China's Expanding Outbound Investment Appetite - Wall Street Journal

While foreign investors are losing their taste for China, Chinese businesses are getting hungrier for overseas assets.

Foreign direct investment in China’s economy came in at $59.1 billion in the first half of 2012, down 3% year-over-year. That reflects slower growth, which makes China a less attractive place to invest. A remission in yuan appreciation, falling property prices, and dismal mainland equity markets has taken the shine off the China bet too.

The story on China’s outbound investment is the reverse. Overseas direct investment in the first half came in at $35.4 billion, up 48% year-over-year. That reflects a combination of abundant cash on the books of Chinese firms, and bargains to be had as foreign asset prices remain depressed.

It also reflects moves by Beijing to encourage Chinese firms to spend more of their foreign earnings on productive assets, rather than hand the cash over to the central bank to park in ultra-low yielding government bonds. China’s holdings of U.S. Treasurys (Treasuries) fell $6.4 billion in the year to Aprilâ€"the latest month for which data is available.

No surprises on top sectors for surging outbound investment. Oil and gas and mining top the list for China’s outbound mergers and acquisitionsaccording to numbers from Dealogic. That reflects a voracious appetite for energy and metals, where $9.4 billion in deals accounted for 45% of China’s outbound M&A in the first half.

But there are also signs that China’s list of targets is starting to expand. Superior Aviation Beijing Co’s $1.8 billion bid for Hawker Beechcraft Inc. shows China’s ambitions in aerospaceâ€"an area where it has previously relied on imports from the U.S. and Europe. China also spent $1.2 billion on outbound food and beverage dealsâ€"including Bright Food Group Co.’s acquisition of British cereal firm Weetabixâ€"reflecting an appetite for foreign brands and safer food.

The deep pocketed Chinese buyer has already put a floor under prices for energy and metal assets around the world. As China’s outbound investment rises and the range of targets broadens, it’s time to factor possible Chinese buyers into valuations in other sectors too.

Write to Tom Orlik at Thomas.orlik@wsj.com