2016 will see Chinese outbound investment grow at a faster rate than ever, but what themes and issues will dominate? I take a look below:
Further investment in global real estate
We can expect to see further Chinese investment in global real estate as government restrictions on funds leaving China have been further relaxed and fears around the stability of its economy will lead its citizens to secure assets outside the country. Naturally well known cities like Sydney, Los Angeles and Singapore will see much of this money, but other lesser known cities will also see growth in Chinese buyers as they look for bargains and alternatives to the usual locations.
Fears around a slowing Chinese economy
Fears around the Chinese economy overheating will continue abroad and at home, slowing growth, a stock market in turmoil, the problems around shadow banking and fears around China’s ability to pivot away from manufacturing will test nerves but the power of the goverment to manage the economy through interest rate cuts and stimulus measures should stave off a collapse in growth, at least for now.
One Belt, One Road
We will start to see the first fruits of the One Belt, One Road (OBOR) Initiative. New banks and funds have been established and now the work can really begin on developing new infrastructure projects which lie at the core of this initiative. These new projects are building on an existing program of Chinese investments, but from now (in theory at least) it will be a continent wide coordinated effort and we shall also see what impact OBOR has on the politics of Eurasia.
The rise of the Redback
The international rise of the Renminbi will continue unabated, increasing usage in bilateral trade payments and its role in new offshore trade products in centres like London and Luxembourg will make it an increasingly important international currency. However Beijing’s need to control the currency means it has a long way to go before it can become truly international in the same way as the US Dollar or the Euro.
More mergers and acquisitions
In the hunt for high quality mergers many Chinese firms have been burnt through poorly chosen companies, or have overpaid in a haste to go global. Now they are looking for companies they can easily backwards integrate into their home operations with an emphasis on firms that offer valuable technology and strong brands, they will also be more discerning about who they approach and will conduct their due diligence with more care.
We can expect to hear more about clashes between Chinese companies and local people and authorities like this one in India and this story from the Bahamas. As China’s international portfolio grows it will naturally run into issues with local governments and citizens, while some of these are normal, FDI projects rarely run completely smoothly, others originate from the fact that Chinese state owned firms work in a different manner compared to private firms, for example insisting on sub-contracting to Chinese construction firms which in the Bahamian case meant a shoddy construction job in a massive hotel complex on the island, resulting in long delays in its opening.
Commodity prices are likely to bottom out this year as the great commodity super cycle comes to an end. This will mean rock bottom prices for oil, iron ore, copper and all the other raw materials that power Chinese factories for the near future. In turn this will help alleviate the rising wages that are making Chinese exports less competitive, giving the entire economy (along with other manufacturing nations like Germany, France and increasingly India) a major boost, helping to shore up falling growth.