Chinese FDI to stabilize in the long run

China would continue to see an increase in outbound investment in the mid to long term driven by growing capital strength, and outbound investment will bring new impetus to China's economy, EY said in its latest "China Go Abroad" report.

"In the short term, as US withdraws its capital and focuses on the domestic market, Chinese capital will become the major sources of foreign investment in many overseas countries," said Loletta Chow, Global Leader of EY China Overseas Investment Network

“Trade frictions put higher requirements on Chinese enterprises’ development, which will accelerate the integration of related industries and push companies to transform and upgrade," commented Jesse Lv, Global Tax Leader of EY China Overseas Investment Network.

It also expects that high-tech and high value-added sectors, high-end service industries and consumer products will continue to be the focus of overseas M&A activity.

Chinese enterprises should, on the one hand, actively seek overseas investment in high-quality mineral products, crude oil and integrated circuits to secure strategic resources and key technology products from a supply chain perspective, the report suggests.

On the other hand, Chinese enterprises should also increase their research and development investment in fields such as integrated circuits, instruments and equipment to improve self-sufficiency and production capacity, while actively developing renewable energy and new-energy-related industries, thereby reducing dependence on related imports, it added.

At the same time, regulations are also becoming increasingly stringent as many developed countries have strengthened foreign direct investment screening, citing national security concerns.

The total value of Chinese outbound direct investment in the first half totaled 346.8 billion yuan (US$48.8 billion), a dip of 0.1 percent in yuan-denominated measures, amid heightened geopolitical tensions and regulatory updates, according to the Ministry of Commerce.

The total number of merger and acquisition deals dropped nearly 40 percent in the first half to 257, and their combined value was down 60 percent to US$20 billion.

China ranked second place in terms of outward direct investment in 2018, following Japan's leading position, according to the United Nations Conference on Trade and Development.

Yet given its rising economic size, China's proportion of outward direct investment as a share of GDP remains relatively low at 12.3 percent, which lags the global average of 38.6 percent.