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Going Global

The Chinese overseas shopping spree slowed in 2017, but technology buying remains active

China and Hong Kong reported a fall of 32.8 per cent in outbound mergers and acquisitions last year

PUBLISHED : Sunday, 18 February, 2018, 4:06pm
UPDATED : Sunday, 18 February, 2018, 11:12pm

China’s overseas investments declined sharply last year, but technology related buying remained active, as the country pursued a more strategic approach and encouraged companies to purchase advanced technologies in the West.

While some previously aggressive buyers have retreated, Tencent Holdings and Alibaba Group Holding continue to lead the shopping spree, and have spent billions on buying overseas companies and their technology, which ranges from artificial intelligence and cryptocurrencies to electric cars and genetic engineering.

China’s top economic planner recently released a full list of sensitive areas where it intends to restrict overseas investments, including real estate, hotels, cinema, entertainment and sports clubs.

The restrictions come on top of separate rules issued in August and November that tighten control over selected offshore investments.

“We will encourage overseas investments that can boost China’s technological development and manufacturing competency,” the National Development and Reform Commission said.

China lists ‘sensitive sectors’ as it tightens curbs on overseas investments

“Some companies’ foreign investments don’t suit our country’s policy, such as those related to sports, entertainment and clubs,” Zhou Xiaochuan, the governor of the People’s Bank of China, said this year at a press conference. “They don’t do much good to China, while causing lots of complaints abroad.”

Regulatory tightening led to a sudden drop in Chinese companies’ global buying last year. According to a recent report by Mergermarket, China and Hong Kong reported a value decrease of 32.8 per cent in outbound merger and acquisitions deal making in 2017, with a total value of US$137.1 billion, versus a historical high of US$204.2 billion in 2016.

“Chinese companies can’t invest overseas without government support,” said Liu Lixi, an analyst for Northeast Securities. “I think the selected tightening will persist for some time as the government faces pressure to stabilise the economy and the exchange rate. This should continue to affect some companies’ outbound deals.”

Technology companies, however, remained active buyers globally, led by Tencent and Alibaba.

In 2017, Chinese companies’ outbound investments and M&As in the telecommunication, media and technology sectors totalled 395 billion yuan (US$62.28 billion), according to Chinese data compiler ITJUZI.com, based on publicly available information. Tencent led the fray and took part in 28 deals, in most of which it was either the sole or main investor.

Alibaba invested in 13 deals. In 2016, Tencent took part in 22 overseas deals, followed by Alibaba’s 12 deals.

The investment in technology comes as the Chinese government encourages domestic companies to buy Western technologies when they “go out”, and promises it will facilitate the process.

The State Council, China’s cabinet, rolled out a development plan for AI technology in July. “Our country still lags behind in AI compared with developed countries. We lack significant original achievements.

“We encourage domestic AI companies to go out and will make it easier for these companies to conduct overseas M&As, make private equity investments or venture capital investments, or establish overseas research and development centres.”

According to data from ITJUZI.com, outbound telecommunication, media and technology investment mostly went to three areas last year: corporate services, such as big data, cloud computing, and AI; fintech, such as blockchain and cryptocurrencies; and health care, like genetic engineering, biotech, and new drug research.

There has been a refocusing on strategic outbound deals and away from passive or trophy assets
David Brown, head of China and Hong Kong transaction services, PwC

“There has been a refocusing on strategic outbound deals and away from passive or trophy assets,” said David Brown, head of China and Hong Kong transaction services at PwC. “The main aim is to bring technologies back to the domestic market to upgrade the industrial base, as well as to introduce new intellectual property, brands and products to China.”

A recent survey by PwC found that the search for advanced technologies meant that developed markets in the US and Europe remained the biggest destinations for Chinese buyers.

Despite the much publicised impact of increased scrutiny by US regulators and the Trump administration’s ambivalent attitude towards Chinese investment, the number of deals in the US actually increased slightly to a record of 221 in 2017, according to the PwC report.

In 2018, China’s outbound M&As will restart its growth trend, as the policy has become clearer and will result in a more orderly cross-border scene, said PwC analysts.

“On-strategy outbound M&As, including going-out-to-bring-back, industrial upgrade and Belt and Road, continue to be encouraged by government policy, and the stabilisation of the renminbi, availability of capital and positive valuation arbitrage for A-share listed buyers, all point to continuing strong activity,” they said.

“We also expect China’s large technology companies to [continue to] be active on the global stage.”

Alibaba owns the South China Morning Post.

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