While it is widely known that China is one of the world’s top recipients of foreign direct investment (FDI), its outward direct investment (ODI) did not receive much attention until recent years, when Chinese companies were involved in a series of high-profile merger and acquisition activities in industrial countries, primarily in manufacturing, resource, and IT sectors. China’s overall ODI flows jumped from less than $6 billion in 2004 to $69 billion in 2010, making it the world’s 5th largest originator of ODI by volume and the 17th largest by stock (Figure 1). The rapid development of China’s ODI activities reflects the “Go Global” policy measures from the central government in the form of relaxed restrictions on overseas investment and a wide variety of subsidies and financial supports as well as China’s need to secure access to overseas natural resources, search for new markets, and acquire advanced technology, manufacturing processes, and managerial know-how.
Although China’s role as a global investor remains minor, accounting for about 6 percent of global ODI flows and less than 2 percent of ODI stock in 2010, it is well positioned to significantly increase its outbound investment in coming years. This report provides a picture of the geographical distribution and sector composition of China’s ODI in recent years—especially in the U.S.—and sheds some light on future trends.
China’s ODI is widely dispersed and flows to about 170 countries/territories. Official Chinese statistics indicate that Asia was the largest regional recipient in 2010, accounting for 65 percent of its total FDI flows. Asia has been the top destination over the past decade except in 2005 and 2006, when substantial FDI shifted to Latin America. The other regions typically accounted for less than 10 percent of total FDI flows each year, with the shares for Europe and North America rising and the share for Africa declining since 2008 (Figure 2a).
The regional bias in favor of Asia and Latin America can largely be explained by the inclusion of Hong Kong, the Cayman Islands, and the British Virgin Islands, the top three destinations of China’s ODI flows and stock. These three tax havens make it difficult to accurately describe the destination of China’s ODI since the money can either be channeled to projects around the world or recycled back to China as new FDI by investors to take advantage of the preferential treatment and other advantages awarded to foreign companies, a practice usually referred to as “round-tripping.” It is estimated that China’s overall ODI flows could be 15-30 percent less than the officially reported figures if round-tripping flows are stripped out.
Private efforts to track and break down the final destinations of China’s ODI using a transaction-based approach have made progress in recent years. The private data sets matched fairly well with China’s official data in the overall ODI flows, but showed a very different geographical pattern: Asia is not the dominant recipient, and Europe, Africa, Oceania, and Latin America took turns as the leading region for Chinese investment during 2006-2011 (Figure 2b).
One noticeable trend in the last few years is the declining share going to Africa, which partly reflects China’s increasing concerns over political stability and operational safety on this resource-rich continent. Meanwhile, Chinese investment in Latin America is gaining in importance, especially in 2010, when Chinese investors rushed to Brazil, Argentina, and Ecuador for commodities, making Brazil the single largest country for Chinese investment that year.
China’s investment in the U.S. started to take off in 2007 and reached $4.5 billion in 2011 (according to private estimates), making it the fastest-growing source of foreign investment in the nation. Chinese firms have invested in 35 states; California, New York, Texas, Delaware, and Georgia are the top destinations. The FDI from China still accounts for less than 1 percent of the total U.S. FDI stock, though, and the growth rate was slower than that in Japan and some European countries over the past two years.
China’s outward investment spans a variety of industries, and since 2004, the majority of the flows have gone into the service sector. By 2010, the service sector accounted for more than 70 percent of China’s total FDI stock, reflecting the fact that China’s ODI is still largely used to serve and promote its international trade. Within the service sector, business services and leasing had the largest share, followed by banking, retail and wholesale trade (mainly for imports and exports), and transportation and logistics (Figure 3a).
As a comparison, the importance of the mining sector in China’s investment has been dwindling over time, with its share dropping from nearly half of total ODI flows in 2003 to 8 percent in 2010 (Figure 3b). Though small relative to the service sector, China’s investment in overseas natural resource firms has far-reaching impacts, raising various concerns from host countries. Many of the worries about national security and the acquired firms becoming captive suppliers to China (instead of selling in the open market) come from the fact that state-owned enterprises (SOE) still dominate China’s outward investment in natural resources. There is a lack of information about their corporate governance structures and the degree of government involvement in these activities. Some progress has been made in the last few years, however, to alter the governance structure of some SOEs so that they are more likely to prioritize profitability over strategic and other interests if they wish to survive.
China’s investment in the manufacturing sector grew from $907 million in 2006 to $4.7 billion in 2010, making up 6 percent of its total ODI stock by 2010. The main drivers for Chinese firms to venture abroad are to identify growth opportunities and secure market access, especially for those industries with excess production capacity and sluggish domestic demand, such as electronic appliances and machinery. In recent years, Chinese investors more frequently looked for bargains in industrial markets—firms with good brand recognition but in dire financial straits—as a way to gain a foothold, raise brand recognition, and enhance research and managerial abilities. As China is anxiously trying to upgrade its manufacturing structure and climb the global value chain, Chinese firms will very likely invest more in the manufacturing sector in industrial countries, targeting firms with strategic assets and high economic value-added, such as distribution networks, brand value, and other professional human resources.
The strategy change from Chinese investors has been reflected in China’s investment in the U.S., where about one-third is in service and two-thirds is in industrial sectors. Since 2008, most of the growth has occurred in manufacturing, especially in industrial machinery, fossil fuels and chemicals, information technology, and transportation equipment (Figure 4).
It is estimated that China will invest $1-2 trillion globally over the coming decade, and these investments will likely show a new pattern as China adjusts its growth strategy. While natural resource extraction will remain an important component of China’s outbound investment, the country’s investors are apt to focus more on high value-added service in finance, information technology, and healthcare, as well as manufacturing production processes with greater profit margins. The pace of the development will largely depend on how well Chinese investors cope with barriers and challenges, both at home and abroad.
 This includes Lenovo’s acquisition of IBM’s personal computer business in 2005, Geely Holding Group’s acquisition of Volvo in 2010, and Sany Heavy Industry’s acquisition of German industrial firm Putzmeister and Shandong Heavy’s investment in Italy’s luxury yacht builder Ferretti in 2012.
World Investment Report 2011, United Nations Conference on Trade and Development, www.unctad-docs.org/files/UNCTAD-WIR2011-Full-en.pdf.
 For detailed discussion, see Leonard K. Cheng and Zihui Ma, “China’s Outward Foreign Direct Investment,” in China’s Growing Role in World Trade, eds. Robert C. Feenstra and Shang-Jin Wei (University of Chicago, 2010); and Nargiza Salidjanova, Going Out: An Overview of China’s Outward Foreign Direct Investment, U.S.-China Economic and Security Review Commission, March 2011, www.uscc.gov/researchpapers/2011/GoingOut.pdf.
 Hong Kong is treated as a separate customs territory in China.
 The benefits of round-tripping include tax concessions, preferential terms for leasing of land and property, and guarantees for repatriation of foreign exchange.
 Some researchers argue that the official figures can underestimate China’s ODI flows since projects from private companies are more likely to evade the formal ODI approval process and thus not be included in the official statistics.
 The Heritage Foundation uses its China Global Investment Tracker to follow successful and unsuccessful transactions from China by value, location, and investment type since 2005; the Rhodium Group maintains the China Investment Monitor, which also seeks to assess the value of Chinese investment into the U.S. based on publicly known transactions.
 David Stanway, “Chinese investors to tread more carefully in Africa,” Reuters, February 23, 2012, www.reuters.com/article/2012/02/24/us-china-africa-idUSTRE81N06J20120224.
 For detailed discussion on the role of the state in China’s ODI, see Nargiza Salidjanova, op. cit.
 An example of these motives is the merger of the television and DVD operations of TCL (China) and Thomson (France), which led to the joint-venture entity known as “TCL-Thomson Electronics” in 2003.
 For more on China’s FDI in the U.S., see Daniel H. Rosen and Thilo Hanemann, An American Open Door? Maximizing the Benefits of Chinese Foreign Direct Investment, Center on U.S.-China Relations, Asia Society, May 2011.