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Spike In Outbound Chinese Investment Could Mean Big Change

The gradually increasing value of the Chinese currency, the yuan, is one the main reasons for the sharp increase in the nation's overseas buying binge, as it has made foreign assets cheaper in yuan terms, economists said.
by Staff Writers
Beijing (AFP) Sep 10, 2006
A sudden spike in China's investments abroad is a harbinger of momentous changes in global fund flows that could eventually transform the Asian giant into a major source of capital, analysts said. China, long one of the world's top investment destinations, issued surprise figures last week showing that its own outbound investments more than doubled in 2005. And that, economists said, might just be the beginning.

"By 2010, China will emerge as a major global foreign direct investment source," Jiang Xiaojuan, a professor with the Chinese Academy of Social Sciences, wrote in a recent article in the China Economist, a monthly.

United Nations data show China's aggregate investments overseas so far account for a mere 0.6 percent of the world's total, but given current growth rates that tiny figure could soon rise markedly.

Direct investment by China in other countries totaled 12.3 billion dollars last year, up 123 percent from 2004, according to just-published data from the Ministry of Commerce and the National Bureau of Statistics.

Put differently, China's overseas investments, so far considered of little to no significance, attained a size in 2005 amounting to one fifth of the 60.3 billion dollars of foreign investment made in China in the course of the year.

The sharp increase was driven partly by mergers and acquisitions, which accounted for half of last year's outbound direct investment flows, according to the China Daily newspaper.

This reflects a penchant among Chinese businesspeople for buying existing companies rather than starting new ones from scratch.

Many argue it makes more sense to buy operations with a proven track record, tested management methods, and perhaps even a valuable brand.

Taking over a company with established drilling or mining rights may also be the easiest way to get ahold of coveted energy and raw materials.

"Companies have been very active in mergers and acquisitions overseas," said Guan Jianming, an economist with Standard Chartered in Hong Kong. "They need raw materials."

To be sure, China's most well-known foray as an investor overseas was a spectacular failure: China National Offshore Oil's aborted bid for America's ninth largest energy company Unocal in the middle of 2005.

But the tectonic forces of the global economy -- forces that no one can control -- could soon make China's rise to prominence on the global investment scene all but inexorable.

The gradually increasing value of the Chinese currency, the yuan, is one the main reasons for the sharp increase in the nation's overseas buying binge, as it has made foreign assets cheaper in yuan terms, economists said.

"It's the experience from other countries that a rise in the value of a currency boosts outbound investment," said Shen Minggao, a Beijing-based China economist with Citigroup.

The government allowed the yuan to rise 2.1 percent against the US dollar in July last year, and since then it has permitted a gradual appreciation of about two percent.

"If the yuan goes on rising significantly in value, we'll see a relatively rapid increase in investment overseas," said Shen.

Another reason why Chinese money has suddenly started pouring into foreign economies is a policy-making establishment in Beijing signaling its unequivocal support for investment abroad by relaxing existing restrictions.

On July 1, the State Administration of Foreign Exchange abolished foreign exchange quotas for outward investments by foreign firms.

The purpose, the administration explained, was to "encourage local investors to develop overseas investments and operations."

A side effect that will please the Chinese government is that it will remove some of the upward pressure on the yuan, economists said.

"It's the rise in the currency that has forced the authorities to relax the management of outbound investments," said Gao Shanwen, a Shanghai-based economist with Everbright Securities.

Further fueling China's overseas investment drive are concerns that its foreign exchange reserves, the world's largest, are not being employed in optimal ways.

China's forex reserves rose to 954.5 billion dollars at the end of July, up 30.3 percent from a year earlier, placing the nation well on track to hold an unprecedented one trillion dollars by the end of 2006.

China will "take comprehensive measures to avoid further significant growth in foreign exchange reserves," Vice President Zeng Qinghong said when announcing the latest reserve data.

Perhaps, economists argued, that will not even be necessary if China's companies extend their spending spree in overseas markets at the current brisk rate for just a few more years.

Source: Agence France-Presse

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