Intercedent Insight – June, No Slowdown in Outward Investment

The clampdown on property speculation in China is starting to bite even though cooling measures were introduced more than a year ago.  As well, share prices for companies listed on the Shanghai and Shenzhen exchanges are under pressure recently.  Little surprise then that cashed up Chinese companies and affluent Chinese are showing increased interest in acquiring international assets.

As part of this trend, we have observed several recent moves by local real estate developers – representing some of the most cashed up local private companies - to diversify into resource projects.  Even though not their traditional area of expertise, these developers continue to believe in the growth story and the idea that raw materials supply remains the safest way to participate in China’s build-out while the local property sector remains subdued.  Interestingly, foreign resource investments are seen by them as more attractive which probably demonstrates the highly-regulated nature of local resource plays.

While this may be the flavour of the month, it is likely that many of these developers will turn their attention back to real estate – but, this time, in foreign countries – once they finally confront the complexities and long term returns of investing profitably in resources exploration and development.  In any event, we forecast that Chinese real estate investment in foreign markets will accelerate in the months ahead.  China Sohu, one of the largest local developers, is strategically on the lookout for foreign real estate acquisitions already and others will follow suit.

China-based local marketing companies are reacting quickly.  China’s biggest real estate website, Soufun, has been taking Chinese investors on tours of select Western cities now for several months and several local agencies are report ably setting up local arms to help buyers purchase homes abroad.  Clearly, not only companies but individuals are interested to look at the acquisition of real estate outside their home country.

China has been forced to evacuate around 30,000 of its citizens working for its invested projects there (mainly in the oil sector) since the conflict broke out.  This is having the additional effect of convincing the Chinese investment community to look harder at macro economic and political country risk.  Investment in the developed world where political stability and better legal regulation exists is in the process of making a comeback.

While the resources supply chain still remains the focus of Chinese investment abroad, interest is likely to expand beyond this to property and other sectors in the second part of this year and beyond.

The Chinese Ministry of Commerce reported during May that the country’s outbound foreign direct investment (FDI) grew 17.5 percent in the first four months of this year compared to the same period last year.  Ending April, the amount of total outbound FDI made over the years in the non-financial area was USD 272 billion.
 

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