Will COVID-19 Halt China’s ‘Going out’ Economic Strategy?

By Chan Kung and Wei Hongxu

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The impacts of COVID-19 could cause further problems for the already suffering Chinese economy. Fazed by the tremendous pressure from the outbreak, it is very likely that China will soon direct its future development strategies and priorities toward improving its domestic economy instead of pursuing outbound investment. Consequently, this also means that the country’s plan of “going out” into the international economic and geopolitical scene would have to be put on hold for the time being.

Even prior to the outbreak, China’s outbound investment had already slowed down as a result of international trade frictions, particularly the U.S.-China trade war. Despite having reached the first phase of a trade deal with the United States, China’s attempts to retain its foreign investors have not eased up the slightest bit, and the U.S. government’s increasingly stringent scrutiny and restrictions on Chinese investments have hurt China’s overseas investments. As a result, China’s outbound investment had already begun to show a gradual decrease back in 2019.

According to Ernst & Young’s report, “Overview of China outbound investment in H1 2019,” the trend of Chinese companies’ overseas investment declined in the first half of 2019, with the country suffering a 9.8 percent and 31 percent loss in outbound direct investment and the amount of announced overseas mergers and acquisitions (M&A), respectively. Data published by the Ministry of Commerce showed that China’s industry-wide outbound direct investment in 2019 was $117.12 billion, a 9.8 percent decline year-on-year, and non-financial outbound direct investment was $110.6 billion, a 8.2 percent decline.

From a micro-level perspective, the trade war between China and the United States has caused China’s external economic to deteriorate, with many countries rejecting investments from the country out of doubt. What’s more, Chinese regulators have been tightening the approval of outbound investment in the past two years, all of which points to an even more obvious slowing trend in China’s outbound investment. It is also believed that the decrease in China’s outbound investment is not only caused by the fact that Chinese enterprises face more stringent regulatory approval for outbound investment, but because the trade war between the United States and China has reduced the latter’s foreign currency supply. Any move toward a more balanced trade relationship with the United States, meaning a further expansion of Chinese imports, would reduce China’s foreign exchange reserves, which in turn reduces the capital needed for investment.

On a regional level, China’s outbound investment have shown very obvious changes too. According to Ernst & Young’s data, Asia has risen to become China’s largest overseas M&A destination, accounting for nearly 30 percent of total investment. Meanwhile, Chinese companies’ M&A in other continents have declined to varying degrees, particularly in Europe and North America, where M&A fell by nearly 60 percent and 30 percent, respectively, reaching the lowest levels since 2014 and 2012. While competition in European and North American countries remains fierce, the degree of marketization is relatively high, and the investment risk is relatively low, which means, to some extent, the return of the investment in European and American countries is still guaranteed. At present, regions under the Belt and Road Initiative that are experiencing rapid investment growth are still within the market development phase. That means large investment risks are to be expected, as seen by the large number of previous infrastructure investments, which had a long investment cycle and low returns. These risks threaten subsequent investment.

The recent outbreak of the novel coronavirus will have a significant impact on overseas investment and China’s external strategic development. The suspension of economic activities resulting from efforts to control the outbreak will inevitably delay any activities relating to outbound investment. The slowdown in outbound investment will be further exacerbated by China’s decision to direct its focus “inwards”, to improve its domestic economy, which will certainly hurt the BRI as well as the construction of the Guangdong-Hong Kong-Macao Greater Bay Area. The domestic market needs to “recuperate” and replenish its resources following the outbreak. Thus, it makes sense to halt all of China’s outbound investments in response to the outbreak’s impact – and that’s aside from the broader slowdown and delay of overseas investment that will come as a byproduct of the outbreak forcing China to shift its focus inwards.

China’s focus on the domestic economy does not necessarily mean that the country is shying away from opening up once more. Regardless of the situation, China still has to explore the depth and breadth of its market to attract overseas investment and commodities, especially since it intends to strengthen the attractiveness of its domestic market to BRI countries. Currently, China’s actual use of foreign investment is maintaining a steady growth. Figures for January showed China’s actual use of foreign capital (excluding financial sector investment) reached $12.68 billion, up 2.2 percent year-on-year. Among the major sources of investment, Singapore, South Korea, and Japan saw year-on-year growth of 40.6 percent, 157.1 percent, and 50.2 percent, respectively. Meanwhile, the actual amount of foreign investment invested by countries along the BRI and ASEAN increased by 31.3 percent and 44.8 percent respectively. Clearly, the development of the domestic market is still of great significance to the act of opening up and “going out” for Chinese enterprises.

The changes brought by the novel coronavirus outbreak have worsened the slowdown of outbound investment, which is directly attributed to China redirecting its attention “inwards” to focus on its domestic policies and economic activities. In the post-epidemic reconstruction process, China’s outbound investment would continue to decline, and is expected to stay that way, at least for the remainder of the year.

Founder of Anbound Think Tank in 1993, Chan Kung is now Anbound Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Wei Hongxu graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research.