US, Singapore top destinations for Chinese investment in 2015
The US and Singapore are once again the most attractive destinations for Chinese outbound investment. This is the key finding of the 2015 China Going Global Index (GGI), published this year by the Economist Intelligence Unit.
The index, which was first launched in 2013, ranks the attractiveness of 67 major economies to Chinese firms. To capture the latest trends in investment, the 2015 GGI ranks countries based on 70 indicators, increased from 55 in previous versions. The new indicators cover areas such as agriculture, overseas contracted projects, quality of infrastructure, service industry and country credit risk.
The EIU says that since Chinese outbound direct investment (ODI) took off in 2005, annual outflows have grown at an average rate of 35% per year, reaching US$123bn in 2014. China is now the world’s third largest investor, only behind the US and Japan. However, while OECD data show that China’s share of global ODI stock remains small as it is still in early stage (China 2.3%, US 22% and Japan 4.5% in 2013), fast growth is expected in the coming years with strong government support.
Ireland remains heavily reliant on American FDI (foreign direct investment) and Ireland is not included among the 67 countries. The EIU says:
We have selected 67 countries that have sizable markets and active trading history with China for our analysis.
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Highlights of the GGI 2015 country rankings
Australia and South Korea enjoy improved rankings. Both feature in the top 10 destinations, reflecting the free trade agreements they signed with China in 2015.
EU countries and Canada have seen their rankings improve due to the inclusion of new indicators such as financial market, real estate, and the quality of infrastructure. The impact of the falling commodity prices has also been felt by countries such as Russia, Kuwait, Kazakhstan and Pakistan — all of whom saw their rankings tumble.
The EIU says political stability has also played a key role in this year’s rankings — Egypt and Portugal have both jumped in the rankings as a result of greater openness to foreign investment. Conversely, Taiwan’s ranking has fallen this year as it's anticipated that the recent change in government will mean that closer cross-Strait relations are likely to slow.
The “One Belt, One Road” (OBOR) initiative, which invokes ancient Silk Road trade routes with the rest of Asia, Europe and Africa, is a strategic priority for the Chinese government and while many countries along the OBOR route, such as Pakistan, Bangladesh and Kenya, are relatively risky destinations for investment, they scored highly in the index owing to the potential for getting Chinese government-directed funding.
Opportunities and risks
Based on their relative scores in the opportunity and risk pillars, the EIU classified all 67 countries into four groups. The analysis reveals a group of countries which offer high opportunities with limited risks. They are mostly developed countries, with the exception of Malaysia. Iran has low opportunity and a high risk score, but its ranking improved by four places due to a brighter macroeconomic outlook inspired by the lifting of sanctions on energy and financial sectors. The EIU says that the business environment for Chinese investors is likely to improve after a recent visit of Xi Jinping, Chinese president.
Yue Su, deputy economist of the EIU Access China said:
For Chinese ODI to keep up its momentum, firms will need to approach investment in a more sophisticated manner. In the past, Chinese investment exhibited a strong pro-cyclical pattern — firms bought natural resources when its economy was growing fast and, as a result, they found themselves often paying peak prices for commodities. A counter-cyclical approach and long-term thinking will be the key to success for future ODI.
CLSA, the Hong Kong brokerage, says that at the heart of One Belt, One Road project lies the creation of an economic land
belt that includes countries on the original Silk Road through Central Asia, West Asia, the Middle East and Europe, as well as a
maritime road that links China’s port facilities with the African coast, pushing up through the Suez Canal into the Mediterranean.