Investments signal rise of multinationals

The direction of the financial tides flowing in and out of China’s shores has been changing. The perception that China is primarily attractive as an inbound investment center is now being outpaced by Chinese money heading across the world to acquire assets.

In 2015, China’s non-financial outward direct investment (ODI) was $118 billion. Based on the Ministry of Commerce’s 2015 data for foreign direct investment (FDI), which stood at $128.5 billion and the non-financial ODI of $118 billion, one can therefore assume China’s total ODI (financial and non-financial) actually exceeded FDI for the first time in 2015. This represents a significant shift.

UBS expects China’s ODI to accelerate to an 18 percent compound annual growth rate from 2015 to 2018, having recorded on average at 14 percent during 2008-14.

Globally, developed markets have attracted a far higher share of China’s ODI. Nearly two-thirds of China’s offshore investments are currently being routed to those markets, withNorth America, Europe and Asia accounting for more than 80 percent of Chinese acquisitions in 2015.

By specific industry sector, more Chinese money has been invested in tech and tourism businesses, while investment in resources, such as energy and metals, has declined. UBS projects that sectors with solid domestic fundamentals such as consumer, IT and tourism will continue to record accelerated ODI during the medium term. In sectors such as rail, ports, home appliances and telecom equipment, emerging Chinese multinationals may significantly alter the global competitive landscape in upcoming years.

State-owned enterprises were the original initiators of Chinese ODI, because they enjoyed government support and had access to lowcost funding. Today, private enterprises have access to the same kind of funding levels and there is a perception that the days of SOEs embodying the biggest momentum supplied by the Chinese economy has passed.

However, that hypothesis is not borne out by the information gleaned from Chinese investment offshore. Participation by the SOEs in ODI has actually been rising, and now represents over half of offshore mergers and acquisitions. Overseas expansion should be positive for Chinese companies, given the still relatively strong yuan and cheap domestic funding. The ability to pick up debt finance at a relatively modest cost is key to the proliferation of Chinese ODI. Eighty to 90 percent of Chinese outward investment has been financed with debt, though we have noticed that A-share companies have been more inclined to rely on equity financing.

However, growth in Chinese ODI is not a foregone conclusion. There are still challenges. The sustainability of overseas expansion depends on capital flows, foreign reserves and the yuan’s value. Also a weaker global economic environment may jeopardize bullish sentiment toward investing overseas.

There is a misconception that Chinese companies are insensitive to acquisition costs and as a result are willing to pay a hefty premium. But the data suggests otherwise. Chinese companies pay on average a 27 percent acquisition premium compared with the global average of about 24 percent.

This year, the momentum has increased. Chinese companies have announced $145.4 billion of overseasM&Aduring the first half of 2016, although not all them may be successfully completed. That figure exceeds the all-time high of $116.2 billion during the whole of 2015.

There is still a long way to go, though. China’s direct investment abroad in 2014 was about 1.2 percent of GDP, compared with the US’ 1.9 percent and Japan’s at 2.5 percent. In the coming years, Chinese investment will be spreading across the world. The author isHead of China Strategy, UBS Securities.

Lucid waters and lush mountains are the nation’s goals, President Xi Jinping has said. Since he became the top leader, China has taken every possible measure to make environmental protection one of the government’s principal guidelines as it deals with eco-problems and economic restructuring.

More than 20 years ago, in nearly every development program, China set the goal of transforming its development patterns, which were heavily reliant on energy, especially fossil fuel consumption. Although China’s economy grewat double digits for long, the economic growth caused heavy environmental damage. Besides, China has not yet fulfilled its objectives of changing its development patterns.

But preliminary figures now indicate that Xi’s team is on track to deliver on its promise. For instance, China’s coal consumption decreased 2.9 percent and 3.6 percent year-onyear in 2014 and 2015. And even though the consumption figure for the first half of this year is not yet available, coal production is believed to have dropped year-on-year by 9.7 percent in the January-June period.

For decades, coal accounted for about threefourths of China’s total energy consumption but that ratio fell to a historic low of 64.4 percent in 2015. Qi Ye, director of the BrookingsTsinghua Center for Public Policy of Tsinghua University and Nicholas Stern, president of the British Academy, have published a joint paper on the subject on Nature Geo-science website. And former energy chief Zhang Guobao has, on the basis of data, said China’s coal peak year, by and large, was 2013.

Basically, these achievements have been accomplished in the macroeconomic framework of the “newnormal” and supply-side reform, which are focused on reducing industrial overcapacity. But they have also improved the quality of the economy by increasing the output from almost all inputs, such as energy, capital, human and other resources.

To achieve this, China adopted what might be termed a strategy of “killing two birds with one stone”.

China has not yet announced a legally-binding ceiling for coal consumption on a countrywide basis, but nearly all provincial capitals and municipalities, most of which suffer from heavy air pollution, have set their goals for coal use. For example, Beijing’s coal consumption will be no more than 10 percent of its total energy mix next year. Shanghai has banned all households and small-scale boilers from using coal. And some areas of Chengdu, capital of Southwest China’s Sichuan province, have been prohibited from burning coal altogether.

Sichuan has already announced a ceiling on coal consumption. Even Shanxi, China’s largest coal producing province in North China, has started building large-scale wind farms and setting up solar plants to gradually replace coal use.

The phasing out of coal consumption and the ceiling policy are similar to what happened across Europe when countries realized the importance of protecting the environment. As such, the bottom-up approach of China to curb coal use has positive implications even though the coal industry faces the pressure of low price and rising lay-offs.

The policies adopted by China will help reduce industrial overcapacity, especially in the steel industry. In some cities, blue-sky days have increased dramatically since the clean-air campaign was launched. That is the kind of environment people long for and deserve.

Such environmental welfare approach can help reduce the healthcare bill of familiesandthe government. Froma policy point of view, these practicesmay help the government put a ceilingon total energy consumption. Andif that happens, it wouldbe a huge step forwardin fulfillingChina’s commitmentsto reducing energy consumption.

Another revolutionary stepwouldbe to revise the peak year forChina’s carbon emissions, which waspreviously setby the government around 2030.

It seems Xi’s goal of developing a green and beautiful nation is on way to be achieved before schedule.