Regional Distribution: Blossoming in Multiple Points

As of 2022, China's outward direct investment (ODI) stock and flow still showed a high degree of concentration, but regions with a relatively low share of stock funds had a better momentum in terms of flow, and the ODI flow showed diversification. According to the Ministry of Commerce's "2022 Statistical Bulletin on China's Outward Direct Investment," as of 2022, the regional distribution of China's ODI stock and flow was relatively concentrated, with investments in Hong Kong, China, accounting for nearly sixty percent. The proportion of funds flowing to "offshore financial centers" such as the British Virgin Islands, the Cayman Islands, and Singapore was also high. In addition to these, the countries and regions with a higher stock share included the United States (2.9%), Australia (1.3%), the Netherlands (1.0%), and Indonesia (0.9%). Comparing the flow share and stock share in 2022, it can be observed that the proportion of funds flowing to the British Virgin Islands and the Cayman Islands has significantly decreased, while the proportion of funds flowing to regions such as Hong Kong, China, Singapore, the United States, Indonesia, Luxembourg, the United Kingdom, and Macao, China, has significantly increased. Furthermore, regions with a relatively low stock share, such as Turkey, South Africa, Cambodia, and Nigeria, have seen their flow share enter the top 20, reflecting a further diversification of China's ODI flow.

As of 2023, Chinese enterprises' overseas mergers and acquisitions (M&A) activities have truly "blossomed in multiple points," with "niche" destinations such as Canada, Peru, and Kazakhstan entering the top ten. According to EY analysis, in 2023, the top ten destinations for Chinese enterprises' announced overseas M&A covered North America (Canada, the United States), Europe (the United Kingdom, Germany), Oceania, Latin America (Peru), Southeast Asia (Singapore, Indonesia), Central Asia (Kazakhstan), and East Asia (South Korea), with a very wide distribution. Among them, the funds in many countries or regions have achieved significant growth compared to 2022. For example, the M&A amount in Canada increased from $80 million to $5.75 billion, surpassing the United States to become the largest destination for Chinese enterprises' overseas M&A that year. Peru, with no M&A records in 2022, obtained $3.2 billion in 2023 (mainly invested in the power industry), entering the top five. Kazakhstan's amount increased from $130 million to $2.31 billion, ranking seventh. In addition, the United Kingdom, Australia, Germany, and Indonesia have all achieved more than 100% year-on-year growth in cross-border M&A funds, while the United States' amount remained basically the same year-on-year, and Singapore's amount was halved.

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China has actively established cooperative relations with a series of emerging market countries in Asia, Latin America, and other regions, greatly expanding the space and gradient of China's outward direct investment. According to EY analysis, in 2023, China established new relationship positionings with a total of 18 countries, of which 8 were Asian countries, namely Singapore, Vietnam, East Timor, Kyrgyzstan, Turkmenistan, Palestine, Georgia, and Syria. In addition, starting from 2024, Saudi Arabia, Iran, and the United Arab Emirates in Asia officially joined the BRICS cooperation mechanism. In 2023, China's relations with Latin America developed steadily, enhancing relations with Venezuela, Colombia, Uruguay, and Nicaragua; by the end of 2023, China had also attracted 22 Latin American countries to join in the joint construction of the "Belt and Road Initiative." It is expected that in the future, China and Latin America will continue to expand cooperation in areas such as infrastructure, energy and electricity, and social welfare.

Since 2019, among the main investment regions, the proportion of ODI funds in Hong Kong, China, and Europe has slightly decreased, while the proportion in ASEAN and the United States has increased. We further observe the changes in the ODI share of the four major regions of Hong Kong, China, ASEAN, Europe, and the United States in recent years. The ODI share of Hong Kong, China, has generally remained at a high level, decreasing since the pandemic, from 66% in 2019 to below 60% from 2020 to 2022; the share in Europe has remained stable, with an average share of 6.9% from 2020 to 2022, slightly lower than the 7.7% in 2019; the share in ASEAN has clearly increased, rising from 9.5% in 2019 to 11.4% in 2022; the share in the United States has also actually increased, from 2.8% in 2019 to 4.5% in 2022.

The performance of ODI in Hong Kong, China, is a "barometer" of China's outward investment, and in recent years, the attractiveness of Hong Kong's local funds to mainland capital has increased. The scale of mainland China's ODI to Hong Kong has maintained a relatively fast increase from 2009 to 2016, then experienced a phased decline, and rebounded after 2020. It is worth mentioning that the trend of mainland China's ODI to Hong Kong has been basically consistent with the overall trend of China's ODI. Since ODI to Hong Kong not only includes funds ultimately flowing to Hong Kong but also includes funds reinvested in other countries and regions through Hong Kong, the performance of ODI to Hong Kong largely reflects the overall demand for China's ODI. However, judging from the performance of China's ODI flow in 2022, against the backdrop of a decline in the proportion of flows to offshore financial centers such as the British Virgin Islands and the Cayman Islands, the proportion of ODI flows to Hong Kong has continued to increase, reflecting the increased attractiveness of Hong Kong to mainland capital. In recent years, with the continuous advancement of the construction of the Guangdong-Hong Kong-Macao Greater Bay Area, the economic and financial cooperation between mainland China and Hong Kong has been continuously strengthened, directly or indirectly promoting the willingness of mainland enterprises to invest in Hong Kong. In January 2024, the People's Bank of China and the Hong Kong Monetary Authority launched the "Three Connects, Three Facilitations" policy; in July, the Hong Kong Special Administrative Region Government stated that the two sides had completed negotiations on further opening up trade in services under the Closer Economic Partnership Arrangement (CEPA), and it is expected that the agreement will be formally signed and implemented soon.

The rapid growth of China's ODI to ASEAN fully reflects the demand for "nearshore, friendly shore" industrial chain layout. Since 2019, China's ODI to ASEAN has accelerated, with an average level from 2020 to 2022 increasing by 39% compared to 2019, among which Vietnam and Indonesia increased by 17% and 67%, respectively. Since 2019, Chinese enterprises have increased their direct investment in ASEAN, largely due to the signing of the Regional Comprehensive Economic Partnership (RCEP) in 2020 and its official entry into force in 2023. According to the Ministry of Commerce, in 2023, China's non-financial direct investment flow to other RCEP member countries reached $18.06 billion, a year-on-year increase of 26%, 14 percentage points higher than China's global growth rate. In the same year, Chinese enterprises enjoyed $90.52 billion in imports under the RCEP, with tax concessions amounting to $236 million.

China's investment in Europe has generally maintained resilience, with investment in the United Kingdom increasing and investment in the European Union decreasing. According to the Ministry of Commerce data, since 2019, China's ODI in Europe has continued to maintain above $10 billion. In terms of structure, China's investment in the United Kingdom has shown a significantly better growth trend than in the European Union. The proportion of China's ODI in the United Kingdom among all European regions increased from 10% in 2019 to 27% in 2022, while the proportion of the European Union decreased from 102% (due to net outflow of funds in non-EU and UK regions) to 67% in 2022. In recent years, China's investment momentum in the United Kingdom has been good. According to the Ministry of Commerce, since 2021, a new batch of Chinese investment and financing projects have been implemented or steadily advanced in the United Kingdom, involving green finance, new energy, healthcare, and digital technology fields. According to EY analysis, in 2023, Chinese enterprises announced overseas M&A in the United Kingdom amounting to $3.93 billion, a significant year-on-year increase of 172%, about twice that of Germany ($1.99 billion).

China's investment in the United States shows a weak recovery, while investment in Mexico grows rapidly, reflecting Chinese enterprises' active breakthroughs amidst Sino-American economic and trade uncertainties. Since 2019, China's ODI in the United States has bottomed out and rebounded, but it is still significantly weaker than the level before 2018. At the same time, Canada has also absorbed a relatively limited amount of Chinese capital in recent years. In contrast, China's investment in Mexico has grown significantly, reaching $490 million in 2022, a year-on-year increase of 111%, and a 199% increase compared to 2019, with the investment amount exceeding that of Canada. Since the Sino-American trade friction in 2018, Chinese enterprises have increased their investment in Mexico. On the one hand, this is due to Mexico's relatively complete industrial system, good geographical location, and sufficient labor force. On the other hand, as a member of the United States-Mexico-Canada Agreement, it has tariff advantages and is an important part of the North American value chain. According to data from the United States Department of Commerce, in 2023, the total imports from China to the United States were $427.2 billion, a year-on-year decrease of about 20%, while Mexico's exports to the United States were $475.6 billion, a year-on-year increase of 5%.Industry Distribution: Acceleration in Manufacturing

As of 2022, China's outward direct investment (ODI) stock was primarily concentrated in leasing and business services, as well as wholesale and retail sectors. However, the proportion of manufacturing (mainly equipment manufacturing) and transportation and logistics has been increasing rapidly. According to data from the Ministry of Commerce, as of 2022, the top five industries in terms of ODI stock in China were leasing and business services, wholesale and retail, finance, manufacturing, and mining, which also happened to be the top five industries in terms of ODI flow for that year. Comparing the industry proportions of flow and stock in 2022, there was a significant decline in the flow of industries such as leasing and business services, TMT (Technology, Media, and Telecommunications), and real estate, while there was a noticeable increase in manufacturing, transportation, storage, postal services, and finance. Looking further into manufacturing, in 2022, investments directed towards the manufacturing sector amounted to $27.15 billion, a year-on-year increase of 1.1%, accounting for 16.6% of the total industry ODI. The main investment destinations were specialized equipment manufacturing, automobile manufacturing, other manufacturing, computer/communication and other electronic equipment manufacturing, metal products, pharmaceutical manufacturing, etc. Among these, investments flowing into the equipment manufacturing sector were $14.61 billion, a year-on-year increase of 3.5%, accounting for 53.8% of the manufacturing ODI investments.

In recent years, the proportion of ODI in China's manufacturing sector has increased rapidly, contrasting with the decline in manufacturing foreign direct investment (FDI). The differentiated development demands of the domestic and international manufacturing industries are the economic logic behind the "going global" trend of Chinese manufacturing. Observing the changes in the proportions of leasing and business services, wholesale and retail, and manufacturing in China's ODI, the proportion of leasing and business services decreased from 30.6% in 2019 to 26.7% in 2022, while the proportion of wholesale and retail decreased from 14.2% to 13.0%. In contrast, the proportion of manufacturing increased from 14.8% to 16.6%. Over a longer period, the proportion of manufacturing ODI has risen significantly since 2014, reaching a peak of 18.6% in 2017. In our report "New Features and Trends of China's Foreign Direct Investment," we pointed out that from recent years up to 2022, the proportion of manufacturing and real estate in China's FDI has been declining year by year, which is basically in line with the trend of the proportion of manufacturing in China's GDP. This is the result of the upgrading of the manufacturing industry and the servitization of manufacturing. At the same time, the urgency of China's manufacturing capacity moving overseas and serving overseas demand has increased. According to World Bank data, since 2014, the proportion of China's manufacturing value added in GDP has decreased by 4.2 percentage points, to 26.2% in 2023. During the same period, Vietnam and Mexico's data increased by 3.5 and 1.9 percentage points, respectively, to 23.9% and 20.2%, while the EU slightly increased by 0.3 percentage points, to 15.0%.

As of 2023, Chinese companies' overseas mergers and acquisitions (M&A) have mainly targeted high-tech industries such as TMT, advanced manufacturing, and healthcare. At the same time, resource-based industries such as mining, oil and gas, electricity, and public utilities have seen rapid growth in their layout. According to EY analysis, as of 2023, the top three industries in terms of Chinese companies' overseas M&A transaction value are TMT, advanced manufacturing and transportation, and healthcare and life sciences, accounting for 53% of the total transaction value. In terms of growth rate, the aforementioned three major industries all achieved double-digit growth year-on-year, while the fifth-ranked mining and metals industry saw a significant increase of 31% year-on-year. In addition, except for the financial services industry, most industries announced M&A amounts have increased to varying degrees, with the oil and gas and consumer goods industries showing larger increases, and electricity and public utilities achieving double growth in both amount and quantity. In the countries participating in the "Belt and Road" initiative, Chinese companies' M&A mainly focused on advanced manufacturing and transportation, electricity and public utilities, and TMT industries, accounting for 62% of the total M&A amount of Chinese companies in the "Belt and Road" initiative.

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Regions and Industries: Tailoring to Local ConditionsConsidering the comprehensive regional and industrial distribution characteristics, in China's Outward Direct Investment (ODI) stock, the proportion of manufacturing investment in ASEAN, the EU, and the US is relatively high. According to data from the Ministry of Commerce, as of 2022, in the ODI stock of China, for the six key industries we selected, the regions with a higher proportion of leasing and business services are China Hong Kong and the "other regions" excluding China Hong Kong, ASEAN, the EU, and the US; the regions with a higher proportion of wholesale and retail trade are China Hong Kong and ASEAN; the regions with a higher proportion of finance are the US and China Hong Kong; the regions with a higher proportion of manufacturing are ASEAN, the EU, and the US; the regions with a higher proportion of mining are the EU; the regions with a higher proportion of software and information technology services are the "other regions" excluding China Hong Kong, ASEAN, the EU, and the US.

Looking at the merger and acquisition (M&A) announcements in 2023, Chinese companies mainly invest in high-tech industries such as TMT and healthcare in the US and Europe, and mainly focus on resources and consumer goods industries in Asia and Australia. According to EY analysis, in 2023, in China's overseas M&A layout in Asia, the M&A amounts in natural gas, advanced manufacturing and transportation, and consumer goods industries recorded relatively fast growth year-on-year. The popular investment industries of Chinese companies in Europe are TMT, advanced manufacturing and transportation, and healthcare and life sciences, with the main investment destinations being the UK, Germany, Poland, and the Netherlands, accounting for 83% of the total M&A amount announced by Chinese companies in Europe. The main investment directions of Chinese companies in North America are TMT (51%) and healthcare and life sciences industries (24%). The main investment industries in Australia are consumer goods and mining and metals, each accounting for about one-third.