China increasingly investing abroad, but some not invited to the party

Outbound Chinese FDI 2013  2013-04-08Enlarge Graph

Chinese foreign direct investment (FDI) in February increased almost 150% versus last year, reflecting China’s commitment to expanding abroad.

The size of the Chinese economy can make or break economies that depend on Chinese demand for their exports. Even an economy as large as Brazil has now faced headwinds given reduced demand from China. Currently, the correlation between the Chinese and Brazilian market is close to 96%1.

The Chinese government recently released the data on FDI for February which showed that FDI into China grew six percent versus the previous year. What did not receive as much attention in the news is that China’s investments abroad increased 146% versus February 2012.

An increased investment from China in other countries naturally helps boost foreign economies and is also a sign that China is not headed for a hard landing, instead remaining relatively healthy. The increased volume of “south-south” trade2 in the world will benefit from this, with the Brazil-China trade being the poster child.

In terms of specific countries where China focused its investments, the largest recipient of investments was Australia,which grew 282% over January and February combined versus the same period the previous year. Australia has a large developed economy based on commodities, and China is the largest buyer worldwide of several commodities, copper being, likely, the most notable.

The investment in the U.S. and Europe also increased significantly, increasing 146% and 82%, respectively, over the period. Other investments were in China’s own backyard, increasing investment in Hong Kong by 156% and in southeast Asia by 114%.

Japan and Russia were not invited to the party. Due to the territorial dispute with China, investment in Japan fell 31% while Russia saw a decrease of almost 50%.

The Chinese government is increasingly focused on investment overseas to acquire and develop business and intellectual property that can continue to drive growth in China at above 7% per year.

The data is positive for equities in China (e.g. FXI, MCHI, HAO), Hong Kong (e.g. EWH) and their southeast neighbors, since it supports the case that the Chinese economy remains strong and can rebound in the medium term. Likewise, Brazil’s (EWH) economy will benefit from a strong comeback by China in the medium term. The data is yet another warning sign for Russia (RSX) where industrial production numbers plummeted recently, among other negatives.

  1. One year correlation of daily price returns for FXI and EWZ.
  2. South-south trade refers to trade between an emerging market and another emerging market, unlike the more conventional trade between an emerging market and a developed market.