China's outbound direct investment set to rise

HONG KONG - The process of rebalancing China 's external investment portfolio will increase the country's global direct investment assets from $400 billion today to $1-2 trillion by 2020, Daniel Rosen, founding partner at Rhodium Group, an advisory firm focusing on China, and visiting fellow at the Peterson Institute for International Economics, said here on Friday.

Addressing a luncheon held by the Asia Society Hong Kong, Rosen said China's burgeoning outbound direct investment is not an indication of "China taking over the world", but efforts by Chinese firms to catch up after decades of a growth model focused on domestic investment and exports.

Rosen said the shrinkage of the investment-driven growth in China is giving Chinese companies a push and a reason to go out, looking for ways to remain profitable as their home economy starts to change and adjust.

He said margins are a big problem for Chinese firms nowadays, given that the margins in manufacturing part of the global value chain are very thin, whereas the upstream including the research, design and branding, and downstream including distribution and retail, are where the margins lie.

"They (the upstream and downstream) are not where China earn its reputation for being dominated," Rosen said, "and there are two ways to address that, you can either build it or you can buy it."

Rosen said building is relatively hard for Chinese companies under the current economic and political environment in the country, while buying foreign firms is much easier. "That is why you are seeing such an extraordinary boom in China's outbound direct investment today."

He expects China's total stock of direct investment around the world to go from $400 billion today to $1-2 trillion by 2020. On the other hand, the Hong Kong Monetary Authority forecasts the number to hit over $5 trillion.

Take the American story as an example. Rosen said the country has got close to $25 billion in deals from China by the third quarter of 2012 since 2000, across 40 states and widely distributed over all sectors. "And 2013, I should think, is almost definitely going to blow 2012 out of the water".

Rosen said the European story is almost exactly the same as American story, with the European Union slightly ahead of the United States in terms of value of transactions. "Europe and America are not really competing. It is not 'either or'; it is ' both' are going to see a really significant interest from Chinese investors going forward."