Chinese companies set to invest in more sectors overseas, finds KPMG report

Chinese companies set to invest overseas

Today KPMG’s Global China Practice released “China Outlook 2015”, its annual review of and outlook for the Chinese economy.

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Today KPMG’s Global China Practice released “China Outlook 2015”, its annual review of and outlook for the Chinese economy.

The report makes the following predictions for 2015: 

  • GDP growth is likely to slow down further in 2015, but not dramatically; 
  • Having likely overtaken FDI in 2014, ODI should see continued double-digit growth in 2015, which will widen the gap further; 
  • FDI is likely to remain at the 2014 level of around USD120 billion.

Chinese outbound direct investment is set to see steady growth off what is now already a high base; with more companies – especially private owned enterprises, investing in more sectors across more countries; in targets that enable Chinese companies to move up the value chain and improve their core competitive advantages in terms of technology, product development, branding and quality.  That is why outbound investment will make an important contribution to the transformation of China’s economy, and the advancement of quality economic development. And that is also why we expect to continue to see more investments in new markets, particularly in developed economies.  

Agriculture and food, technology, high-end manufacturing, infrastructure and real estate are new ‘hot’ sectors for Chinese investment.

The ‘One Belt and One Road’ national strategic initiative, together with the establishment of the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund should promote large-scale infrastructure investment in the countries and regions along the ‘belt’ and ‘road’ for at least the next 5-10 years. ‘High-speed rail diplomacy’ is also emerging as an economic and diplomatic tool to promote China’s technology expertise. We expect to see Chinese companies participating in more high-speed rail projects around the world – including as providers of debt and equity capital, suppliers of highly competitive and advanced equipment, and providers of construction services, in both developing and developed countries. 

The China–Australia Free Trade Agreement (ChAFTA) is expected to stimulate Chinese investment in a number of strategic industries in Australia, including agriculture, animal husbandry, food processing and infrastructure.

Vaughn Barber, KPMG’s Head of China Outbound, says: “With USD1.25 trillion in ODI expected over the next decade, China seems set to enter the fast lane as a ‘global investor’. Overseas investments are helping more Chinese companies from more sectors access new markets, and acquire the experience, technology, brands and human capital necessary to become more competitive. Recipient countries are also benefiting from the capital, experience, cost-competitive inputs to the production process and expanded market opportunities that Chinese investors bring. There is an increasing recognition that Chinese companies can achieve success in areas like infrastructure and agribusiness by ‘partnering’ with incumbent players in key target markets.” 

Of the top 10 outbound M&A deals, there was only one large mining deal in 2014, while five years ago in 2010, there were six oil and gas deals and one mining deal, the report notes. The 2014 data also shows that more deals are being struck in developed markets such as the US, Europe and Australia. Nine out of the top ten outbound M&A deals (by value) in 2014 all took place in developed economies, while looking back to 2010, only four were conducted in developed countries, including one in the US and one in Canada, both of which targeted oil and gas assets. 

“China’s pursuit of ‘quality development’ and its stable macro-economic development should underpin continued growth in ODI. In the meantime, the economic rebound in the US and Europe, and the potential for higher investment returns, should continue to provide good investment opportunities for Chinese companies,” Barber adds. 

In terms of FDI, growth is expected to continue in the service sector, which is growing in size and importance as China rebalances its economy away from a heavy reliance on exports and investment-led growth. China also plans to open its service sector wider to foreign investment as a way to further boost growth in services. 

New economic reform guidelines meanwhile are aimed at encouraging foreign companies to invest in a broad range of services, including financial services, tourism, entertainment and healthcare. The economic restructuring process will likely temporarily exert a negative impact on China’s economic growth. 

Peter Fung, Global Chair of KPMG Global China Practice, says: “We expect more targeted measures are on the way, including government-funded investment in infrastructure and a looser monetary policy. Price controls in the energy, transportation and healthcare sectors are likely to be loosened, while monopoly industries such as telecoms are likely to be opened up further. However, massive stimulus measures are unlikely to be rolled out in the near term, as the economy is less likely to depart significantly from its present trajectory.” 

“We also maintain our earlier projections that the real estate sector in first-tier cities and less developed regions will continue to suffer from an oversupply, including residential and commercial space. 

The government is likely to continue taking softer, less direct measures to boost real estate consumption as well as to prevent prices from declining too rapidly. The new Draft Foreign Investment Law recently announced by the Ministry of Commerce is likely have a significant impact on China FDI as it will give foreign investors easier access to the Chinese market, however it will take some time for the proposed law to be approved and implemented,” he concludes.

 

– Ends –

 

About KPMG:

KPMG is a global network of professional firms providing Audit, Tax and Advisory services.  We operate in 155 countries and have more than 162,000 people working in member firms around the world.  The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.  Each KPMG firm is a legally distinct and separate entity and describes itself as such. 

KPMG China has 16 offices in Beijing, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Hangzhou, Nanjing, Qingdao, Shanghai, Shenyang, Shenzhen, Tianjin, Xiamen, Hong Kong SAR and Macau SAR, with around 9,000 people. 

KPMG China refers to the member firms of KPMG International in Mainland China, Hong Kong SAR and Macau SAR.

China Outlook 2015

KPMG’s Global China Practice provides analysis and commentary on China’s economy, outward direct investment (ODI) and foreign direct investment (FDI) in 2014, and offers a closer look at the industry sectors. The report also provides our outlook for 2015.

 
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