BEIJING - China’s overseas investments are heading for an eight-year high as its dominant firms build more factories abroad, a shift that could soften criticism of Beijing’s export drive.

Chinese companies made 243 billion yuan (S$46.6 billion) in foreign direct investment (FDI) from January to March, data released last week showed. That was the highest first-quarter figure since 2016 – before a crackdown on capital outflows – and up almost 13 per cent from a year earlier.

Leading the push are firms in industries where China is racing ahead of rivals, such as electric vehicles (EVs) and solar energy. These investments may help to tamp down trade tensions – by creating jobs and economic growth in overseas markets, instead of flooding them with exports that threaten to put local producers out of business.

“China wants to produce overseas so the trade surplus is reduced and, most importantly, overcapacity is reduced,” said Dr Alicia Garcia Herrero, chief Asia- Pacific economist at Natixis. “I expect this pace to continue very aggressively. But they will still face protectionism.”

Geopolitical competition – especially with the United States and Europe – means investment from China may not always be welcome.

‘Huge suspicion’

Japan in the 1980s was able to use overseas investment by its world-leading carmakers to smooth diplomatic ties. But it was not a strategic competitor with the US in the way China is today. That means Beijing might not be able to follow suit, according to Professor Bert Hofman from the National University of Singapore and a former World Bank country director for China.

“There’s a huge suspicion against Chinese investments” in the US and Europe, he said.

There is no official breakdown yet for where investments in 2024 or the previous year have gone.

In 2022, about three-quarters of Chinese FDI was in Asia – though that figure is skewed because much of it goes to Hong Kong and is then rerouted to other countries, or even back to the mainland in what is known as “round-tripping”. Almost 17 per cent of investment was in manufacturing, the second-biggest single sector.

A separate report released this week showed a surge in Chinese manufacturing investment in Asean countries, which almost quadrupled in 2023. At US$26 billion (S$35.4 billion), it was nearly twice the combined total for US, South Korean and Japanese firms.

Chinese businesses have ploughed cash into processing key materials, such as nickel mines and smelters in Indonesia. They are making downstream investments, too. Chery Automobile this week announced plans to become the latest Chinese carmaker to set up a plant in Thailand, aiming to start EV production in 2025.

Chery signed another deal in April to take over an old Nissan factory in Spain and produce electric cars there. BYD, the world’s biggest EV maker, began work in March on a factory in Brazil – its first outside of Asia – and aims to start output by early 2025. It also has a big project in Hungary, which has become a hub of Chinese business activity in Europe.

Tariff workarounds

In the solar industry, Chinese manufacturers that dominate global production are looking to invest more overseas after many countries grew uncomfortable relying on a geopolitical rival for equipment that is vital to the energy transition.

Longi Green Energy Technology and Trina Solar have announced plans for factories in the US, where generous government subsidies are available as part of the Biden administration’s push to develop renewable power.

Some Chinese investments have been aimed at accessing the US market without incurring tariffs, according to Prof Hofman. Now “something similar is happening with the European market,” he said, amid expectations there will be more China tariffs imposed there, too.

Companies may also be factoring in the weak demand at home, as China’s housing slump weighs on consumer spending.

The increase in factory-building marks a shift away from the infrastructure investment that until recently was the centrepiece of Chinese spending overseas. It is not necessarily a geographical change, because investment in countries that are part of Beijing’s Belt and Road Initiative reportedly hit a record in 2023.

But since the pandemic downturn, a lot of Chinese lending that financed infrastructure has gone sour – while countries in Africa and Asia are looking to restructure and lower their debts. That has triggered a reversal in the flow of Chinese labour for construction investments. The number of Chinese workers in Africa fell almost two-thirds between 2015 and 2021, according to the International Monetary Fund. BLOOMBERG