Do drivers to China’s ODI growth spell trouble ahead?

HONG KONG - If the share of China’s global ODI stocks is not under-represented vis-à-vis its share of global GDP, what other factors could be behind this year’s surge in Mainland outbound flows?

In a special research report, BBVA says it has identified three drivers:

1) Access to technology: We could now be entering a phase whereby the need to access technology to facilitate a shift up global value chains becomes more important than securing natural resources. This would explain why many of China’s top investment destinations are developed economies.

2) Depreciation expectations: Another factor to take into consideration is expectations of future RMB depreciation. China has expended vast amounts of sovereign resources to support the RMB, fuelling fears of future depreciation. This may have prompted domestic actors to relocate capital resources overseas in order to hedge against a weaker RMB.

3) Geopolitical implications: Asia is recipient to most of China’s ODI. This is no surprise given China’s efforts to boost its economic and political clout in the region. MOFCOM defines this region very broadly, encompassing both the Middle East and Central Asia, both of which should continue to benefit from further inflows on governmental support for initiatives such as Belt & Road (B&R) and the Asian Infrastructure Investment Bank (AIIB).

“In sum,” says BBVA,  while we believe that Chinese ODI flows will continue to increase, headwinds abound in case a number of risk scenarios materialize in the future.

“For example, regulators in developed markets may tighten their scrutiny over Chinese deals. The latest wave of support for populist/isolationist policies does not bode well in this regard.

“Furthermore, large capital outflows could trigger Chinese authorities to revise their ODI policy, making it harder for Chinese corporates to shift funds overseas.

“Last but not least, it may take a few more years before Chinese initiatives such as B&R and AIIB come to fruition.”  www.bbvaresearch.com (ATI).