Mergers & Acquisitions

Buy, buy, buy ... but how, what and why? China’s new offshore investment spree explained

Sound business reasons lie behind Chinese investors' rash of deal-making in rich countries such as the US, say analysts

PUBLISHED : Wednesday, 23 March, 2016, 9:00am
UPDATED : Wednesday, 23 March, 2016, 5:31pm

There was a time when Chinese investors looking offshore only had eyes for energy and resource supplies. They headed to the globe’s remotest corners to secure the fuel and raw materials needed to satisfy the appetite of the country’s booming economy.

Now outbound investors have recalibrated their sights, aiming to snap up non-commodity assets such as hotel groups, particularly in the United States.

But while the shift is stark, the motives for and implications of the shopping spree, led by the country’s well-connected players, remain unclear, analysts say.

In the first 80 days of this year, the value of Chinese overseas acquisitions was already close to the 2015 total, which itself was an all-time high, according to data compiled by Dealogic, a firm tracking China’s overseas deals.

The investment flurry was mostly around hotels, entertainment and technology stakes in rich countries such as the United States. So far, Chinese firms have said they plan to close 37 deals in the US this year, with the value of those purchases set to more than double the 2015 total, according to Dealogic.

China’s outbound property buying spree will continue

Riding the wave are China’s private but well-connected firms such as Anbang Insurance Group, which is locked in a fierce multibillion US dollar bidding war against Marriott International for Starwood Hotels & Resorts Worldwide. Another major deal is the US$43 billion purchase of Switzerland-based Syngenta by state-owned China National Chemical Corp.

Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics and a leading expert on the Chinese economy, said there were question marks over the bottom line of the many of the Chinese players.

“There is a big rush to make a lot of investments, and many companies that are making these investments have relatively weak balance sheets – some have a lot of debts and little interest coverage,”Lardy said on the sidelines of the Boao Forum for Asia in Hainan.

“Whenever I hear a new deal is announced, what I always want to know is how it’s being financed, but frequently it is hard to find out.”

So is it all part of a concerted effort by Beijing?

Alan Wheatley, an associate fellow in international economics at British think tank Chatham House, said that while there was no evidence this was the case there was also “no doubt” that the firms on the front line “are politically well connected and are expanding with official approval – either implicit or explicit”.

The interest in assets in developed economies comes after a slew of losses by Chinese companies in frontier markets like Myanmar, Libya and Venezuela.

Shi Yinhong, an international relations professor at Renmin University of China in Beijing, said the US had several advantages over these economies and these could have broader implications for China’s plan to expand trade and infrastructure links in Asia and beyond.

“The US’ rule of law, its lead in technology and its economic growth potential are all attractive to Chinese businesses,” Shi said.

“While China is promoting the ‘One Belt, One Road’ as a big strategy, many markets along the route are immature and may not be attractive for Chinese investors.”

Other analysts point to Beijing’s long-standing plan to make better use of its foreign exchange reserves, with recent declines making the matter more urgent.

There were also concerns about the yuan’s “inevitable prospective depreciation that emanates from the systemic downdraft in China’s economy”, which Harry Broadman, a senior fellow at Johns Hopkins University’s Foreign Policy Institute, said was driving the outbound investment.

Broadman said “the drive for capital flight on the part of China’s elite” could have played a role as well.

Even so, there are sound business reasons behind the rash of deal-making.

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For instance, Dalian Wanda’s US$3.5 billion purchase of Legendary Entertainment could cement Wanda’s position in China’s film market. The studio is producing a China-focused film, The Great Wall, directed by Zhang Yimou, to tap a market that is doubling in size in every two years.

And Anbang’s desire for luxury hotels comes as the flow of outbound Chinese tourists shows no sign of abating, with more than 120 million Chinese travelling abroad last year, four times the total a decade earlier.

Peking University professor Jiang Guohua said the offshore investment drive was unlikely to stop any time soon.

“It’s time for China capital to flow into the international stage,” Jiang said. “It’s a big trend that Chinese money will be more involved in cross-border production, trade and consumption.”

But Broadman sounded a final note of caution.

“From an inbound policy perspective in the West, particularly in Washington, it’s not at all clear how successful the Chinese will be in securing many so-called ‘trophy’ assets,” he said. “Regrettably for the Chinese, questions abound about transparency, accountability and motives.”