China became the top destination for foreign direct investment last year, surpassing the United States for the first time with over US$100 billion in FDI. While the world focuses on the rivers of investment flowing into China, Mainland enterprises are quietly expanding their presence abroad, supported by China's mountain of foreign exchange reserves, which stood at US$300 billion at last count.

The country's rising GDP is transforming the traditional one-way flow of capital into China into a two-way street. Typically, developing economies don't start to invest overseas until their GDP reaches US$1,200 per capita. Per capita GDP in China currently averages US$900, but in coastal areas such as Zhejiang and Jiangsu province, the figure exceeds US$2,000.

With the media focused on China-bound FDI, it is easy to lose sight of the fact that about 6,000 Chinese firms with assets totalling around US$400 billion have invested overseas. Moreover, China's overseas investments are forecast to reach US$10 billion annually in the coming years.

Mainland enterprises are looking to invest abroad not just because they want to cut costs, but also to restructure their operations and to raise the bar on their overall competitiveness. Consequently, they pump capital into areas that offer the greatest potential to enhance their capabilities.

Mainland pioneers

The first wave of Mainland enterprises to invest abroad comprises mainly of traders, who today still occupy 49.7 percent of total Mainland investments. With roughly 50 percent of international Mainland enterprises stationed in Hong Kong, the territory is living up to its name as the best platform for Mainland firms looking to "go out."

Currently, most of these firms are medium- and large-sized, state-owned enterprises. But this mix is expected to change as more small-and medium-sized private Mainland enterprises -- mainly exporters -- start building up their global networks.

Chinese firms have also started moving into trade processing, accounting for 22.2 percent of the total overseas Mainland businesses, due to China's strong manufacturing sector which is hurting from over-production.

For example, China produces about 40 million colour television sets every year for a domestic market that can absorb only 10 million sets. As a result, large Mainland manufacturers specialising in household appliances, textiles and garments, among others, have had to expand overseas.

Other companies are building factories overseas to conquer new markets. The Haier Group, for example, has established 12 factories in Southeast Asia, the United States and Europe, and has 10 more under construction. The Chunlan Group has invested in seven automobile and air-conditioner plants in Southeast Asia, South America and Europe. And the Changhong Group has established joint ventures in Europe, South America and Southeast Asia.

Some 18.1 percent of all Mainland companies that have set up outside of China have invested in natural resources-related firms. This is hardly surprising, considering that demand for natural resources like minerals and wood, in addition to energy, has skyrocketed in China since the 1980s. Moreover, these companies are mainly SOEs with deep pockets.

Nonetheless, the Central Government has strict controls on foreign investments by state-owned enterprises to prevent any illegal outflow of state capital. Private enterprises, on the other hand, are encouraged to invest overseas, but China's strict controls on foreign exchange still makes it difficult for many private Mainland enterprises to get the hard capital to invest overseas. Even if they can navigate the complicated financing procedures in the country, another problem is that they often have insufficient knowledge about the risks associated with their planned investment destination. Hong Kong, with its world class financial, consultation and management services, can help these Chinese firms go global.

The preferred mode of investment for Mainland enterprises is to set up a wholly-owned or joint-venture project. Only a few companies opt for a merger or acquisition to enter new markets. This, to a certain extent, reflects Chinese enterprises' lack of knowledge about mergers and acquisitions, but as Chinese firms become increasingly investor savvy, more are expected to use this widely recognised and cost effective channel to expand abroad.

Overseas investments have helped Hong Kong and Taiwanese firms reap substantial benefits. As Mainland enterprises take their first steps to expand overseas, they will learn new skills, raise China's competitiveness and increase its global economic clout, and ultimately enable China to take up a new position in the world economy.