• Sat
  • Dec 20, 2014
  • Updated: 9:34am
BusinessChina Business

Chinese companies' overseas investments surging

Purchases of foreign companies surge this year, with mainland firms particularly active in the United States, Europe and Canada

PUBLISHED : Monday, 26 May, 2014, 10:08am
UPDATED : Tuesday, 27 May, 2014, 12:24am

Chinese companies are increasingly pursuing opportunities in higher value-added industries such as manufacturing, vehicles, IT and telecommunications.

As such, they are now more active in advanced economies such as the United States, Canada and Europe, which offer higher-value investments, said David Blumental, a Hong Kong-based partner at US law firm Latham & Watkins.

During the first quarter of this year, Chinese investment in Europe reached US$7.2 billion, exceeding the US$5.5 billion of Chinese investment in Europe for the whole of last year, according to Mergermarket, an international publisher of information on mergers and acquisitions.

Investment flows bring benefits for Americans, including job creation

Chinese investments in Europe in the first quarter outpaced US$5.5 billion of US investments there, according to Mergermarket.

China accounted for 11.6 per cent of total investments in Europe in the quarter, a big jump from 2.9 per cent last year.

Agriculture was the most targeted sector by Chinese investors, led by Cofco's US$2.9 billion acquisition of 51 per cent of Netherlands-based Nidera, said Mergermarket.

In America, Chinese firms spent US$1.36 billion on 26 deals in the quarter, with the number of acquisitions reaching an all-time quarterly high, according to a report by Rhodium Group, a US consultancy.

The US industries attracting the most Chinese investment were health care, real estate and IT. The biggest Chinese deal in the US during the first quarter was the US$290 million acquisition by Chinese medical device firm MicroPort Scientific of Wright Medical Group's OrthoRecon business.

More than US$8 billion worth of Chinese deals in the US are pending, including two potential mergers and acquisitions in IT equipment worth more than US$5 billion, said Rhodium. In comparison, Chinese investments in the US totalled more than US$14 billion last year.

Chinese investments in America exceeded US investments in China for the first time in 2012, according to the Ministry of Commerce. Chinese firms now employ more than 70,000 Americans, a sharp increase from barely 10,000 in 2007, according to Rhodium.

"These investment flows bring benefits for Americans, including job creation, and have the potential to be a major contributor to stronger US-China relations," Rhodium added.

Although energy and resources remain the dominant targets of Chinese overseas investments, a fast-growing sector for Chinese outbound investments has been technology, media and telecommunications.

Last year, the total value of Chinese overseas investments in this sector more than tripled to US$3.9 billion, according to a report by Mergermarket and Squire Sanders, a US law firm. This includes Citic Telecom International's acquisition of 79 per cent of Companhia de Telecomunicacoes de Macau for US$1.2 billion in June 2013.

In the consumer sector, Chinese investors made 32 overseas deals worth US$8.8 billion in 2013, almost double the value in 2012, driven by the multibillion-dollar acquisition of US pork producer Smithfield Foods by Shuanghui International, a Chinese meat producer now renamed WH Group.

"China's growing middle class has increased demand for foreign products such as coffee. We have also seen an uptick in Chinese buyers targeting wineries and vineyards, often purchased as status symbols," said Squire Sanders partner John Poulsen.

Another reason for the increase in Chinese investment in consumer businesses overseas has been the need for cash by many consumer companies in developed markets, says the Mergermarket-Squire Sanders report.

Last year, mainland and Hong Kong investors made 220 overseas deals worth US$68.9 billion, representing a 17 per cent increase in value from 2012.

Despite the slowing growth on the mainland, outbound investment continues to increase, according to Blumental.

Poulsen said: "[Chinese] overseas expansion has increased in recent years partially thanks to an increase in funding from state-owned banks to private sector companies."


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The issuance of perpetual loan by a government is at least 3 centuries old.
The Bank of England was set up at the end of the 17th century to give a loan of £1.2m to the British government, because ‘public finances (in Britain) were in so dire a condition at the time that the terms of the (perpetual) loan were that it was to be serviced at a rate of 8% per annum, and there was also a service charge of £4,000 per annum for the management of the loan.’
In this way, the British government only needed to spend £100,000 every year, and was able to obtain cash (bullion) of £1.2m, which were never required to be repaid !
In return, ‘the Bank was given exclusive possession of the government's balances, and was the only limited-liability corporation allowed to issue bank notes.’
The loan helped to 'fund the huge industrial effort needed, from establishing iron-works to making more nails to agriculturally feeding the quadrupled strength of the navy, and started to transform the economy.
The power of the navy made Britain the dominant world power in the late eighteenth and early nineteenth centuries.'
The rest is well-known the-sun-never-set Pax Britannica economic history.
Utilising the present low interest rate world environment, and her triple-A credit rating, the Hong Kong government can also consider the issuance of perpetual bonds to prepare for the coming problem of persistent budget deficits.
The balanced-budget stipulation of the Basic Law can be reinterpreted to some extent.
Arguably this stipulation greatly hinders the development of a sophisticated bond market here in Hong Kong, which cannot truly claim herself to be one of the world's global financial centres without having a deep and well-developed bond (and derivative) market.
The interest income so given to the Hong Kong bondholders can partly compensate for their loss arising from the present financial repression caused by the linked exchange rate mechanism.
Given the city's ageing population, this bond arrangement can also help lessen the burden of the government's future old-age spending.
(Chinese readers: ****money18.on.cc/econ/econ_comment_content.html?type=2&cat=econ&aid=20140527005721_0000&subsect=comment&adate=20140527)
Following the road of Japan, China is now engaging in more and more overseas direct investments (ODIs) by using up part of her too-large foreign reserves accumulated from her trade surpluses over the years,
and this when the country's domestic cost of capital is still quite high, many private enterprises are hopelessly short of funds, and the local governments are planning to issue munis with the potential to further bid up the domestic interest rate and crowd out some of the private investments !
The ODIs also serve to strengthen the foreign companies or countries, which are China's potential bitter rivals.
To me at least, this does not make much economic sense.
The money should be used in her own country.
Another way to use the foreign reserves is to lend or give part of them to the banks, which convert the reserves to yuan in the foreign exchange market, to be used to buy the perpetual bonds issued by the central government and the first-tier cities.
This I think will have the same effect as lowering the RRR so far as expansionary monetary policy and lowering of the domestic cost of capital are concerned.
The perpetual bonds held by the banks can be counted as part of their capital under Basel 3.
With confidence in China's banks restored, the share market can be rejuvenated almost at once.
With perpetual bonds, the central and local governments only need to repay the owed interest, and the maturity mismatch, loan-rollover and crowd-out problems will disappear.
While selling the foreign reserves (US dollar) for yuan in the foreign exchange market, the Chinese banks may greatly bid up the yuan, to the detriment of the economic recovery of the country.
The PBOC can first guide the yuan downward from the present widely-believed equilibrium level (which I think is still overvalued), before the banks start gradually bidding up the yuan back to its equilibrium level.


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