CASHING IN OUTSIDE: Chinese enterprises are becoming global players, including Sinosteel Corp. that invested another $440 million in South Africa in February 2008

China's economic expansion is sizzling with its outward investment continuing to reach new highs. Chen Jian, Vice Minister of Commerce revealed at the Fourth East Asia Investment Forum that the first quarter of 2008 saw China's overseas direct investment rocketing by a dizzying 353 percent to $19.34 billion. This figure surpasses investment for the whole of last year.

This astonishing growth came as no surprise after a flurry of big deals were signed in recent months. In Africa, the Industrial and Commercial Bank of China paid $5.5 billion for a 20-percent stake in the Standard Bank of South Africa. In another move, the Aluminum Corp. of China teamed up with the U.S. aluminum producer Alcoa to buy a 12-percent stake in the Australian iron ore giant Rio Tinto. Staying with iron ore, Sinosteel Corp. paid $1.1 billion to take over Australia-based iron ore miner Midwest.

Li Huiyong, senior analyst with Shenyin Wanguo Securities Co. Ltd. told Caixun.com that Chinese enterprises are now more empowered to go global.

China's economic boom in recent years has seen the acquisition of a slew of companies, all internationally competitive, deep-pocketed and advanced in technologies and management.

This is in line with the country's development strategy of "going global." Since the 1990s, the Chinese Government has continuously encouraged domestic enterprises to invest overseas by providing favorable policies and extending direct guidance and help. Over the years, these enterprises have made big achievements in tapping domestic and foreign markets and resources.

From 2002 to 2007, China's overseas direct investment increased nearly seven times from $2.5 billion to $18.76 billion, representing an annual average growth of 60 percent. Its net overseas investment also leapt from 26th to 13th place in the world, outranking all other developing countries.

On the other hand, heightened domestic pressures also add extra incentives for Chinese enterprises to look abroad. First, they can leverage the cheaper labor and resources in some foreign countries to offset rising costs at home. Second, foreign expansion can drive up exports and avert a slump that may arise from a global economic slowdown.

"Some of my friends have invested in Viet Nam and Bangladesh, where the labor costs are much less than China. For example, a Bangladeshi worker is generally paid 300-400 yuan ($43-$57) per month while an ordinary Chinese textile worker earns more than 1,000 yuan ($143)," Chen Huiyong, General Manager of Dongguan Moon Light Co. Ltd., was quoted as saying by China Business News.

The government also hopes to encourage more capital outflows to reduce foreign exchange reserves and relieve appreciation pressure on the renminbi.

"Chinese exporters have suffered a huge loss from the renminbi's fast appreciation, but they should not be put off by risks but rather focus on the opportunities ahead," Fu Ziying, Vice Minister of Commerce, said at the Sixth Annual Conference of Chinese Import and Export Enterprises recently held in Beijing.

According to Fu, the subprime mortgage crisis ruptured the financial liquidity of the United States, and temporarily cash-strapped some U.S. private enterprises and institutions. This means a rare acquisition opportunity for Chinese investors. If taken over, some of these well-known brands, with strong global sales networks and leading research and development capacities, will significantly sharpen the international competitive edge of Chinese enterprises.

Meanwhile, foreign companies in financial distress may well welcome an infusion of Chinese capital, and see joining hands with a Chinese partner as a passage into the Chinese market.

History shows that Germany and Japan seized the moments of their currency appreciation and devaluation of foreign assets to expand outwards. They benefited tremendously from the interaction of trade and investment.

From a macro perspective, a swelling overseas direct investment is instrumental in curbing the explosion of foreign exchange reserves. Excessive capital inflow has in recent years become one of the problems ailing the Chinese economy. Latest statistics from the People's Bank of China show that China's foreign exchange reserves had escalated to $1.68 trillion by the end of the first quarter of this year.

Besides this, more overseas direct investment can also lead to a rational two-way capital migration and cushion the pressure of international payment surplus. Wei Benhua, Deputy Director of the State Administration of Foreign Exchange, said at a news conference that China will further broaden its foreign investment channels and support more transnational operations of domestic enterprises.

According to the Ministry of Commerce, East Asia has become one of China's largest sources of foreign direct investment, as well as a key area for China's overseas direct investment. By the end of 2007, China had received a total of $763 billion in paid-in foreign direct investment, 19.3 percent of which came from Southeast Asian countries, Japan and South Korea. Conversely, 1,950 Chinese enterprises had invested $3.52 billion in East Asian countries. Although that only makes up a tiny 4 percent of China's total overseas investment, it is certain to gain momentum in the future, said Chen Jian.

According to a report released by Xing Houyuan, Director of the Overseas Investment Research Center of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, China will speed up its overseas expansion in manufacturing, mining and the tertiary industry in the next five to 10 years. The government should reduce heavy taxation and loosen foreign exchange controls so that enterprises may easily secure financing to feed their expansion drive.

Chen Xiaohong, a researcher with the Development Research Center of the State Council, even projected that China's overseas direct investment could reach $50 billion by 2010, or even more.

Around 60 percent of China's top 500 enterprises have set off beyond borders. The overseas business volumes of some even outweigh their domestic proportion, according to Chen Xiaohong.

China has streamlined approval procedures for overseas investment and signed bilateral investment treaties with 118 countries and regions, Zhang Xiaoqiang, Vice Minister of the National Development and Reform Commission, told China Business News.

This would smooth the way for Chinese enterprises to seek foreign pastures, but more treaties on avoiding dual taxation, judicial assistance and products inspection are still needed, according to Zhang.