China has experienced rapid growth over the past few decades. Going from a relatively impoverished agrarian society suffering from the ails of a failed communist experiment, China emerged as a full blown export power house. Indeed, China played a critical role in lifting the world economy out of the financial crisis partially through its almost insatiable appetite for resources, driving commodity prices post crisis to new highs.
Like many countries before it, the development cycle has slowly eroded China’s export advantages, as the rising cost of labor, currency value, and increased competition have slowed the country’s growth. In line with this trend, China is now experiencing an economic correction. The country’s growth rate has plummeted from an average historical GDP growth rate of 15.2% to a reported 6.7%. While this growth rate is several times higher than most developed nations, China, unlike other countries, cannot afford a steep decline in growth as much of the country remains under-developed on many levels. While the Chinese government can be construed more as state managed capitalism rather than communism, the state is none the less cognizant of the implicit deal it has made with its countrymen, a trade off between political and social rights in exchange for prosperity and overall development.
By and large, this exchange has been successfully achieved. The children of farmers that once toiled in the hot sun, now enjoy the luxuries of the middle class. Living in modern air conditioned high-rises and spending weekends browsing the aisles of well lit mega shopping malls, Chinese middle class life has become surprisingly western.
Thus China is naturally shifting to internal consumption, a trend that will hopefully provide a solution to declining growth rates and concerns of overcapacity. While this trend may eventually save the Chinese economy, dwindling exports and slow growth in the traditional infrastructure based industries remain a huge concern to Chinese leadership.
Enter China’s new dynamic strategy to combat slowing growth. Coined “China’s War Chest”, China’s vast foreign reserves stand at about $3.2 trillion U.S. dollars. Historically China has opted to store these reserves in U.S. Treasury bills but in recent times, China has utilized its wealth to drive foreign investments. This mandate has promulgated from the highest levels of the Chinese government and has affected every state owned enterprise and every outwardly focused industry.
Traditionally China’s inbound FDI’s far outpaced outward bound investments but that trend has shifted dramatically. According to Xinhua, the official news agency of China, outbound Chinese investments for Q1 of 2016 stood at approximately $40 billion U.S. dollars, a 55% increase year on year. The Chinese are pumping these funds into everything from retail brands for the growing middle class to investing in large infrastructure projects. This strategy firstly revolves around trying to find higher yielding investments than can be found domestically in China. Secondly, the Chinese are acquiring platforms and projects that can spur Chinese exports.
According to a joint report by the economic research firm Rhodium Group and the Berlin-based Mercator Institute for China Studies, with its high saving ratio, China may become the world’s largest cross border investor. China’s global offshore assets are predicted to triple from $6.4tn now to nearly $20tn by 2020, according to research.
S&S Capital Advisory has a network of Chinese entities that are seeking international foreign investments. Please feel free to contact us if you have any interest in the information that has been presented.