What’s going on with Chinese outbound investment?

Sean Ellison

Senior Economist, Asia-Pacific (RICS)

China has been a key pillar in supporting global investment flows into property in recent years. Overseas real estate investment from China has grown rapidly since 2012, as shown in Chart 1.


According to Real Capital Analytics data, in 2016 the US received 43% of Chinese outbound direct investment (ODI) into commercial property in 2016, followed by Hong Kong which received 18% and Australia which received 12%.

Chart 1: Chinese outbound direct investment into real estate

China RE ODI

However, after a banner year in 2016 overseas investment is off to a tepid start in 2017, largely due to government policy. At the end of 2016 the government announced a number of de facto policies limiting overseas investment, specifically in real estate. These were codified in August, when China’s State Council released guidelines on overseas investment.

The effects of the crackdown on overseas investment is already evident in data. As shown in Chart 2, respondents to the RICS Commercial Property Monitor have indicated that overseas investment to the US and Australia has stalled in 2017, while that in to Hong Kong has remained subdued. Although this metric accounts for all overseas investment, Chinese investors have accounted for a significant portion of overseas buying in recent years.

Chart 2: RICS foreign enquiries into commercial property


A similar effect can be seen in the Hong Kong residential property market, a key destination for Chinese capital looking for US dollar assets. Chart 3 shows that respondents to the RICS Hong Kong Residential Market Survey have reported that demand from mainland Chinese buyers has slowed significantly since the beginning of the year.

Chart 3: RICS mainland chinese enquiries into Hong Kong residential property


Understanding what is driving policies restricting outbound investment is key to understanding whether Chinese capital will be restricted further. Much of the motivation for the Chinese government enacting restrictions on outbound investment lies in the desire to keep its currency, the yuan (CNY) stable.

Chart 4 illustrates this. As the CNY weakened following its initial devaluation in 2015, mainland Chinese companies and individuals moved capital abroad to hedge against further currency weakness.

Chart 4: Chinese outbound direct investment and Chinese Yuan/United States Dollar


As Chart 4 shows, the government’s restrictions on ODI have helped to stop the yuan’s depreciation, with the currency appreciating nearly 6% in 2017. The Chinese government has taken notice, and this month rolled back currency restrictions, making it easier for Chinese companies to move capital abroad. It seems unlikely that there will be any new restrictive measures announced in the near-term, allowing for a stabilization in Chinese outbound investment. However there remain two risks looming on the horizon.

The first is the US dollar. The CNY has benefited from US dollar weakness in 2017, with the Trump administration unable to pass meaningful fiscal stimulus and subdued inflation pushing back expectations for interest rate increases. However, if the market were to adjust its expectations of the path of US interest rates, this would likely result in a reversal in the CNY’s appreciation.

The second is domestic instability. As I have written previously, Chinese property developers face a critical juncture in 2018. If Chinese policymakers are unable to contain the financial strains that will hit mainland developers, they may need to revert to fresh capital controls in order to stabilize the currency.

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