China’s total non-financial outward foreign direct investment (OFDI) in 2015 was US$118.0 billion, an increase of 14.7% compared to 2014. About 12.6% of the investment flowed into “One Belt, One Road” countries. The China Institute dataset indicates that Chinese investment in Canada in the fourth quarter of 2015 amounted to CAD$1,674.1 million through 21 portfolio and direct investment transactions, bringing the cumulative Chinese investment inflow in Canada to CAD$65.6 billion. The value of new Chinese investment in Canada in Q4 was the highest of all quarters in 2015, marking the third straight quarter of investment growth. This report reviews recent trends in Chinese investment flows to Canada, key developments in China’s outward investment policy, and other notable events regarding Chinese global investment.
New features of Chinese investment in Canada: Due to continuing low commodity prices, the energy sector and the metals and minerals sector were no longer priority targets for Chinese investors. The majority of China’s OFDI went into the automotive and aviation sector and the transportation and construction sector in Q4, with the two sectors accounting for around two thirds of the total investment in the quarter. In addition, investment in the entertainment and real estate sector was larger than the energy sector for the second straight quarter. Chinese private investors outperformed state-owned enterprises for another quarter, beating the already historical high investment by private enterprises seen in Q3 2015.
Promoting the manufacturing and equipment industry going global: The Chinese government has made great efforts to facilitate and boost the Chinese manufacturing and equipment industry’s efforts to invest abroad. China’s economic growth is slowing down in the context of slow growth in the global economy and trade. It seems that China is also gradually rebalancing its industry structure, shifting away from “over-heating” manufacturing sectors and towards consumption and services sectors. Promoting international production capacity cooperation and encouraging the manufacturing and equipment industry to invest overseas will likely be an important theme for China’s OFDI for the foreseeable future.
Chinese investment reaches a broader range of countries: Along with the implementation of “One Belt, One Road” initiatives, China has been investing in about 50 “One Belt, One Road” countries, and has signed a variety of cooperation agreements with dozens of countries. Those countries mainly cover Central and Eastern Europe, Africa, the Middle East, and the Pacific Rim. Furthermore, as the Asian Infrastructure Investment Bank (AIIB) is starting to function in 2016, China’s infrastructure investments along the “One Belt, One Road” will receive great financial support from the AIIB. This may help China’s OFDI reach a higher level.
The value of new Chinese investment in Canada in Q4 2015 was the highest of all quarters last year, with the CAD$1,674 million recorded marking the third straight quarter of investment growth, compared to Q3’s CAD$1,259 million. This sizable increase between quarters occurred even in the context of a slight dip in the number of completed transactions, from 22 in Q3 to 21 in Q4. Nearly half of this quarter’s investment total came from one deal, the CAD$800 million Johnson Electric–Stackpole International deal.
Over the course of all of 2015, CAD$3,689 million in China-Canada investment occurred, a slight increase from the CAD$3,428 million in 2014. The number of deals was also similar, with 66 deals in 2014 rising to 69 deals in 2015.
The bulk of Q4’s investment came from M&A deals, with CAD$1,352 million invested in 11 transactions. This amount brought 2015’s total value of Chinese M&A investment to CAD$2,732 million, almost the same as 2014’s CAD$2,745 million. The number of these M&A deals increased between years, from 39 in all of 2014 to 47 the succeeding year.
There was only one joint venture deal, valued at CAD$190 million, in Q4 2015. Along with another much smaller transaction in 2015, the total for joint venture investment stands at CAD$194 million, which is less than half of 2014’s CAD$522 million from six deals. This made joint ventures the type of Chinese investment into Canada with the greatest decrease in value between years.
There are three cases of greenfield investment in Q4 2015, with a combined value of CAD$104 million, while 2015’s total was CAD$522 million from six deals. In contrast, 2014’s greenfield investment total was CAD$123 million in nine deals, meaning greenfield investment saw the largest increase in value of all types of investment between 2014 and 2015.
Six portfolio investment deals in Q4 2015 resulted in CAD$28 million in investment, for a yearly total of 14 deals and CAD$242 million; 2014’s totals were slightly lower in deal number and significantly lower in total value, with that year seeing 12 portfolio investment transactions and CAD$38 million.
Of the CAD$1,674 million in Chinese investment in Q4, the majority went into either the automotive and aviation sector or transport and construction sector, which saw a small number of deals lead to large dollar values: with only two deals into the automotive and aviation sector and one deal into the transport and construction sector in Q4, the total invested in each sector was CAD$804 million and CAD$451 million respectively. Automotive and aviation investments hiked nearly tenfold from CAD$78 million in 2014 to CAD$821 million in 2015 and also increased in number of deals, from two to four. Transport and construction had CAD$501 million invested over two deals in 2015, while the year prior had seen no investment.
Of the other sectors, investment in Q4 occurred in entertainment and real estate (CAD$290 million in three deals), information technology (CAD$76 million in three deals), energy (CAD$25 million in four deals), health and biotechnology (CAD$25 million in three deals), metals and minerals (CAD$2 million in one deal), industrial and electronic equipment (CAD$1 million in three deals), and financial and business services (one deal with an unverifiable value).
Canada’s entertainment and real estate sector had the highest number of transactions in 2015, with 15 that year compared to nine in 2014; it also had the greatest increase in Chinese investment value, from CAD$215 million in 2014 to CAD$1,384 million invested in 2015, becoming the largest sector in terms of Chinese investment in 2015. The second largest, transport and construction, increased from no investment in 2014 to CAD$501 million in 2015, while the third, energy, saw a significant decrease down from CAD$2,370 million in investment in 2014 (when it made up the majority of Chinese investment into Canada) to CAD$458 million in 2015, the largest decrease in value in any sector. No recorded investment in the agriculture and food sector occurred in 2015.
Private (as opposed to state-owned) investment was the source of almost all Chinese investment into Canada in Q4 2015, at CAD$1,556 million in 16 deals. With 53 deals totalling CAD$2,567 million, it was also the source of the large majority of investment in 2015, up from 39 deals totalling CAD$1,764 million in 2014.
In contrast, state-owned investment resulted in CAD$104 million invested in Canada by way of two deals in Q4 2015, and CAD$691 million invested via seven deals for all of 2015; the latter a significant drop from the CAD$1,546 million in 15 deals that came about in 2014 due to state-owned investment.
Notably, state-owned enterprises made no recorded investments into the Canadian energy sector in 2015, whereas they were behind six investments totalling CAD$1,513 million in 2014. The majority of their investment activity went into metals and minerals: CAD$187 million in four deals. In comparison, 2014 investment by state-owned enterprises into metals and minerals was CAD$11 million in seven deals. However, the majority of the money invested by state-owned enterprises in 2015 flowed to Canada’s entertainment and real estate sector, which had two transactions that led to a combined total of CAD$500 million. The same sector had no state-owned enterprise investment activity in the year before, 2014.
With twelve transactions, in total coming to CAD$185 million, the information technology sector was the most frequent target for Chinese private firms’ investment in 2015, an uptick in activity from 2014’s two transactions, worth CAD$2 million. Another sector with significant private Chinese firm activity is the energy sector, where nine transactions led to CAD$235 million in investment in 2015; however, eight transactions in 2014 led to a much greater CAD$846 million, reflecting private firms’ much larger energy deal values in 2014 as opposed to 2015. The entertainment and real estate sector also had nine transactions by private firms in 2015, for a total of CAD$685 million, the second largest sector in terms of money invested that year; this was up from 2014’s three transactions leading to private investment of CAD$112 million in the same sector. Finally, the sector with the largest amount invested by private Chinese firms in 2015 was the automotive and aviation sector, where three deals led to CAD$817 million in investment; 2014 had two deals lead to just CAD$78 million.
Recent policy developments emphasize the Chinese government’s efforts towards promoting the manufacturing and equipment industry to “go global” and supporting the “One Belt, One Road” initiatives. The Ministry of Industry and Information Technology (MIIT) is developing a strategic framework for those in the manufacturing industry who are seeking opportunities overseas. MIIT has been working with the China Development Bank to support more than 30 major projects, and MIIT will further boost OFDI from high-end value-added manufacturing and equipment enterprises. High-speed rail, nuclear power generation, and ultra-high voltage grids, among others, are good examples of China’s comparative advantages that could lead to increased OFDI.
The Chinese government will develop and implement policies to support private companies “going global,” according to Premier Li Keqiang’s speech at the 13th Session of the 12th National Committee of the Chinese People’s Political Consultative Conference. The cost of going global for private companies is normally higher than for state-owned enterprises (SOEs), partly due to better policy support and lower capital costs for SOEs. Premier Li indicated that private companies should be offered similar level of support from the government.
In addition to efforts by the Chinese central government, many local governments actively developed policies to support and encourage local firms to “go global,” especially within those provinces participating in “Belt and Road” initiatives. For instance, Jiangxi Province drew a “go global roadmap,” providing guidance and references for local companies. Other examples of active local governments include the Province of Shandong, the Province of Guangdong, the City of Nantong, and the City of Xi’an.
The State Council issued the Opinions on Speeding up the Implementation of Free Trade Zone Strategy (the Opinions) on December 6th, 2015. The Opinions proposed to comprehensively utilize both domestic and overseas market and resources, and build a high standard Free Trade Zone network with neighboring countries, influencing the “One Belt, One Road” countries and the world. It will also assist in liberalizing and facilitating bilateral trade and investment.
Aiming to improve regulatory transparency and efficiency, China’s State Council plans to introduce a series of “negative lists”, whereby equal and open market access will be granted to investments in “industries, fields and businesses” that are not listed. Sectors pertaining to “national security, the layout of national productive forces, the development of strategic resources and significant public interests” however will likely appear on the “negative lists” where access by investors will be either barred or limited. The lists will apply to both domestic and overseas investors, as well as foreigners investing in China. The new policy has a trial period from December 1, 2015 to the end of 2017 in Guangdong, Fujian, Shanghai, and Tianjin, which have free-trade zones, and will be implemented across the country in 2018.
Premier Li Keqiang proposed a “1+6” cooperation framework at the Fifth China and Central and Eastern European Countries Economic and Trade Forum on November 24, 2015. The framework outlines one target and six focuses, aiming for further cooperation on infrastructure development and production capacity building, and promoting both trade and investment. China and 16 European countries jointly published the Medium-term Plan for Cooperation between China and Central and Eastern European Countries and the Suzhou Guidelines for Cooperation between China and Central and Eastern European Countries at the meeting.
The Chinese government unveiled a second Chinese-African policy paper at the Forum on China-Africa Cooperation (FOCAC) Johannesburg Summit, opened on December 4th,, 2015. The new African policy entails treating African countries as equal partners, enhancing political, diplomatic, cultural and economic cooperation, and launching an ambitious industrialization program on the continent.
At the end of November of last year, mainland China signed two agreements, both titled the Closer Economic Partnership Arrangement Agreement on Trade in Services; one with Hong Kong, and the other with Macau. Both agreements are free trade agreements that allow the mainland to open fully trade in services through preferential treatment. With the implementation of the agreements, the mainland, Hong Kong, and Macau will essentially liberalize trade in services.
In this most recent quarter, the People’s Bank of China (China’s central bank) renewed three currency swap agreements with the central banks of the UK, Turkey and UAE. The swap amounts of the first two agreements were increased to 350 billion Chinese Yuan/35 billion British Pounds and 12 billion Chinese Yuan/5 billion Turkish Liras. The amount of the last swap agreement remained the same at 35 billion Chinese Yuan/20 billion UAE Dirhams. The renewal of swap agreements will further facilitate bilateral trade and investment between China and its partners, and strengthen financial cooperation between the central banks.
Besides policies for supporting China’s OFDI, the Chinese government also released measures to attract foreign investments into China. For example, China relaxed registered capital requirements for foreign invested enterprises. Since 2014, China had largely removed restrictions on registered capital of corporations in China, with the exception of foreign invested enterprises (FIEs). On October 28, 2015, the Ministry of Commerce of China issued the Decision on Amending Certain Rules and Normative Documents, removing inconsistency between the relevant rules applicable to FIEs and those that apply to corporations in China in general.
In November and December, the State Council approved granting a RMB50 billion quota to the UAE, Malaysia, and Thailand under the Renminbi Qualified Foreign Institutional Investor (RQFII) program. In addition, Singapore’s RQFII quota was doubled to RMB100 billion. All of these will further promote growing trade and investment relations between China and the above-mentioned countries, enhance capital market cooperation, and widen investment channels for overseas Renminbi funds in mainland China.
According to statistics released by the PRC Ministry of Commerce (MOFCOM) on January 20th, 2016, China’s total non-financial OFDI reached RMB5,400 billion (US$863.04 billion) by the end of December 2015. In 2015, the total non-financial OFDI increased by RMB735.08 billion (US$118.02 billion), which is 14.7% higher than the figure for 2014. Chinese non-financial direct investment to 49 countries along the “One Belt, One Road” was US$14.82 billion in 2015, 18.2% higher than 2014, with investment mainly flowing to Singapore, Kazakhstan, Laos, Indonesia, Russia, and Thailand. Below is a list of notable events regarding China’s OFDI activities in the last quarter of 2015.
On October 4th, 2015, the Trans-Pacific Partnership (TPP) negotiations among its 12 member countries were officially closed, marking a new standard in regional trade liberalization. Although China is not a member of the TPP, China’s Minister of Commerce Gao Hucheng spoke highly of the agreement in an interview. He also pointed out that China has been promoting its own free trade area network. On November 22nd, China and ASEAN upgraded their free trade area. On December 10th, 2015, China and Georgia officially launched their free-trade agreement negotiations. On December 20th, 2015, both the China-Australia and the China-Korea FTAs came into force simultaneously. According to a report from the Ministry of Commerce of the PRC, by the end of 2015, China had reached 14 free trade agreements with 22 countries and regions, including but not limited to the ASEAN countries, South Korea, Australia, Pakistan, Iceland, Switzerland, Chile, Peru, Costa Rica, New Zealand, Hong Kong, Macao, and Taiwan.
During Chinese President Xi Jinping’s state visit to the UK from October 20th to October 23rd, 2015, the two countries reached up to £40 billion (about US$61 billion) in deals in the areas of infrastructure, energy, automotive, R&D etc. Among the firms involved was state-owned China General Nuclear Power Corporation (CGN), which signed a £6 billion (about US$9 billion) deal with French energy firm EDF to take a 33.5% stake in the Hinkley Point C nuclear plant in Britain. The project would involve construction of a nuclear power station in Somerset, which could help create more than 25,000 local jobs. Recent news stories, however, have pointed to major delays in the project due to funding shortfalls. China and Britain signed several Memoranda of Understanding during Xi’s state visit to promote bilateral trade and investment cooperation and development cooperation. China’s trade and investment volume with Britain have been steadily expanding, and Chinese FDI in Britain has increased from US$1.35 billion in 2010 to US$12.8 billion in 2014. “A strong (investment and trade) relationship is in both our countries’ interests”, stated Britain’s Prime Minister David Cameron during President Xi’s state visit.
Africa is among the investment targets that China is most interested in. On December 4th, 2015, Chinese President Xi Jinping announced the three-year “10 Major China-Africa Cooperation Plans” (the Plans) at the opening ceremony of the Johannesburg Summit of the Forum on China-Africa Cooperation (FOCAC). President Xi also announced that China would provide aid totaling US$60 billion as financial support to implement the Plans. As part of the US$60 billion aid package, a China-Africa industrial capacity cooperation fund will be established, with an initial capital investment of US$10 billion, which will be invested mainly in sectors covered by the Plans such as manufacturing, hi-tech, agriculture, energy, infrastructure construction, and finance. The package also includes US$5 billion of free aid and interest-free loans, US$35 billion of preferential loans and export credit on more favorable terms, US$5 billion of additional capital for the China-Africa Development Fund, and US$5 billion of special loans for the development of African small and medium-sized enterprises. African officials welcomed the Plans with great enthusiasm. As China’s economy slows, China’s trade and investment in Africa has dropped significantly in the last year, with a 38% decrease of African exports to China relative to 2014 and a 40% decrease of Chinese FDI to Africa in the first half 2015. Although the Plans and US$60 billion in aid signal strong cooperative prospects between China and Africa, how the funds would be used and distributed remains unclear, which has raised concerns from some commentators.
On December 25th, 2015, the Asian Infrastructure Investment Bank (AIIB) came into being. AIIB is a multinational lender consisting of 57 members, with China as the biggest shareholder. AIIB mainly provides financing to Asian projects in areas of power, transportation, and urban infrastructure. The establishment of AIIB provides great financial support to China’s infrastructure investments along the “One Belt, One Road”. Meanwhile, to further facilitate the implementation of international capacity-building cooperation and the “One Belt, One Road” strategy, on December 9th, 2015, China released its “going out” public service platform website and the “Foreign Investment Cooperation Country (Region) Guide (2015 Edition)”.
According to the MOFCOM, China’s international cooperation in capacity building and equipment manufacturing is rising rapidly. In 2015, Chinese OFDI in transportation, electricity, telecommunications, and associated industries increased by US$11.66 billion, an 80.2% year-on-year increase compared to 2014. Meanwhile, Chinese OFDI in equipment manufacturing increased 154.2% year-on-year, with a total of US$7.04 billion.
By the end of 2015, the number of China’s overseas Economic & Trade Cooperation Zones that are under construction reached 75, half of which are closely related to international capacity cooperation. Chinese firms’ investments into those cooperation zones cumulated to US$7.05 billion, and there are 1,209 firms with subsidiaries in the cooperation zones. The total output value generated by firms in the cooperation zones reached US$42.09 billion, with US$1.41 billion in tax paid to the host countries. The development of cooperation zones by Chinese firms in host countries will help China’s traditional industries (such as textiles and household appliances manufacturing) accelerate transfer of their excess capacity overseas.
With the prolonged slump in oil and metal prices, the Canadian market has started to lose its attractiveness to Chinese investors, and China’s investment in North America has further shifted towards the United States. A report by Reuters confirmed that China’s sovereign wealth fund, the China Investment Corp. (CIC), will move its North American headquarters from Toronto to New York in early 2016, largely due to the poor performances of CIC’s investments in Canada. For example, CIC’s CAD$1.74 billion investment in Teck Resources Ltd, has lost 72% of its value and is now worth only CAD$492.3 million.
On the other hand, with the newly elected Liberal government in Canada taking office in November 2015, many expect that the trade and investment relationship between the two countries might improve. Canadian provincial-level visits to China have also increased. From October 10th to 16th, 2015, the Alberta Minister of Energy led a joint industry-government delegation to Shanghai and Beijing to strengthen the energy relationship with China. One of the outcomes of the mission included an expanded mandate for the 26-year-old China National Petroleum Corporation (CNPC)–Alberta Petroleum Centre. From November 5th to 13th, 2015, Premier of Ontario Kathleen Wynne visited China to promote trade and investment opportunities in Ontario. The mission has seen 100 agreements and MOUs signed, with an estimated total value of CAD$2.5 billion. There is also early indication of Chinese interest in the Canadian railway market: according to an announcement by Toronto’s KWG Resources on December 29th, 2015, the state-owned China Railway First Survey & Design Institute Group (FSDI) plans to embark on a feasibility study of an ore-haul railway for the Ring of Fire chromite project. Though market signals are mixed, many observers agree that the two economies would both benefit from more engagement and collaboration in the long run.
China’s OFDI manages to maintain a high, double-digit growth rate despite the fragility in the global economy in the last quarter of 2015. However, China’s economic growth slowed to a 25-year low, at 6.9% in Q4 2015, and an even lower growth rate in 2016 is forecast by economists. This may raise doubts about China’s capacity for outward foreign investment in the near future. However, we would anticipate China’s OFDI to continue increasing over the next few years, thanks to the Chinese government’s efforts towards “promoting international production capacity cooperation” and “One Belt, One Road” initiatives. Chinese enterprises also have incentives to export their excess production capacity by investing overseas, a consequence of slowing economic growth and a sluggish domestic market.
Strong growth of investment in the manufacturing industry is a recent highlight of China’s OFDI. The rapid growth was largely associated with the “equipment going global” campaign. About half of the investment flowed into the equipment industry. Increasing overseas Chinese investment in the manufacturing industry is expected for a few years, as China is slowing down its “over-heating” industrial output at home due to concerns about the domestic economy, environment, pollution and depletion of natural resources. “One Belt, One Road” initiatives have been boosting China’s OFDI across the broader world. Chinese enterprises have invested in 49 “One Belt, One Road” countries in 2015. Many new contracts and agreements have been signed; more investments will likely be observed in the following years.
Not only is China’s OFDI increasing fast, but China is still very attractive to inward foreign investment. China is becoming a major country with both high outward and inward foreign investment. Chinese OFDI will exceed US$1 trillion in five years, according to a speech by Premier Li Keqiang at a forum on economic and trade cooperation between China and Central and Eastern Europe countries. The average yearly investment in the next five years would almost double the amount of current annual OFDI.
 The deal was closed on July 15th, 2009.