China's Outbound Investment Strategy Becomes Clearer

Over the last several years, China’s regulators have made increasingly significant changes to the policies that guide outbound investment from China to foreign markets.  

From Forbes

In mid-April, China announced its most recent round of rules which made outbound investment that much easier for Chinese companies.  The changing role of the National Economic Development and Reform Commission (NDRC), historically one of China’s most important regulatory and policy-making bodies, points towards greater latitudes for how Chinese companies can pursue outbound investment opportunities.  For all the hand wringing that has surrounded China’s overseas investments, the reality as Marc Szepan, Co-Director of the Economy and Business Research Group at the Mercator Institute for China Studies (MERICS) in Berlin, points out, “China’s outbound investment volume as a share of global cross-border M&A activity is actually less than their share of global GDP.”

In a mid-April MERICS report, Szepan noted that, “For the full year 2013, worldwide cross-border M&A deals amounted to USD 737.8 billion … China’s outbound M&A volume of USD 63.3 billion accounted for merely 8.6 percent of global cross-border M&A deals by value.  During the same time, global M&A activity backed by private equity firms totaled USD 374.3 billion.  In other words, M&A activity by the global private equity industry alone was almost six times larger than the entire outbound M&A deal value of all Chinese firms.”

As China’s economy has grown, in particular because its growth and (thus-far) relative stability when compared to other more developed countries, is enviable, many assume that China’s outbound investment strategy is born of strength.  While China has been successful pursuing government-led foreign investments that tie together offerings from its domestic champions such as Huawei with deals that allow China privileged access to natural resources in another country (typically within a region that suffers from the so-called “natural resource curse”), thus far this strategy has not translated to consistent success by Chinese firms in their pursuit of stand-alone foreign investment deals.  Where China’s coordinated and government led outbound investment strategy may be a strength, it is much less of one for China’s companies.  According to Szepan,  “China’s outbound investment strategy is often a story of catching-up.  Quite often, Chinese companies are less searching for new markets, but instead looking for technology they do not have, know-how their companies recognize they need, and input resources not readily available domestically.  If they had these things, they would not need to buy them.”

“The increased possibilities and new government legislation has made it easer for outbound Chinese investment to grow and flourish”  - Scott Barrack, Managing Director at Space Global.

A review of the high profile deals Chinese firms have been able to successfully close in the UK, US and EU over the past several years reveals an important trend:  Chinese companies were not getting good deals, most were overpaying for those targets they could successfully bring to a close, and many transactions were going at a premium because the domestic target required some sort of compensation for regulatory risk.  The combination has meant that even when a Chinese company is successful closing a deal in a foreign country, most of the times they are only able to buy companies that represent a business with a second or third tier technology platform.  This is why the most recent reforms in China are so important:  they decrease counterparty risk as seen from the firm being acquired and should, in theory, allow Chinese businesses to work on a more even playing field relative to non-Chinese competitors.  If successful, these reforms will allow both the number and quality of outbound Chinese M&A deals to grow.

China’s first round of overseas investments was, as mentioned earlier, characterized by an emphasis on access to natural resources the country does not have access to within its own borders.  Now, however, China’s companies are becoming more aware of their need to upgrade technologies and diversify from too heavy an emphasis on domestic sales’ growth.  What Chinese companies may lack in know-how over particular technologies or services they make up for in readily available capital.  This makes Chinese firms interesting potential partners for industries and national economies where access to capital continues to be a problem post the 2008 financial crisis.  One of the most un-threatening areas where this is going to happen over the course of the next two years is as Chinese capital finding its way into American and European senior living.

 “With this investment ‘finding’ its way to Europe and America I think we can expect to see a greater Chinese influence with regard to architecture, business practices and even perhaps culture” – Scott Barrack, Managing Director at Space Global.