However, HSBC Bank Malaysia Bhd said there should be little impact in the long term and the One Belt, One Road initiative would be a key catalyst to accelerate China’s outbound investment flows.
HSBC noted that in 2016, the value of the renminbi depreciated over 6% against the US dollar whilst China’s foreign exchange reserves dropped sharply. Such magnitude of changes have caused concern for Beijing and global markets.
There is no easy solution, China’s policy makers have to either control speculative capital outflows or allow the renminbi to weaken further, which in turn would exacerbate the former.
China has chosen capital restrictions and the dilemma it now faces is that while the capital controls may ease depreciation pressures on the renminbi, they have also curbed the overall volume of outbound acquisitions and investments.
HSBC said this decision seemed like an uncomfortable turning point, it appears targeted and likely short term for the benefit of the wider economy.
“There are strong signals that Beijing is confident that their current approach will not impede or reverse China’s long-term overseas investment trend. President Xi Jinping has made it clear that China will continue to reach out to the world and invest in key sectors In the next five years China expects to invest 750 billion dollars overseas and ODI will continue to play a key part in supporting the country’s economic transition,” HSBC CEO Mukhtar Hussain said in a statement.
China’s ODI continues to surge, with a 44.1% year-on-year growth to US$170.11bil in 2016. The Belt and Road Initiative is bolstering cooperation between Chinese and foreign firms.
Outbound investment to countries involved in the initiative totalled US$14.53bil in 2016.
“We have seen Chinese companies expanding into high value-added sectors such as advanced manufacturing, real estate, finance, agri-business and healthcare sectors in order to improve their competitiveness in the global market as well as meet growing domestic demand,” Mukhtar said.
“Driven by this shift, the investment destinations for China are becoming increasingly diversified. On the one hand, Chinese demand for technology, services and consumer brands means that they will continue to gravitate to developed markets such as the UK, Germany and the US.
“On the other hand, Chinese investors may find new and more investment opportunities along the Belt and Road as a result of improving infrastructure and China’s economic and capacity cooperation with developing countries,” he added.
Currently, the Belt and Road Initiative is bringing in a new round of opportunities for China’s outbound investment, particularly in infrastructure construction – building roads, railways, bridges and ports across the Asia region.
In particular, large infrastructure investments require substantial capital support, but financing is often a challenge for most Asian countries.
Fortunately for China’s Belt and Road Initiative goals, seed funding for infrastructure projects along the Belt and Road will mainly come from China-led policy banks including the Asian Infrastructure Investment Bank (AIIB) and New Development Bank, as well as Chinese funds like the Silk Road Fund which have dedicated billions to support Belt and Road Projects.
Financial institutions including Chinese and foreign commercial banks also have key roles to play in facilitating this financing.
“The Belt and Road Initiative will deliver massive benefits to Malaysia in terms of infrastructure, connectivity, social facilities, better living standards and abundant business opportunities. Among the major projects under the initiative is the Malaysia-China Kuantan Industrial Park in Pahang, Melaka Gateway, East Coast Rail Link and Xiamen University Malaysia and more to come,” Mukhtar said.
Additionally, the growth in China’s ODI will also enhance the pace of renminbi internationalisation. Already a global trade, investment and reserve currency, the Belt and Road Initiative will drive an increased share of renminbi use in cross-border payments and financing be it in loans or through capital markets.
“China’s prospects of strong ODI growth remains sound. The country is continuing its steady integration with the global economy through a new phase of increased investment overseas, in particular as the Belt and Road Initiative picks up momentum.
“In the long term, China will be relied upon to be a leader in the next phase of globalisation to drive the world’s economic growth,” Mukhtar said.