As China enters a historic ‘new era’ in its economic, political, cultural and social development, KPMG China launched its new report on what this means for the business environment and the development of inward and outward foreign direct investment in 2018 and beyond at a closed-door meeting at the Diaoyutai State Guesthouse on 22 March 2018.

The new report, China Outlook 2018 – A new era, a new paradigm of globalisation, finds that the implementation of Present Xi’s ‘new vision of development’, the emergence of a ‘new economic cycle’ in China, and the implementation of a ‘new paradigm of globalisation’ – the so-called ‘China Solution’ proposed by the Chinese Government to address global economic disparities – will translate into recovery and steady growth in higher-quality investment into and out of China. This will support the ongoing transformation and upgrading of China’s economy, as well as the vitality and resilience of global trade and investment flows.

Attending the meeting, Bill Thomas, Chairman, KPMG International, said, “Without a doubt, China will continue to be an important source of growth for companies around the world – not only because of the ongoing expansion and transformation of its economy, but also because the ‘Belt and Road’ Initiative will lead to more win-win-win cooperation between Chinese and foreign companies in third-country markets.”

Below are some key findings from the report:

Inward foreign direct investment (FDI)

While growth in FDI has slowed down, we expect that as China transitions into a ‘new economic cycle’, the market and policy conditions for foreign investment will improve, leading to a rebound in high-quality FDI, eventually levelling out at a ‘medium-high’ rate of growth.

The key reasons underlying this view are: (1) a medium-high growth rate in an economy the size of China’s ‘underwrites’ demand for investment, an indispensable part of which will come from FDI; (2) more FDI is needed to support China’s economic transformation under the ‘new normal’; (3) the Chinese Government understands and is supportive of the important role that FDI can play to achieve China’s development goals; and (4) the Chinese authorities are actively managing key macroeconomic risks.

As China works to implement President Xi’s ‘new vision of development’, foreign companies need to consider three ‘fours’ when deciding their strategy and operating model for the Chinese market. First, four shifts in China’s advantages in attracting FDI; second, four changes in the structure of China’s FDI; and third, four new mindsets for investing in China in the ‘new economic cycle’. These are explained in the report.

Outward foreign direct investment (ODI)

We expect that China’s outbound investment will rebound and maintain a ‘medium-high’ level of growth for three key reasons:

• The emergence of a ‘new economic cycle’ and the continued expansion of the Chinese economy are bringing increased demand for outbound investment in high value-added sectors to ‘bring back’ technology, expertise and high-quality brands and products that can support China’s economic transformation and meet the evolving demands of Chinese consumers.
  
• The ongoing implementation of the ‘Belt and Road’ Initiative will become one of the main drivers of Chinese ODI going forward because of its centricity to the ‘new paradigm of globalisation’ initiated and advocated by China. This is why we expect the ‘Belt and Road’ region to become the fastest growing destination for Chinese ODI.
  
• The tightening of China’s regulatory oversight on outbound investment will support these strategic objectives and result in Chinese firms becoming more rational when investing overseas, focusing on making high-quality, value-adding investments.  

International cooperation

China is working with foreign governments, international organisations and the private sector to increase the supply of bankable infrastructure projects along the ‘Belt and Road’. As a result of these efforts, in future, international private capital will have more opportunities to invest alongside Chinese state capital, sovereign wealth funds and Chinese private capital in these projects. Greater participation from private capital will create opportunities for Chinese companies and companies from third countries – that is from countries other than China and the host country – in project advisory services, investment and financing, operating and managing the infrastructure assets, as well for suppliers of advanced equipment and raw materials.

Cooperation between Chinese and foreign companies in infrastructure development and building local industrial capacity across multiple sectors will be key to unlocking the social and economic development potential of ‘Belt and Road’ regions, while allowing companies to access new market opportunities, achieve synergies and manage risks. As such, this type of third-country market cooperation will become an important form of Chinese outbound investment under the ‘new paradigm of globalisation’ which is being advanced by China.

KPMG has developed a framework for potential partner countries and companies to evaluate the sectors and destination countries where cooperation with Chinese companies would have the potential to yield win-win-win outcomes.

“We hope that successful partnering between Chinese and foreign firms in international markets and in China, steady progress in providing greater market access and investment reciprocity, and the implementation of other important reforms in China will help Chinese companies build greater trust and understanding in host countries and with international stakeholders. This may go some way towards ameliorating suspicion of and resistance towards Chinese investment,” said Vaughn Barber, Global Chair, KPMG Global China Practice.

“Over the longer term, Chinese outbound investment and Chinese market demand will play a key role in the global economic recovery and the development of a new, more ‘inclusive’ model of globalisation, and will be important forces supporting global economic prosperity,” said Honson To, Chairman, KPMG China and Asia Pacific.

“The reforms announced by the Chinese Government to support foreign investment in China, enhance supervision and regulation of market conduct, improve the management of cross-border investment flows, and deepen financial system reforms will encourage two-way flow and connectivity of capital. Yet, they will also necessitate certain changes in mindset and conduct by investors when thinking about how to benefit from the drivers and trends underlying the emergence of the ‘new economic cycle’ and the ‘new paradigm of globalisation’,” remarked Benny Liu, Chairman, KPMG China.

“A key assumption underlying our analysis is that China does not suffer any major external geopolitical, security or economic shocks. Instead, by providing a view about the economic outlook in China, expected trajectory of reforms and business opportunities for Chinese and foreign businesses under this assumption, I hope the report provides a useful reference point for assessing the potential impact of trade and investment measures which have been proposed by some countries,” To concluded.

KPMG’s Global China Practice (GCP)

With dedicated teams in nearly 60 locations around the world, including countries and regions along the ‘Belt and Road’, the Global China Practice plays a leading role in ‘bringing China to the world’ and ‘bringing the world to China’.

We are passionate about facilitating Chinese outward direct investment (ODI) in meaningful ways, including by helping Chinese companies integrate into local business communities, and introducing them to potential partners in key overseas markets. The Global China Practice also enhances KPMG’s ability to serve foreign companies as they enter and grow in China. While many of our clients have been active in China for decades, the 13th Five-Year Plan represents an important turning point in the Chinese Government’s attitude towards foreign direct investment (FDI), and marks a new era of potential Sino-foreign cooperation in China. To succeed in the ‘new normal’ in China, foreign companies should review what contribution they can make to China’s ongoing economic transformation, align their value proposition and business strategies accordingly, and prepare for a shifting landscape of risks.

Through the Global China Practice, KPMG works alongside both Chinese and foreign companies as they navigate through dynamic business environments, shape business partnerships, and build platforms to achieve long-term market positions.