Outbound investments still encouraged, despite Beijing’s curbs on ‘irrational’ deals
Controls on funds being moved out of China have impacted deals deemed ‘irrational’, but those with a sound strategic rationale are still enthusiastically approved by the Chinese authorities
In the global climate of economic uncertainty, coupled with the tightened control over capital outflow by the central government, China’s non-financial overseas investment registered a sizeable drop in the first half of 2017.
Together with Beijing’s stringent controls over funds moving out of the country has been the intensified scrutiny of domestic companies’ foreign investments. The government has sought to promote the so-called “rational” outbound deals that are expected to generate genuine economic gains.
Deals involving purchases of hotels, sports clubs and studio complexes are considered “irrational” and discouraged by Beijing. As a result of the curbing, Chinese foreign investment in sectors such as property, hotels, cinemas and entertainment dropped 82.5 per cent in the first half of 2017 compared with the corresponding period in 2016, according to figures from China’s Ministry of Commerce. In particular, investment in overseas property fell 82.1 per cent year on year in the first half.
David Brown, PwC’s China and Hong Kong transaction services leader, says new rules were announced by the central government in August to give guidance on “encouraged”, “restricted” and “banned” outbound investment projects. “Our view at PwC is that these new guidelines formalise what has already been in place for some time,” he says. “Therefore, we don’t expect them to have a major additional impact.”
Despite the widely reported curbs, Brown continues to find that the state of outbound mergers and acquisitions (M&A) has remained healthy.
“In our latest M&A Mid-Year Review and Outlook we found there was indeed a 13 per cent drop in the value of outbound transactions in the first half of 2017 to US$64.4 billion, compared to US$74.3 billion in the second half of 2016. This was the result of there being fewer mega deals [in excess of
US$1 billion] ... But the dollar value of deals can be a distraction. Massive deals – such as ChemChina’s US$43 billion acquisition of Syngenta in 2016 – can distort the overall trend.”
The volume of transactions is arguably far more significant as it gives a better sense of economic activity, he believes.
“The number of transactions increased in the first half of 2017 to reach a record high of 482 deals, with technology being the leading sector. The message seems important to us that deals with a sound strategic rationale will still be encouraged by the Chinese authorities. Naturally, an increased volume of outbound transactions will result in greater scrutiny from foreign government agencies.
“The Committee on Foreign Investment in the US is attentive to deals involving technology or access to personal data. Despite this, there was an increase in deals into the US in the first half of the year.”
The business sector is increasingly optimistic about business opportunities for the private sector from Beijing’s global trade strategy, the “Belt and Road Initiative” (BRI).
Linda Lin, a partner of KPMG China, says: “After the successful completion of the historic Belt and Road Forum for International Cooperation in Beijing in mid-2017, implementation of the BRI is a focus for Chinese investors.
“Infrastructure and logistics projects will be key areas given their strategic importance for the BRI. We have seen Chinese buyers looking at ports, warehouses, data centres in Belt and Road countries. There are also Chinese buyers looking at leading logistics operators with global presence.”
Andrew Zhao, another partner at KPMG China, shares Lin’s view. “In addition to the implementation of the BRI, we have seen more Chinese buyers making outbound investment projects around their core businesses to acquire advanced technologies, reputable brands and managerial experience,with an aim to improve their products and services,” he says.