China’s Capital Fright and its (Ir)Relevance for Chinese Outward FDI

Over the past year or so, China’s foreign exchange reserves have been “plummeting,” falling several hundred billion (US) dollars as a result of Chinese investors pouring massive sums of money into foreign assets such as real estate and overseas stock markets and Chinese companies undertaking record levels of outward foreign direct investment (OFDI). To protect its foreign currency holdings, the value of its currency, and, in turn, economic stability (always a priority of China’s ruling Communist Party), China has been cracking down on diverse techniques Chinese investors use to send money abroad. Some have claimed China’s new measures have made it difficult for foreign firms in China to remit profits. As far as OFDI is concerned, the government is moving towards imposing measures requiring it to approve deals exceeding USD $10 billion, deals of $1 billion or more in an overseas entity that are unrelated to the investor’s core business, and OFDI by limited partnerships. Some anticipate big consequences for OFDI, proclaiming China’s “‘Shopping Spree’ Over.’” However, it seems unlikely there will be a major impact on COFDI volumes even if reserves continue to decline, albeit moderately. First, China claims it “will stick to its opening up policy and ‘going out’ strategy.’” Second, China’s currency may continue to show weakness in 2017 and even decline further in the new year, which will spur OFDI sooner rather than later. Third, many of China’s big outward investors are state-owned enterprises (SOEs) or connected private enterprises and thus may have back doors to get the approval or foreign currency they need to consummate deals. Fourth, the multiple political and economic motivations behind OFDI all remain powerful. Finally, now that Chinese companies have a base in foreign countries, many can tap overseas banks, capital markets, and their own retained earnings to grow their OFDI.