China’s outbound investments have hit a snag, but its M&A in Asia and Oceania show it’s still the face of globalisation
- At first glance, China’s declining outbound investment appears to confirm the seeming retreat from globalisation. Yet, while M&A has declined in Europe and the US, look to its activity closer to home for a glimpse of the future
At first glance, the outlook for China’s outbound M&A is not positive. Nonetheless, there is reason to remain confident that such investments will rebound in the longer term. In fact, we would go so far as to say that Chinese outbound investment may be the new face of globalisation.
The first wave of globalisation came out of a new US-backed international order. In the 20th century, American companies like Coca-Cola and McDonald's led a tidal wave of globalisation that exported the American way of life – including food, consumer goods and culture – to almost every country and territory in the world, including Asia.
However, in recent years, China has significantly stepped up its efforts to extend its influence globally. Perhaps no project represents China’s globalisation drive more clearly than the Belt and Road Initiative, an ongoing outbound investment strategy that aims to recreate China’s ancient Silk Road trade routes to Europe and the Middle East via two corridors, one by land and one by sea.
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To sustain growth momentum, Chinese companies have a genuine need for access to strategic assets and those that complement their current offerings. Cash-abundant Chinese companies also need to deploy their capital to achieve long-term returns for investors.
A recent example of Chinese companies making strategic outbound M&A includes Tsinghua Unigroup’s acquisition of French smart card components maker Linxens.
Against the backdrop of global uncertainties, the value of outbound Chinese M&A investment to the US fell 17 per cent in the first half of 2019 compared to the same period in 2018, and investment to Europe fell by nearly 90 per cent year on year in the first quarter of 2019.
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However, Asia and Oceania are expected to surpass Europe and the US to become the most popular overseas M&A destinations for Chinese companies, driven by the belt and road and China’s improved relationships with various Asian markets. In the first quarter of this year, the announced value of China’s M&A to Asia and Oceania increased by over 80 per cent.
Similar levels of investment can be seen in Malaysia and the Philippines, indicating that China still has an appetite for deals and is shifting its destinations rather than turning off the taps.
In the same manner, the targets of Chinese investment are changing. Chinese companies are increasingly investing up the value chain, with more deals involving telecommunications, media, technology, health care and life sciences.
China is only beginning its initiatives in global investment. Macroeconomic fundamentals suggest Chinese companies have ongoing needs to acquire strategic assets overseas, underpinning strong outbound M&A activities in the coming years.
As China’s age of globalisation emerges, it is important that companies understand the implications and are ready for the opportunities – and challenges – that could arise.
Jonathon Clifton is regional managing director, Asia-Pacific, at Vistra, where Sherrie Dai is managing director for North Asia