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Daily Intelligence Briefing

Wednesday, May 1, 2024

Identifying Change-Driven Investment Themes

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China Looks to Counter Rise of Trade Restrictions by Increasing Outward Investment Across the Globe

Summary: A spate of increasingly large duties on Chinese-made goods has forced the country’s enterprises to look abroad for alternative production capabilities. Chinese investments in international construction and manufacturing capacity have surged as foreign direct investment into the mainland tumbled to a three decade low last year. The largest sum of those investments are flowing to Belt & Road nations, which remain key nodes for Chinese economic influence abroad.


Chinese automakers, particularly those manufacturing electric vehicles (EVs), are especially dedicated to ensuring they can continue expanding into major western markets that have taken measures to restrict imports from China. This can be done by gaining footholds in so-called “springboard” economies in Eastern Europe and Latin America. As such, multiple Chinese EV firms have plans to set up facilities in Hungary, Poland, and Mexico. Southeast Asia is also a critical component in China’s attempt to skirt harsh import duties.


Related ETF: iShares MSCI China ETF (MCHI)

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As foreign investment flows into China fell -82% to a three decade low last year, Chinese companies were setting their sights abroad as well. EY notes that China’s overall outward direct investment (ODI) reached $147.9 billion, marking an 0.9% increase from 2022. Perhaps even more significantly, $264.5 billion in new overseas engineering, procurement and construction (EPC) projects were signed, marking a five-year high. Growth in Chinese interests overseas has continued into 2024, as the country’s businesses have piled on another $33.5 billion in outbound investments from January to March. Per Bloomberg, that was the strongest first-quarter figure since 2016.


A large majority of these investments continue to flow to belt and road (B&R) countries – particularly those in Asia and Europe. The B&R initiative is essentially a Chinese-led infrastructure project meant to mirror a modern silk road, bolstering global trade and China’s influence in Asia, Europe, and beyond. Though the project has faced delays, cost inflation, and emerging skepticism, the US Council on Foreign Relations writes that 147 countries — accounting for two-thirds of the world’s population and 40% of global GDP — have signed on to projects or indicated an interest in doing so.


Chinese enterprises are likely leveraging this network of friendly locales to establish international footholds in an effort to insulate themselves from emerging hostility toward goods made in China. MRP has previously highlighted efforts to increase offshore manufacturing of what would usually be Chinese-made goods that are now subject to increasingly burdensome trade restrictions in Europe and the US.


FDI Intelligence reports that a third of manufacturing foreign direct investment (FDI) among members of the Association of Southeast Asian Nations (ASEAN) came from China itself in 2023, up from just 18.5% in 2019. The Southeast Asian region is one of the most critical pillars of the B&R initiative. In particular, we’ve noted that Vietnam’s close ties with Chinese enterprise and the country’s supply chain make it an ideal candidate for China to use as an offshore manufacturing base. Voice of America ha reported that Vietnam was the top exporter to the US of products covered by the Uyghur Forced Labor Prevention Act (UFLPA) in 2023, which blocks the import of products made with Uyghur forced labor in western China. The rejection of more shipments of Vietnamese-made goods than Chinese under the UFLPA may indicate that Chinese firms are pushing more components made with Uyghur forced labor through Vietnam’s economy in an attempt to skirt sanctions. 


New Chinese manufacturing projects planned in Vietnam include an $800 million electric vehicle (EV) plant, which would make the owner, Chery Automobile Co., the first Chinese EV maker to set up shop in Vietnam. The EV industry is a major focus for Beijing’s economic ambitions, as China is now the world’s top vehicle exporting nation. The government provides generous subsidies to many of its myriad EV makers, which allows Chinese vehicles to be particularly cheap compared to their western-made competitors. As such, some of the larger firms have sought to begin manufacturing in Europe to aid their international expansion. MRP has covered this effort in previous intelligence briefings.


Europe was the destination for about half of the new energy vehicles China exported last year. Low prices have made Chinese EVs particularly attractive, even in light of a hefty 10% tariff on the cars Chinese firms import to the EU. According to a Rhodium report, Chinese firms plowed the equivalent of $24 billion into the EV ecosystem in Europe in 2022 – representing more than half of China’s direct investment into the continent. BYD laid out plans in late December for its first car factory in Europe. The plant is to be based in southern Hungary, an EU member state that will serve as the center for its European operations, following the launch of direct sales in that market last October. Reuters reports that China’s Leapmotor will soon utilize partner Stellantis’s Tychy plant in Poland to build vehicles for European markets. Output of Leapmotor’s T03 EV could start before the end of June. Both Hungary and Poland are listed as B&R nations, having previously signed memorandums of understanding (MoU) with China.


China may also try to slip past some level of US duties on Chinese vehicle in the future by establishing manufacturing capacity in Mexico. Per the Wall Street Journal, at least a dozen Chinese electric-car component suppliers have announced new factories or added to their existing investments in Mexico in recent years. Top Chinese EV maker BYD is currently looking for a location in Mexico to set up a factory with capacity to assemble up to 150,000 cars annually. Though BYD executives claim they goal is to “build the facility for the Mexican market, not for the export market,” Mexico has already become a key transit hub for Chinese vehicle components that are ultimately destined for the US. Figures from Mexico’s trade body for auto parts suppliers, cited by the Financial Times, show that 33 Chinese-owned companies with Mexican operations sent $1.1 billion worth of parts to the US in 2023, up from $711 million in 2021.


ODI from China will likely continue to grow as tariffs tighten their grip on goods shipped directly from the mainland. Getting Chinese-branded vehicles and components into major European and North American markets will prove more costly in years to come, but that has yet to deter the country’s automakers from unloading large sums of cash to secure footholds in nearby “springboard” economies.


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