Chinese outbound investment requires facilitation to overcome the headwinds

Despite the outbreak of the novel coronavirus, China's outbound direct investment remained relatively stable in 2020. However, with the novel coronavirus affecting international investment cooperation, and many countries tightening their foreign investment policies－major European economies and the United States have stepped up their security reviews of potential foreign investments with the blatant intention of targeting Chinese capital-Chinese ODI is expected to decrease by 5 to 10 percent this year, which might be increased in 2022.

Although Chinese ODI produces win-win results－for instance, in a survey carried out by the China Council for the Promotion of International Trade in 2020, 35.3 percent of respondents said Chinese companies hire more than two-thirds of their employees locally－Chinese businesses also face compliance challenges when going international. A survey of nearly 1,000 businesses by the CCPIT shows that 36.2 percent of Chinese overseas companies have encountered compliance problems in investment, production and operations in their host countries. As a result, they have found it difficult to break even or turn a profit, which represents headwinds for the better distribution of Chinese companies in the global industrial chain, especially in high-end manufacturing and high-tech fields where the return on investment would be higher.

With the risks and uncertainties being exacerbated by the pandemic, banks should moderately raise their tolerance for nonperforming loans for overseas projects to ease the financial pressure on Chinese companies overseas. Partnering with foreign financial institutions to establish multilateral or bilateral investment funds could help shape an international investment ecosystem conducive to Chinese ODI.

International policy communication and coordination should also be enhanced with key economic partners. The country accelerated major trade negotiations last year to offer international policy institutions to Chinese businesses going global. The Regional Comprehensive Economic Partnership between China and 10 ASEAN member states, plus Japan, the Republic of Korea, Australia and New Zealand, for example, contains investment provisions, covering investment liberalization, promotion, protection and facilitation. China has also announced negotiations with Singapore, Belarus and Iceland, among others, to upgrade the bilateral free trade agreements.

And now that more economies are starting up again, international cooperation should be strengthened by improving networks to facilitate the flow of people and mutual recognition of international pandemic prevention and health information. Fast Track and Green Channel cooperation mechanisms should also be improved via trade facilitation and streamlined customs clearance to expedite logistics for Chinese enterprises overseas. The government should also continue to guide promising and well-positioned economic and trade cooperation zones overseas to create platforms for Chinese companies to go global together.

With tightening investment review policies in Europe, the US and other regions toward Chinese companies, ODI doesn't necessarily have to be large M&A with controlling stakes in the targets. More small and medium-sized tech firms can be identified in countries with relatively friendly investment reviews, and more green-field investments.

China should, based on win-win cooperation, link the Belt and Road Initiative with the development strategies and regional cooperation initiatives of other countries for better connectivity, thus contributing to the economic recovery and sustainable development of the participants in the BRI and supplementing economic globalization with the unique advantages of regional integration. By investing in the countries involved in the BRI, China has helped improve their infrastructure, while contributing to the local industrial system and industrial upgrading. China has also adopted measures to support local development by pooling more international financial resources and offering financial incentives.

And the BRI is still the most important vehicle for Chinese companies going global. Exemplary joint projects should be promoted to elevate the BRI cooperation to new levels and open up new areas for cooperation. The legal, policy and service framework needs to be further improved to facilitate direct investment abroad and help Chinese enterprises improve their operations overseas. With this in mind, China should improve the liaison service platforms and the Joint Conference of Chinese Overseas Chambers of Commerce, with a focus on key countries and sectors for ODI, and offer due diligence services concerning national security reviews, economic sanctions, long-arm jurisdiction and export controls through government purchase of services for companies as they go global.

To create institutional guidance for companies investing abroad in the RCEP region and the EU, institution building for ODI should be completed in the RCEP and the China-EU Comprehensive Agreement on Investment. There also need to be better policy and legal consultation services for Chinese companies overseas so that they know how to resort to laws, international rules, media and other means when they need to safeguard their legitimate rights and interests.

Relevant enterprises should be reminded of the security review risks related to investment and merger activities in sensitive sectors in Europe and the US. They should improve their compliance awareness and put in place compliance mechanisms to manage relevant risks. Chinese companies overseas need to be more aware of international rules, and the laws and regulations of the host countries and services should be provided to better acclimatize them.

With a clearer understanding of what is expected of them and the right policy guidance, Chinese companies overseas can better pursue long-term sustainable growth and profitability.

Yang Ting is a senior economist with the Foreign Direct Investment Research Center at the University of International Business and Economics. Chen Zhaoyuan is an assistant researcher with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.