China’s outward direct investment (ODI) grew 9.6% year-on-year to US$75.4 billion in the first half of 2023 as its economy continued to recover, a new report finds.

Non-financial ODI amounted to US$62.3 billion, up 14.8% YoY, of which non-financial investment in Belt and Road countries reached US$11.6 billion, an increase of 15.4% YoY and representing 18.6% of the total, accounting major Ernst & Young says in its report, Overview of China Outbound Investment.

These investments were mainly directed towards countries and regions such as Asean, United Arab Emirates, Kazakhstan and Russia.

“Since the beginning of this year, China’s economic societies have resumed normal operations, and the economy has continued to recover, with a 5.5% economic growth in the first half, meeting expectations. The momentum for Chinese companies to go abroad has also strengthened, as ODI continues to grow,” says Loletta Chow, global leader of EY China Overseas Investment Network.

The upward trend is expected to continue. Chow notes that the Chinese government recently released Opinions on Promoting the Development and Growth of the Private Economy, which explicitly encourages private enterprises to expand overseas operations and actively participate in the Belt and Road Initiative (BRI).

“It also outlines support for guiding and assisting private enterprises in countering external challenges such as trade protectionism, unilateralism, long-arm jurisdiction and enhancing coordination among relevant departments to establish risk prevention and resolution mechanisms for the safety of private entrepreneurs and their overseas interests. EY believes that these measures will give confidence and assurance for [private enterprises] to boldly go abroad,” she adds.

M&A deals down

In H1 2023, Chinese enterprises announced overseas mergers and acquisitions totalling US$11.7 billion, the lowest for the same period in nearly a decade, representing a 14% YoY decrease. There were 224 deals during the period, down 13% from a year ago. The volume in the second quarter was down 33% from the previous three months, a new low for a single quarter in recent years.

Sector-wise, power & utilities ranked as the top sector in terms of deal value, with financial services and advanced manufacturing & mobility ranking second and third, respectively. The top three sectors accounted for 54% of the total deal value, with power & utilities experiencing a significant surge. In terms of deal volume, the top three sectors were TMT (technology, media & entertainment and telecommunications), advanced manufacturing & mobility, and financial services, accounting for 58% of the total.

Latin America recorded the largest M&A deal value by Chinese companies during the period, rising 1,737% YoY to US$3.2 billion. According to EY, China’s circle of friends in Latin America has been continuously expanding in recent years, with Brazilian President Luiz Inacio Lula da Silva’s visit to China in April 2023, Honduras establishing diplomatic relations with China, and China and Argentina signing a cooperation plan under the BRI.

In contrast, the announced M&A deal value in Europe was US$3 billion, the lowest in nearly a decade, with a YoY decrease of 44%, while in North America, it was down 28% at US$2 billion.

Top Asia destinations

In Asia, the total M&A deal value fell 61% to US$1.6 billion, with the number of deals down 3% at 87. The top three M&A destinations in Asia were Vietnam, Singapore and Japan, accounting for 64% of the total M&A deal value, with investments in Vietnam showing a counter-trend increase, with both the investment amount and number of deals increasing by over 200%.

Overall, investment activity has increased in Asean countries, with a YoY growth of 35% in the number of M&A deals. The main sectors for Chinese M&A in Asia were real estate, hospitality and construction, financial services, and advanced manufacturing and mobility. It is predicted that India and the Asean-5 countries (Malaysia, Indonesia, Thailand, the Philippines, and Singapore) will grow by 6.1% and 4.6% respectively this year, with the Philippines and Vietnam leading the region with GDP economic growth rates of 6% and 5.8% respectively.

“As China’s economic development continues to accumulate momentum, Chinese companies’ overseas expansion is expected to accelerate in the second half of the year,” Chow says. “However, companies should remain cautious about external challenges, such as continuous slowdown in international market demand, weaker-than-expected global economic recovery, increasing scrutiny on foreign direct investments, and the recent volatility in the RMB exchange rate, which requires more attention.”