Will lower Chinese growth cut its outbound investment flows?

China compassThe last couple of months has seen a flurry of attention around the Chinese economy and its perceived weaknesses, the fall of an overpriced stock market and the government’s subsequent expensive and misguided attempts to prop the market up have made a compelling story. Other commentators have pointed to weaknesses in China’s financial system, unsustainable debt, overinvestment, a shadow banking system and a fragile property market as signs that the economy is staring at the abyss.

While the country could still surprise us it is clear (and as predicted by Beijing) that growth is at best going to be at a much lower rate, 5 – 7 percent, still high for a middle income economy but not of course the 10 percent the country has become accustomed to. If the economy tanks too far, unemployment and social unrest could soon follow, if the government try and increase growth by allowing credit to grow further and reducing interest rates, it would just delay an inevitable recession which would be even more painful as a result.

What will happen to China’s overseas growth if there is a recession or low growth at 4 percent or below (which will feel like recession) is not yet clear, there are countervailing forces involved, clearly a downturn in the economy might make Chinese firms less likely to expand abroad as they become more risk adverse and focus on their core market, also lower revenue and profits means firms are less able to act and expand abroad, despite the government’s recent relaxation of the capital controls which makes it easier to invest overseas.

China is not the only country in potentially choppy waters, falling emerging market currencies and low commodity prices have hit many of these countries hard, some like Brazil and Russia are in recession, others like Nigeria may be heading in that direction. All this means that uncertainty is abound and right now much of the world looks like a much less attractive place to invest in.

However, there are forces which will push Chinese firms to expand further abroad. Lower growth at home may well entice Chinese firms to look abroad to make money, China is a fiercely competitive market for many products and services so many ventures find they can make higher margins abroad, despite operating in lower growth environments. There is no reason this will change in the short term and so recession in China may push cash rich Chinese firms to take the plunge and expand abroad.

Thanks to concerns about a Chinese recession a great deal of capital has left the country in a hurry recently, although it is not clear how much of this has been invested – some has been put into safe haven property spots like London, Vancover and Singapore or just parked in offshore accounts. These transfers represent China’s wealthy hedging their bets in case of recession or government seizure of assets.

Of course many Chinese firms are state owned and the government may make the decision to invest overseas for them, luckily there are a multitude of international projects like the Silk Road, China –Pakistan economic corridor and the India – Bangladesh, Myanmar economic corridor all of which are capital and infrastructure heavy and will require a great deal of construction expertise. Firms suddenly finding work has died down in China will be able to shift resources to work on these projects.

While some emerging markets are running into serious problems others are performing well, African growth continues to be bright spot for the global economy and a recent US $ 4.3 billion deal announced between Sinoma and Dangote to produce cement in 8 African countries is just the kind of news which indicates long term confidence the African economy.

Overseas investing is a long term project and well run companies should have the ability to see beyond current headlines and view the bigger picture. China might well suffer a recession or downturn, but as long as it is not prolonged or results in massive political unrest and upheaval then there is every reason to believe that China will recover in a couple of years and return to strong growth.

In short Chinese economic woes will no doubt stem the rush to expand abroad as some firms hold back, but many others will continue to take the plunge and “go global” while others will be forced to by the Government. But in the longer term I confidently expect Chinese overseas investment to continue rising rapidly as companies look to seek fortunes beyond their homeland.

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