Chinese companies made record bids for foreign acquisitions in the first quarter of 2016, focusing especially on agriculture, manufacturing and tourism. But while such investments have been met with open arms in Europe, regulatory resistance is stiff in the United States. With Chinese firms eager to gain Western technology, brands and customer bases, the European Union is likely to benefit.
Chinese investment abroad was almost nonexistent. Today, China is one of the world’s top three sources of foreign investment. According to financial data provider Dealogic, Chinese firms put up some $102 billion to buy foreign companies between the beginning of the year and mid-March 2016. This includes the mega-bids for Swiss agrochemical firm Syngenta by China National Chemical Corporation (ChemChina) and for Starwood Hotels & Resorts by a consortium led by Chinese insurer Anbang. Anbang’s $13 billion bid ultimately failed, but the numbers are still eye-popping. For comparison, Chinese companies spent $106 billion overseas throughout the whole of 2015.
The value of Chinese firms’ offshore assets is set to triple from about $6.4 trillion in 2015 to nearly $20 trillion by 2020, according to a joint report by the Rhodium Group, a research company, and the Mercator Institute for China Studies. A growing share of these offshore assets will be in Western countries. China’s global stock of investment abroad, which includes corporate mergers, acquisitions and spending on start-ups, is expected to grow from $744 billion to $2 trillion by 2020. There is plenty of room to grow. Today China’s stock of outbound investment represents only about 7 percent of gross domestic product. In Germany, the proportion is 47 percent, in the US it is 38 percent and in Japan it is 20 percent.
Chinese companies undertake cross-border deals for many reasons, including access to resources, expertise, technology and brands, as well as to move up the value chain. A classic example is Lenovo’s acquisition of IBM’s personal computer business, which allowed the Chinese firm to gain global distribution, operational expertise and brand value. Chinese companies are increasingly eager to learn from their global competitors and absorb best practices in areas such as risk management, quality control and information technology.
After having relied on investment from other countries for years, China has begun encouraging domestic companies to invest and operate overseas. This is all the more important for the Chinese firms saddled with debt, overcapacity and losses – the so-called “zombie companies” – many of them SOEs. Their situation is partly the result of huge investments Chinese authorities required them to make to stimulate the economy after the 2008 global financial crisis crimped international demand. Acquisitions abroad address these problems by offering a better return on capital – which is declining inside China – and by allowing firms to offload some of their debt onto newly purchased companies. The People’s Bank of China (PBOC) has designed loan schemes to support companies that invest overseas.
There is, however, risk of a backlash from regulators, especially in the US, where the Committee on Foreign Investment could block deals – such as the recent Syngenta mega-bid – if it is deemed to endanger the country’s food supply, and thereby its national security. In February, Fairchild Semiconductor International rejected a $2.5 billion takeover offer from a Chinese-led group, opting instead for a smaller offer from an American rival. The company cited concerns that US regulators could block the deal with the Chinese. The unsuccessful offer was one of at least 10 failed Chinese bids in the last year, according to the New York Times.
The winner in the battle between American regulators and Beijing-backed companies will be Europe, which has clearly become the preferred destination for Chinese investors. According to the China Global Investment Tracker, a joint project of the American Enterprise Institute and the Heritage Foundation, between 2005 and 2016, China invested nearly $164 billion in Europe (including non-European Union countries). During the same period, it invested $103 billion in the U.S.
The Rhodium Group found that between 2000 and 2014, Chinese companies spent 46 billion euros ($52 billion) on 1,047 direct investments (greenfield projects and acquisitions) in the EU-28 countries, with the vast majority of the transactions coming after 2009. The United Kingdom received the biggest share of that amount, with a total of 12.2 billion euros ($13.8 billion), followed by Germany with 6.9 billion euros ($7.8 billion) and France with 5.9 billion euros ($6.7 billion). In 2015, however, ChemChina’s acquisition of Pirelli put Italy in the top position.
Chinese companies show no sign of slowing their investment push. More big deals can be expected in coming years. If the American politicians and regulators continue their stiff resistance to Chinese investment, Europe will see even more money flowing in.
An earlier and expanded version of this article was published by the: austriancenter.