. It could offer them a break to review the financial risks in some highly leveraged deals and to strengthen their risk prevention and control mechanism. In the long run, Chinese companies, especially large- scale Stateowned companies, should shift their overseas acquisition mode from aggressive to prudent so as to keep away from risks in foreign markets.