By Jeremy Gaunt, European Investment Correspondent
LONDON, Oct 19 (Reuters) - China's direct investments abroad are rising sharply this year and will accelerate even further as the yuan is revalued upwards, according to a new paper from a Columbia University think tank.
The New York-based Vale Columbia Center for Sustainable International Investment estimates outward foreign direct investment (FDI) from China, already ranked fifth in the world, rose at an annual rate of 44 percent in the first half of 2010.
China's outward FDI, which involves buying or setting up businesses rather than simply investing in financial market assets such as U.S. Treasuries, has been growing at a phenomenal pace.
It more than doubled to $27 billion in 2007 from $12 billion in 2005, and doubled again the following year to $56 billion, the Vale paper said.
Significantly, outward FDI nudged higher to $57 billion in 2009 despite the fact that world FDI flows collapsed by 50 percent due to the global recession and financial crisis.
"The increasing international competitiveness of Chinese firms and an encouraging government policy have been the main drivers of this surge," study authors Karl Sauvant and Ken Davies wrote.
Part of it, however, appeared to be stimulated by the 20 percent revaluation of China's currency against the dollar in 2005-2008.
A weaker dollar makes it cheaper for overseas investors to buy or set up firms. According to Vale, for example, Japan's overseas FDI soared as its currency rose 50 percent against the dollar in the late 1980s.
China has signalled that it intends to let the yuan strengthen gradually against the dollar, but has strongly opposed demands by the United States that it quicken the pace.
"A renewed yuan appreciation would boost China's (outward) FDI growth even further by lowering the cost of overseas assets for Chinese firms, which have strong cash reserves from both retained earnings and large-scale state credit allocations that put them in a position to invest internationally," the study said.
"Like competitors elsewhere, they need to invest abroad to acquire a portfolio of locational assets to protect and increase their international competitiveness through better access to skills, technology, natural resources, and markets."
The other side of the coin, the Vale study noted, is that yuan appreciation would make inward Chinese FDI more expensive for foreign companies.
It said foreign companies that already have a presence in China would be best-placed to handle any change in exchange rates. (Editing by Hugh Lawson)