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Michael Zakkour
China Goes Global
How Chinese investment is changing the world
By Michael Zakkour | NO. 8 FEBRUARY 19, 2015

 
China's reemergence as a global economic superpower during the end of the 20th and into the early 21st century was marked by a long list of firsts, milestones and eye-popping statistics.

The 1990-2014 period saw China become the largest manufacturing and export country in the world. China gained admittance to the WTO, became a host of the Olympics and saw its cities become some of the largest in the world. Its economy boomed, and it became the largest consumer market. A Chinese company became the world's biggest e-commerce player. Its auto market surpassed all others in growth. Finally, its crowning achievement was becoming the world's second largest economy.

Many policies, events and factors combined to make all of this possible, including the government's long-term planning and willingness to experiment, the entrepreneurial passion of the people and the opening up to world markets. In turn, the world embraced China. Privatization and the modernization of old businesses and an emergent middle class resulting from massive job growth and urbanization, also contributed to the phenomenon of China's growth.

However, one of the key foundations for all of this success was foreign direct investment, or inbound investment into China. No amount of policy changes, entrepreneurial spirit, technological development or urbanization could count for anything unless the money to build new businesses and industries and to institute new policies was not made available.

Thirty years ago, the West had the money, the banks, the companies, the experience and the desire to invest abroad, and a great deal of this investment went to China. Companies from regions and countries such as Hong Kong, Taiwan, Singapore, the United States and Europe invested in making the Chinese mainland the workshop and marketplace of the world. Eventually, they invested in providing Chinese citizens with the products and services they needed and desired. The West also had the wealth and the insatiable appetite for goods and products that made the investments in China pay off in affordable products for import, which allowed the government, businesses and individuals in China to profit.

In 2015, the roles have been, in many ways, reversed. China has the economy, the money, the banks, the foreign reserves, the companies and the individuals who are ready, willing and able to invest outside of China.

Net cash exporter

For most of the last 30 years China has been a net cash and investment importer, a natural role for a developing economy. What has separated China from other net cash importers is how its people have used those investments to grow and prosper for the long term.

During this period, outbound investment started as an experimental afterthought but has now become a primary driver for future growth.

In 2002 China invested about $2.7 billion on acquisitions and new projects overseas. In 2013 the total had increased to $108 billion. In 2014, China's outbound investment reached $116 billion. If Chinese firms' investment through third-party financing is included, the total investment would amount to $140 billion. In 2015 I expect that to increase to between $180-$250 billion.

The major factors that will spur record outbound investment and make China a larger net exporter of investment include a natural and healthy adjustment in the mainland economy making overseas investments, an attractive--and needed--part of China's growth; government, corporate, bank, private equity and private wealth interests seeking high growth opportunities; the desire of foreign governments, companies and property holders for Chinese-led investment; and the growing wealth of all Chinese individuals.

Outbound investment from China can be divided into three categories: government- or bank-led; corporate-, private equity (PE)-, or venture capital (VC)-led; and private- or individual-led.

Government-led

The Chinese Government has more than $4 trillion in government-administered foreign reserves. It will continue to put this money to good use in a number of ways.

It will continue developing strong relationships in Africa and Latin America through investment in local economies and infrastructure as well as the development and purchase of much needed natural resources. Smart governments will continue to engage China and learn how to create mutually beneficial partnerships.

China will also continue to utilize the massive wealth and immense brainpower that make up the China Investment Corp. (CIC), the largest sovereign wealth fund in the world. Founded in 2007 with $200 billion in assets CIC has leveraged smart investments and savvy partnerships into more than $600 billion in 2014. Smart global companies, banks and others will continue to engage with and seek partnerships with CIC.

China will also actively encourage and assist private and state-owned companies to invest in overseas mergers and acquisitions (M&As), minority stakes and greenfield projects.

Corporate-led

China's economy is still growing faster than almost any other economy on Earth and, relative to its maturity, the rate is impressive. One of the fruits of this growth is that the country and its companies are awash in cash. A great deal of investment is being deployed in China to develop industries, infrastructure, healthcare, urbanization and local companies and brands.

Still, there is ample cash on hand at all levels to invest in projects overseas.

"China Going Global," as China's global step forward is known, is healthy for China and the world. A key determinant of success for China Going Global will be in Chinese companies' abilities to expand their operations, sales, brands and presence in developed markets.

In 2015, Chinese companies and investors are expected to build on the success of M&As in 2014 with even more activity. As Wanda Group proved in 2011 (acquiring the AMC cinema chain) and WH Group proved in 2012 (buying U.S. producer Smithfield Foods), Chinese companies can reap the rewards of new customers and the attainment of new technologies, best practices, distribution, supply chains and personnel through M&A activity.

I expect the following companies to be active in overseas investment and growth in 2015.

Alibaba should be making major investments in overseas supply chain and operations projects. It will also engage in a massive global branding campaign, investing heavily in creating e-commerce platforms in the United States, Europe, India and Africa.

Lenovo is seeking to expand its global footprint in the mobile communications category and has the smarts, the muscle and the legacy product mix to make it work.

Chinese conglomerate Wanda Group's motto should be Let Me Entertain You, the song from the musical Gypsy. From movies and TV shows to Web content, theaters, hotels and resorts--if it can put a smile on your face, Wanda will be investing in it and doing it well. A play for a major Hollywood studio is possible.

The investment firm Fosun has now established itself as not only a major Chinese firm but also a major global firm to be reckoned with. It completed its takeover of Club Med this year, acquired Meadowbrook Insurance for $433 million and is a factor to be considered in any major investment opportunity in China, the United States and Europe.

Some of the categories where I see the most action taking place include--media and entertainment, e-commerce, hard asset real estate, FIRE (finance, insurance and real estate) service providers, and food and beverage industry.

Individual-led

As I wrote about in my new book China's Super Consumers  the era of the China Global Demographic/Consumer/Investor has arrived. What makes a China global consumer? It is the nexus of Chinese consumers becoming mobile--using mobile devices, acquiring brand and product sophistication; and a want/need to invest their time, money and future inside and outside of China.

In 2015, individual Chinese will increase investments in overseas capital markets and investment vehicles as well as overseas real estate. Chinese investors rank first in dollars spent in New York City. They will also continue to invest in education abroad. For some families, the ideal mix is a Chinese and foreign education that will ensure their children are prepared for a global economy. U.S. and European universities love the smart, prepared and ready Chinese students who are willing to pay full tuition. They will also invest in global luxury products and services and spend more on experiential luxury.

Chinese will continue spending on travel. China set a record with more than 100 million outbound travelers in 2014. That number will likely double in the next two years thanks to increased wealth, consumer sophistication, business engagement and new China global consumers. The recent agreement between the United States and China for 10-year visas will further spur investment in travel.

China has gone global and shows no sign of stopping. Investments by the Chinese Government, banks, investment companies, corporations and private individuals will grow exponentially in 2015 and this is good news for the countries, companies and governments receiving the investment and the investors from China who stand to profit.

The author is vice president of China/Asia Pacific Practice at the global consulting firm Tompkins International

Comments to yushujun@bjreview.com

 

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