Chinese companies have been stepping up their global investment spree in the past 12 months. Mergers and acquisitions by private Chinese investors are becoming the key drivers of the country’s outbound direct investment.
In what has been called the ‘Third Wave’ of China outbound direct investment (ODI), the focus of investment has been on companies in the developed economies in high-tech and services. Previous ‘waves’ have focused on supporting developing economies and investing in commodities and extraction industries.
The increase in China’s ODI is driven by the central government’s strong encouragement for domestic companies to invest overseas in a bid to boost theirinternational competitiveness. The added benefit to Beijing of ODI is it utilises surplus domestic capacity and helps to slow the rapid build-up of the country’s foreign exchange reserves, which reached a record $3.8tn at the end of 2014.
Slow global economic recovery and depreciating foreign currencies has provided a decent tailwind to this endeavour.
China’s ODI grew 19 per cent year-on-year on average between 2009 and 2014. This compared with foreign direct investment (FDI) into China growing on average 5 per cent year-on-year during the same period. Last year, China’s ODI reached $116 bn, almost the same reaching that of the FDI total of $120bn
Some of the landmark and headline making deals we have seen include the $2.3bn acquisition by Lenovo of IBM’s x86 Server business. Another deal involved Anbang Insurance teaming up with Hilton Worldwide Holdings Inc to purchase The Waldorf Astoria New York hotel for $1.95bn. Lastly but not least, in financial services, ICBC purchased a 60 per cent share of South African Standard Bank for $690m.
我们看到了一些具有里程碑意义、登上媒体头条的并购交易，包括联想(Lenovo)以23亿美元收购IBM的x86 服务器业务，还有安邦保险(Anbang Insurance)携手希尔顿全球控股有限公司(Hilton Worldwide Holdings Inc)以19.5亿美元收购纽约的华尔道夫酒店(Waldorf Astoria)。还有一项重要交易发生在金融服务业——中国工商银行(ICBC)以6.9亿美元收购南非标准银行(South African Standard Bank) 60%的股份。
So, what is the outlook for China’s ODI and are there any new trends to watch out for?
Firstly, in our view China’s ODI will to continue to grow by around 20 per cent a year, with China overtaking the US as the world’s largest outbound direct investor in the next few years. This year, the pace of investment to accelerate, pushed by massive infrastructure investments in Asia and Europe envisioned in the “One Belt, One Road” initiative.
Secondly, Chinese companies will continue to shift their geographic and sector focus. The investment destination is changing away from Africa, Latin America and Asia. Chinese investors are now making strategic investment in developed markets, in particular the European Union and North America. Europe has recorded 14 per cent of China’s ODI in goods and services in the last five years.
In addition, China’s ‘Third Wave’ ODI is shifting focus from acquiring natural resources in coal, oil and metals to infrastructure including rail, shipping and ports. They are now turning to agriculture, technologies, high-end manufacturing, consumer goods, real estate, services and brands. This is at an early stage, but growth rates are rapidly accelerating.
Finally, another important trend is that private investors are becoming the main driving force of ODI. State owned enterprises (SOEs) continue to do deals in the industrial, resources and energy sectors. Private owned enterprises (POEs) are investing in more value-added industry sectors such as agri-business, technology, high-end manufacturing and real estate in more countries and regions. They are looking for intellectual property and brands to bring back to the Chinese market.
Mergers and acquisitions (M&A) have become the fastest way for Chinese companies to tap foreign markets and move higher up the value chain. Foreign currency depreciation against the renminbi prices continue to provide a favourable environment for China’s M&A activities.
In the first quarter, transaction value of China’s outbound M&A deals surged 36 per cent to a historical high of $20.2bn, according to PwC. The number of deals jumped by 33 per cent year on year to a record high of 77, with privately owned enterprises accounting for 68 per cent of the M&As.
Real Estate is the top targeted industry for over deals valued at more than $1bn, with $12.2bn via four deals in 2015 Year-to-date.
Fast moving consumer goods, brands and experiences such as tourism and leisure sectors are expected to feature prominently in the “third wave” of China outbound M&A. This is driven by increased disposable income and wealth creation.
We have seen also private equity make a meaningful contribution to the M&A activates for the first time. The deals in technology and consumer-related sectors accounted for more than half the total investment plans intended to align with the strategic direction of China’s wider economy. A similar trend was seen in deal values last year. There were 15 PEs and financial buyer deals valued at more than $1bn, another record.
The opportunities, however, come with challenges. Acquiring value-added assets is likely to remain extremely difficult. Chinese companies are still not well understood overseas. Cultural integration can be a challenge. To adapt to these challenges we have seen private enterprises hiring local management, applying local operating models in a bid to retain talent and cut acquisition risk.
China’s new wave of ODI is underpinned by the Chinese government actively reforming and deregulating its regulation of overseas investment. We can expect more developments in the near and mid-term. For instance, with Chinese companies speeding up their pace of overseas expansion, renminbi-denominated deals could be promoted in overseas mergers and expansions.
In particular, the expansion of China’s trading and capital investment space in regional economic cooperation would greatly facilitate further the internationalisation of China’s renminbi through deepening the pool of renminbi liquidity globally, more renminbi cross-border investment along with associated cross-border renminbi loans and other derivatives.
All in all, Chinese corporate overseas investment is supported by the central government and is helping to further open the economy at home and China’s participation in the global economy abroad.It is a new era of global cooperation and a clear win-win story.