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Belt and Road – exploring a blueprint for steady growth in overseas investment

By EY

Executive Summary

With 15 years of rapid development, China has seen compelling achievements in overseas investment and China’s outward direct investment (ODI) flow ranked 2nd only to the United States (US) in 2016, rising from 26th in 2002. Against the backdrop of tightened capital control in China and increased global investment uncertainties in 2017, China’s ODI decreased by 32% on a year-on-year (YoY) basis to US$134 billion, reflecting a shift to a steady adjustment period.

In 2017, disclosed deal value of China overseas mergers and acquisitions (M&As) dropped to US$144.8 billion, down by 32% YoY. Despite a significant decline in Chinese overseas M&As, deal value in automotive and transportation, power and utilities, oil and gas and life sciences sectors posted a YoY increase, while technology, media and telecommunications (TMT) and diversified industrial products ranked the first two sectors by deal volume for two consecutive years. This shows even though the scale of China outbound investment decreased in 2017, investments in real economy still keep a steady momentum.

2017 was a fruitful year for the development of BRI. M&A deal value in the B&R countries disclosed by Chinese companies climbed to US$48.2 billion, up by 81% YoY, among which, M&As in ASEAN countries reached a new high, representing a quarter of the total deal value of Chinese overseas M&As disclosed. As a member of ASEAN and an important B&R country, Singapore attracted the most Chinese M&A capitals and replaced the US as the most popular destination for Chinese oversea M&As in 20176. Over the past few years, ASEAN’s economy has seen steady progress. Benefiting from ample human resources and extensive opportunities in infrastructure and other sectors, ASEAN is drawing increasing attention from investors. Looking forward, China and ASEAN are expected to further improve their relationship and expand broader cooperation in BRI. In Section 2 of this report, we will focus on the investment environment in three member countries of ASEAN – Singapore, Malaysia and Indonesia and their growth potential under BRI.

By the end of 2017, the US President Donald Trump signed a US$1.5 trillion tax bill into the law, seen as the most drastic tax overhaul in 30 years – the bill has been passed and come into effect since January 2018. EY has identified that the new policy will improve US investment attractiveness for Chinese companies via the reduced corporate income tax rate and the simplified US tax system. However, challenges always come with opportunities. In Section 3, we will find out how the US tax reform affects Chinese enterprises’ investment in the US.

In October 2017, the 19th Communist Party of China (CPC) National Congress was convened successfully. During the conference, BRI was not only established with high priority for future Chinese companies to go out, but also incorporated into the CPC Constitution, demonstrating China’s determination to promote BRI to achieve regional cooperation, build a new type of international relations and seek win-win outcomes with all countries involved. We believe that China will take a firmer step towards going out, while Chinese companies are expected to raise their competitiveness and influence and will do even better in the era of globalization.

1. 2017 review and outlook

Over the past 15 years, China has seen compelling achievements in overseas investment. Representing 13.5% of total global FDI outflows rising from 0.5% in 2002, China’s ODI has been increasing for 14 consecutive years from 2002 to 2016, which shows that Chinese companies are raising their profiles in global investment. In 2016, China’s ODI flow reached a new record high of US$196.2 billion and ranked second only to the US (US$299 billion).

In the context of complex global investment environment and tightened domestic regulation on cross-border investment, China’s ODI amounted to US$134 billion, down by 32% YoY. Along with a substantial drop, China outbound investment showed three characteristics, reflecting a shift from rapid expansion to a steady adjustment period.

Firstly, industrial structure continued to optimize, with investment focused on real economy sector. Against the backdrop of a significant decline in China’s ODI last year, investment mainly went to sectors closely related to the real economy, including leasing and commercial services, wholesale and retail, manufacturing and information technology sectors.

Secondly, investment is being stabilized and regain growth momentum at the year end. The decline of China’s nonfinancial ODI in 2017 H2 was 34 percentage points less than that in 2017 H1. In November and December, China’s nonfinancial ODI rose by 35% and 49% respectively, contributing to the narrowed YOY decline for the whole of 2017.

Thirdly, investments to B&R countries increased despite overall drop in China outbound investment. In 2017, Chinese companies made non-financial ODI of US$14.4 billion in 59 countries along the B&R, accounting for 12% of total non-financial ODI, up 3.5 percentage points YoY, while total value of newly signed overseas contracted projects amounted to US$144.3 billion, up 15% YoY…

2. The BRI is leading the way in pursuing opening up on all fronts

Policy coordination

  • 86 countries, regions and international organizations have signed 100 cooperation agreements with China on jointly building the B&R
  • By October 2017, China has signed bilateral tax treaties, agreements and arrangements with 106 countries and regions, within which 54 countries are along the B&R

Facilitates connectivity

  • During 2017, 3,600 China-Europe freight trains offered their services, surpassing the total number of combined runs from the previous 6 years
  • In 2017, China has signed contracted projects worth of US$144.3 billion with 61 countries along the B&R, accounting for 54% of total value and increased by 15% YoY

Unimpeded trade

  • In 2017, China’s imports and exports with B&R countries recorded a total value of RMB7.37 trillion, up 17.8% YoY
  • China is developing 75 overseas economic and trade cooperation zones along the B&R. Accumulative investment has exceeded US$27 billion, attracting nearly 3,500 companies to move in. This has also contributed US$2.2 billion taxes to the local countries and has created nearly 210,000 jobs

Financial integration

  • Chinese enterprises invested US$14.4 billion into 59 countries along the route in 2017, account for 12% of the total, up 3.5 percentage points YoY
  • AIIB has approved 24 projects and issued nearly US4.2 billion of loans since its opening in 2016
  • In 2017, China overseas M&As along the B&R achieved a record high of US$48.2 billion, up 81% YoY
  • The Silk Road Fund has committed nearly US$7 billion to 17 projects since its operation 3 years ago

People-to-people bonds

  • China reached agreement with 24 B&R countries on mutual academic degree recognition
  • The “Silk Road Scholarship” from the Chinese government offers no less than 3,000 new scholarships each year for students from B&R countries


3. US Tax Reform: the impact on Chinese enterprises investing into the US

On 22 Dec 2017, the US President Donald Trump signed a US$ 1.5 trillion tax bill into law in the US, seen as the most drastic tax code overhaul in 30 years. The bill came into effect since January 2018. One of the primary goals of the US Tax Cuts and Jobs Act (TCJA) is to encourage US companies to repatriate their retained profits from overseas back to the US through providing them a competitive tax regime, a move to create more jobs in the States. The following aims to analyze the specific implications of the TCJA on Chinese-funded enterprises who have US Inbound Investments. In general, as an overseas investment destination of Chinese-funded enterprises, the US will be more attractive due to the significant reduction in US federal corporate income tax rate and the simplifications of part of the tax regimes…

Conclusion and Outlook

In 2018, with the steady recovery of the world economy, marked increase in international trade and steady growth in China’s economy, the demand environment and development conditions for overseas investment generally favor Chinese enterprises. However, there are still many risks and uncertainties across the globe. China's overseas investment still faces many difficulties and challenges.

Under the complicated international situation, the BRI has a long-term perspective and endeavors to promote the building of a new type of globalization characterized by "openness, tolerance, inclusiveness and sharing" and to inject new impetus and new ideas into economic globalization. The resolution of the 19th NPC clearly proposed that the building of the BRI should be written into the Party Constitution, fully demonstrating China's determination and confidence in bolstering international cooperation in the B&R.

ASEAN countries are the priority and important partners for China in developing the BRI. At present, the ASEAN-initiated Regional Comprehensive Economic Partnership (RCEP), in which China is invited, is steadily advancing. In the future, it is expected to enhance the level of regional cooperation and to build up connectivity among B&R countries.

EY believes that in the future, Southeast Asia will form a closer economic partnership as the BRI strengthens. China and ASEAN countries will continue to bolster strategic mutual trust, strengthen good neighborliness and friendship, build an upgraded version of the China-ASEAN Free Trade Area, and increase the global competitiveness of industries in both ASEAN and China. Driven by the BRI, ASEAN will concurrently draw increasing attention from investors. On the other hand, although the US has always been one of the most important destinations for China overseas investment, with the recent implementation of Trump’s tax reform, Chinese enterprises will have new opportunities and challenges when investing in the US. Therefore, they should get a comprehensive knowledge of the details of the tax reform to effectively manage potential risks and seize underlying investment opportunities.

With roadblocks ahead, Chinese overseas investment has to keep breaking barriers while EY’s professional services continue to be at the service of Chinese enterprises.

Please click to read full report.

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