Chinese Outbound Investment Accelerates…

Recently a Swiss expatriate living in the Stanley area of Hong Kong decided to sell his 600-square-foot flat. The response was immediate and enthusiastic, and the flat sold in a single day to a buyer from Mainland China who turned up the next morning to sign the papers – bearing a carpetbag entirely filled with HK$1,000 bills.

In much of the world, that would be an unheard-of transaction. But in Hong Kong over the last two to three years, it has become commonplace as a flood tide of money rolls out of China to the territory. An estimated 40 percent of all property purchases have been made by mainlanders, who have by and large limited themselves to high-end purchases. The amount of property purchases is hard to quantify, because a lot of it is a grey market made up of bureaucrats and mini-tycoons who don't want the Chinese government to know about it. Stories abound among real estate agents of Chinese housewives appearing in Kowloon to buy five flats at once. Nor are the stories limited to Hong Kong. In Singapore, Jakarta and other cities across Asean, Chinese buyers are appearing with huge amounts of cash, driving up property values as they go.

Although asset prices in Hong Kong and Singapore appear to finally be moderating with the rally in the US dollar and tightening by the People's Bank of China, one Chinese investor who specialises in flipping Hong Kong commercial property told Asia Sentinel that there is still a lot of money around to keep commercial property moving for awhile. Property investment is officially a relatively small part of total Chinese outward FDI but it tends to be the most visible to the street. It is unknown how much of it escapes the eyes of the government, which has yet to update outward FDI figures in the Statistical Bulletin since the end of 2008 so much of the information is anecdotal. The urge to invest in property, partly a strong Chinese cultural imperative, could also be explained by the problems they have had investing elsewhere in corporates. Chinese investors are quite cautious and are more likely to seek joint ventures, finding it difficult to complete and integrate foreign acquisitions successfully.

Total Chinese outward FDI in 2008 amounted to US$55.9 billion, an increase over 2007 of 111 percent (Figure 1 shows the lagging OECD data up to 2006). By contrast, US outward foreign direct investment was US$65 billion during the third quarter of 2009 alone, a decrease of 17 percent because of the global financial crisis.

Figure 1: Chinese Outward Investment Skyrockets, but From a Minuscule Base

chinese outward investment skyrockets1

Source: OECD

Both trade and investment in Asean are expected to pick up noticeably with signing of a free trade agreement with China on 1 January 2010. Sundram Pushpanathan, an Asean Deputy Secretary-General told the ASEAN Roundtable 2010 last week that ASEAN-China trade reached over US$192 billion last year, and is growing annually between 24 percent to 30 percent.

However, the Chinese have had some severe setbacks in the region, exemplified by the failure by Chinalco in its US$19.5 billion bid to acquire the Australian Rio Tinto mining giant. They are involved to their distress in the so-called North Rail Project to rebuild an 80-km railway in Central and Northern Luzon, 80 percent financed by the Chinese Ex-Im Bank. The project is mired in vast cost overruns, delays, political problems, the task of resettling 200,000 squatters and allegations of illegal provisions of the contract. Sources in Manila say the Chinese are growing seriously discouraged. Likewise, in 2007, the Philippines government was forced to cancel a US$330 million contract with China's Zhongxing Telecom Equipment, or ZTE, to wire the government for broadband after evidence emerged that President Gloria Arroyo's husband would be a major beneficiary. An announced project to clear 1 million acres of Kalimantan territory in Indonesian Borneo for palm oil simply seems to have disappeared.

The Chinese usually – although not always – center their official investment into fields that play into their own needs, usually by state-owned companies, most of it to fit their own voracious requirements for inputs such as coal, oil, timber and foodstuffs. From 2004 to 2008, investment in agriculture, forestry, fisheries and husbandry rose from US$288 million to US$1.718 billion. Foreign direct investment in mining went from US$1.8 billion to US$5.823 billion.

Disappointed by the failure of some agriculture operations in Africa, the Chinese have accelerated their investment considerably closer to home. The World Bank reported in 2009 that Chinese investment in Laos now exceeds Thai investment, amounting to US$3.58 billion. According to Vientiane newspapers, at least 119 companies were looking at mining prospects in the Bolaven Plateau region for potash, copper, iron and zinc. ZTE has been licensed to produce 50,000 hectares of cassava in southern Laos, which may rise to 100,000.

According to a paper prepared last year for Springer Science + Business Media and the International Society for Plant Pathology by researcher David Fullbrook, China's Yunnan State Farms has the right to develop 166,700 hectares of rubber across four southern Laotian provinces. As much as 200,000 hectares of rubber have already been planted by Chinese companies. The Chinese are said to be developing similar operations in Cambodia and Burma, although figures are not available. In Indonesia, according to Reuters, the world's largest coal producer, Sinopec, Sinosteel, Minmetals and the China Investment Corp. sovereign wealth fund are all said to be seeking LNG projects, oil blocks owned by foreign companies, and coal mines, with some potential deals reportedly worth as much as $1 billion.

After normalizing relations with Vietnam, China's invested capital reported in licenses went from US$120 million in 1999 to US$2,673 billion, an eight-fold increase in the number of projects and a 22-fold increase in registered capital. According to Associated Press, projects include several to the infrastructure of industrial zones in Haiphong and Tien Gang Province, a US$33 million steel project in Thai Binh Province, the Haiphong industrial zone by the Shen Viet Joint venture company, and others. These projects have contributed to change the outlook of Chinese investments in Vietnam in recent times, and not always for the better. A plan to develop a massive Central Highlands bauxite plant to produce alumina in Lam Dong and Dac Nong Provinces has spurred protests by environmentalists and raised popular concerns of nationalism over exploitation by China.

The Statistical Bulletin of China's Outward Foreign Direct Investment only goes up to the end of 2008, and the anecdotal evidence is that major outflows really began in 2009. However, Figure 2 is an indication that FDI flows into the Asean region have been rising steadily,

Figure 2: China Outward Investment, 2003-08

US$ mn 2003 2004 2005 2006 2007 2008 Asia 1,505 3,000 4,375 7,663 16,593 43,548 Hong Kong 1,149 2,628 3,420 6,931 13,732 38,640 Singapore (3) 48 20 132 398 1,551 Macao 32 27 8 (43) 47 643 Indonesia 27 62 12 57 99 174 Vietnam 13 17 21 44 111 120 Thailand 57 23 5 16 76 45

Source: Statistical Bulletin of China

The Property Picture

"The main issue is language," said an independent property analyst. "That would make Hong Kong the first beneficiary, followed by Singapore and so on. But given the way relations between China and Taiwan are improving, I would expect Taiwan to see a flood of China capital inflow – as it is happening already."

Although there is a certain amount of opposition in Taipei, China and Taiwan are expected to sign an Economic Cooperation Framework Agreement in June that would allow for greater trade and investment between the two economies. Taiwan's house prices are expected to rise by as much as 15 percent over the next year and perhaps more, with the main impact in up-market residential, maybe hotels, and in commercial office space, as with Hong Kong. Over the past 12 to 18 months the mainland buying, particularly in Hong Kong, has gone to supporting prices, particularly in the premium market, and not allowing for downward adjustment. The pace has grown to the point where some old Chinese families in Indonesia, Singapore and other countries say they are becoming concerned that the influx of nouveaux riches from China will have a detrimental effect on their culture.

"In the case of Singapore and Hong Kong, there has been an increase in complaints from the sandwich (middle) class," the analyst said. "In Singapore, the government is attempting to allay fears and trying to push out more government housing and land supply for private developers." Concerned that a housing bubble was forming, the Singapore Monetary Authority ordered banks to increase down payments from 10 percent to 20 percent and introduced sellers' stamp duties on properties bought and sold within a year.

"In Hong Kong, they are thinking of bringing back the HOS again," the analyst said. The Home Ownership Scheme, discontinued in 2003, is designed to assist residents in buying subsidised public housing flats. However, as China continues to tighten and the US dollar continues to rise, Hong Kong's always-volatile property market may finally start to slow.