Despite talk of decoupling and shifting supply chains, foreign investment deals in China have remained strong so far this year, offering some confidence that the world’s second largest economy can recover from the coronavirus pandemic. In the first five months of 2020, foreign capital flowing into China via mergers and acquisitions (M&A) totalled US$9 billion, surpassing the volume and value of Chinese deals made overseas during the same period for the first time in a decade, according to a report from US-based research firm Rhodium Group. While the pandemic has shattered capital movements globally, few have noticed the trend of the growing foreign appetite for acquiring Chinese assets, partly due to investor optimism about the outlook for domestic consumption and policy liberalisation. “Over the past 18 months, we have recorded levels of foreign M&A into China that were not seen in the previous decade. Most of that activity has been driven by American and European firms taking advantage of looser foreign ownership limits or betting on Chinese consumer demand,” said Rhodium’s Thilo Hanemann and Daniel Rosen. If China remains an important source of global demand growth, they will exert themselves to invest into that opportunity Rhodium Group “Over the past century, these [American and European] firms have continued to do business in challenging locations like Venezuela, Burma [Myanmar] and Libya. If China remains an important source of global demand growth, they will exert themselves to invest into that opportunity.” Foreign investment in China has been traditionally dominated by so-called greenfield investments, which build up businesses from scratch, but foreign deal making in China began to take off in the middle of 2018 and reached a 10-year high of US$35 billion last year. Since the beginning of the year, M&A inflows into China have improved each month, while foreign M&A in China has averaged around US$20 billion to US$25 billion annually over the past decade. Some eye-catching deals announced this year include US drinks firm Pepsi’s US$700 million acquisition of Chinese snack brand Be & Cheery, and German carmaker Volkswagen’s purchase of a 26 per cent stake in Chinese battery manufacturer Guoxuan High-Tech for US$1.2 billion. Other deals are expected after Beijing lifted thresholds for the stakes that foreign companies can hold in their joint ventures in China. Volkswagen plans to take control of its joint venture with Anhui Jianghuai Automotive Group, raising its stake to 75 per cent in a US$1.1 billion deal. “Foreign appetite for assets in China will remain robust, despite the chorus of political decoupling and economic reshoring talk, as long as China represents a sizeable share of global growth,” Rhodium said. Official data released on Thursday showed that foreign direct investment into China in the first five months of the year reached US$51.21 billion, down 6.2 per cent compared to a year earlier. China’s future as a global investor depends on two factors: first, the successful implementation of policy reforms at home that have bedevilled leaders in Beijing for years Rhodium Group In May, foreign direct investment inflows into China went up 4.2 per cent from a year earlier to US$9.87 billion, marking the second straight monthly increase, but the gain narrowed from an increase of 8.6 per cent in April. Meanwhile, China’s outbound direct investment fell by 1.6 per cent in the January-May period from a year earlier to 296.27 billion yuan (US$41.8 billion), according to the government data. The country’s outbound investment has slowed since 2017 after Beijing tightened regulations on corporate overseas buying sprees and foreign regulators became increasingly cautious about Chinese capital investments over national security concerns. “China’s future as a global investor depends on two factors: first, the successful implementation of policy reforms at home that have bedevilled leaders in Beijing for years; and second, foreign comfort with Chinese capital, a condition that has shifted starkly to the negative in recent years,” Rhodium added.