Who is attracting Chinese FDI? — Recent Trends, Emerging Hotspots, & Future Trajectory

China is a prominent actor in the Global Foreign Direct Investment landscape. Over the last 10 years, it has featured both amongst the top three sources as well as recipients of FDI (Figure 1). A part of this outward FDI returns back to China and is re-invested thereafter.

However, in the changing global geopolitical environment, China is likely to emerge as a bigger source of FDI through both greenfield and cross-border M&A channels.

Mode of FDI — Cross-border M&As account for roughly 30-40% of the total outward FDI. 2016 was a record-setting year, when Chinese firms closed 407 cross-border deals costing over US$200 Bn. M&A activity has slowed down since then due to strict capital controls in China and increasing scrutiny in seller countries. Two distinct objectives can be noticed in the Chinese cross-border M&A activity, which can be later correlated with the Figure 3 below:

(i) Supply-side approach: Focus on securing access to natural resources & commodities (Sub-Saharan Africa, Australia and Latin America); and enhancing cost efficiency in value chains (ASEAN).

(ii) Demand-side approach: As Chinese corporates became mature, intent has shifted to acquisition of technology, brand and distribution channel, especially in North America and Europe. 80% of deal value of M&As in 2016 was directed to the US and European geographies for this purpose. Increasingly, such deals are either being heavily scrutinized or blocked.

According to a Mergermarket report, Chinese acquisition of US firms plummeted by 94.6% in 2018, falling to a value of US$3 Bn from a record US$55.3 Bn in 2016

Demystifying Statistical Discrepancies — Official Outward FDI data published by National Bureau of Statistics of China (see Figure 2) suggests that Asia (also includes Middle East and Central Asia as per Government of China definition) attracted a giant share of 74% in the total pie in 2018, followed by Latin America (10%), North America (6%), Europe (5%), among others.

However, like FDI data published by other countries, this data is also distorted due to round-tripping and offshoring transactions. Figure 3 suggests that Hong Kong alone accounts for ~60% of outward FDI from China; Hong Kong has also accounted for over 50-60% of the inward FDI in China over the last two decades.

This round-tripping (predominately to Hong Kong, British Virgin Islands and Cayman Islands) helps in changing the colour of domestic capital to FDI making it eligible to receive incentives such as cheap land and other preferential policies. Offshoring of capital helps prevent scrutiny of offshore deals from Chinese government and investments in assets that are restricted by Chinese ODI policy.

Activity in ASEAN — What should be of specific interest to India is the Chinese investments in ASEAN as majority of this investment is directed towards manufacturing sector — such as Electronics, Steel & Metals, Capital Goods, Textiles & Apparels, Footwear, Food Processing, Auto Components — which is also of interest to India.

US-China trade tensions have been encouraging the shift of FDI stock of Japan, US, South Korea and Taiwan from China to ASEAN. Another structural driver that is encouraging this shift is the steady increase in relative labour costs in China and China’s efforts to transcend to higher value addition process in the global value chain. The main beneficiaries in terms of manufacturing FDI from China include Indonesia, Thailand, Vietnam, Cambodia, Laos and Myanmar countries.

Indonesia: China is the second largest FDI source for Indonesia. Chinese companies have invested heavily in metals and steel sector. Construction and mining are other sectors of interest. Most of Chinese investments in Indonesia are either resource seeking or market seeking. Hebei Bishi, Power China and Tsinghan group are the largest Chinese investors in Indonesia.

Malaysia: China is amongst the largest FDI source from Malaysia. China’s investment covered a broad spectrum of sectors, including public transportation, port, manufacturing (steel, solar power, textile, electronics and electrical products), industrial park, real estate, construction and energy.

Laos: China is the single largest investor in Laos, contributing over 75% of total FDI inflows in 2017 and 2018. Most of this FDI is invested in infrastructure and power projects.

Thailand: Although Japan is the largest FDI investor in Thailand. China (along with Hong Kong) accounted for ~20% of total FDI inflows in 2018. FDI inflows from China are also rising steadily in the H1 2019.

Vietnam: Japan, South Korea and Singapore are three largest investors (~62% in 2018) in Vietnam. However, China is amongst the fastest growing investor group. China invested US$1.2 Bn in Vietnam in 2018. Roughly 50% of Vietnamese FDI goes into varied manufacturing sectors such as facilities for aircraft engines, animal feed production, automotive, electronics, clothing and other products.

Adidas (Germany) and Nike (United States) moved manufacturing operations from China to Vietnam for cost reasons, and Hestra (Sweden) opened a glove factory. Group Intellect Power Technology (Hong Kong, China), a power conversion manufacturer, opened a second factory. CCGrass (China), an artificial-grass manufacturer, started the first phase of a US$120 Mn production plant.

Cambodia: China and Hong Kong are the main FDI source for Cambodia, accounting for ~35% of the total FDI inflows in 2017 and 2018. Garment and sportswear manufacturing are the main sectors for foreign investments.

Chinese FDI in India — Emerging Hotspots and Future Projections

Chinese companies have shown significant interest to invest in India in a wide range of sectors since the launch of Make in India campaign, which is evident in FDI equity inflows data from China. However, significant difference emerges between statistics published by Department for Promotion of Industry and Internal Trade (DPIIT) and MOFCOM China. As per DPIIT data, between April 2000 and June 2019, cumulative FDI equity inflows from China were INR 14,282.56 Crores (US$2.26 Bn).

As per the data shared by MOFCOM in media interactions, Chinese firms have invested approximately US$8 Bn; which reflects that several Chinese companies have remitted money from other countries in India. Total number of Chinese companies incorporated in India is estimated to be over 800.

Despite the fact reported by official statistics, it is evident that Chinese investments in India have grown by leaps & bounds especially since 2014 as elaborated in Figure 4.

Post 2014, Chinese companies have shown significant interest to invest in India in a wide range of sectors such as Real Estate, Electronics, Renewable Energy, Textiles and Automotive and financial investments in Start-ups.

Between 2016 and 2019, several companies finalized locations for their factories in India such as SAIC Motors, BYD, OPPO, VIVO, Xiaomi, Midea, Haier, Tsingshan (Steel manufacturer), Lesso (Building material), among others.

Chinese companies are also catering to Indian retail consumer via E-commerce & Physical retail route. In addition, Chinese companies have done well in securing contracts from Government organizations in sectors like Electric Vehicles, Power equipment, Infrastructure (esp. Railways & Metro), Construction Equipment, Optical fibres, Telecom Equipment, etc.

Chinese investors led by Tencent and Alibaba started investing in India start-ups from 2015 onwards and have already closed deals worth US$7.9 Bn.

Chinese PE/VC firms have invested heavily in Indian E-commerce platforms, and other Internet based business models such as music streaming apps, healthcare tech, taxi aggregator, content-apps, travel booking sites, logistics firms, among others.

During 2020-21, sectoral distribution of Chinese FDI in India is likely to spread beyond smartphone & components. Electric Vehicles & Components, Aquatic Feeds, Toys & Games and Consumer Appliances are likely to grow big. India must attempt to attract the labor intensive production processes that are moving out of China such as toy manufacturing, footwear & leather accessories manufacturing and garment manufacturing.

Mapping Indian manufacturing clusters to the cities in China will go a long way in establishing the brand pull required to provide comfort to Chinese investors. Choosing Mahabalipuram (near Chennai) as the venue for President Xi and Prime Minister Modi’s second informal meeting was an excellent idea. As per ground reports, large number of Chinese business delegations have visited Chennai post this meet, and this area is likely to emerge as a major investment hotspot for Chinese investors in India.

Read more about the Chinese investment trends in India at these links — (i) Divay Pranav, “India-China Investment Corridor — Dangal and Business Goes Hand-in-Hand,” July 2018 (ii) Divay Pranav, “Chinese Apps spicing-up Infotainment Sector with Regional Condiments,” October 2018 (iii) Divay Pranav, ”Five Facts about India-China Trade and Investment Relations — An Indian Perspective,” October 2019