Chinese businesses are investing even more abroad

Chinese companies, large and small, private or state-owned, are embarking on a spree of overseas mergers and acquisitions, spurred by government policies that encourage overseas expansion.

All the signs are that M&A activity will break all records this year, even at a time of economic slowdown.

But what are the targets? Where are they? And, more importantly, how are Chinese companies going to overcome the inevitable challenges?

Ministry of Commerce data suggest smaller enterprises rather than larger, state-owned and private entities are behind the latest surge. In January, China’s non-financial outbound investment rose 18.1 per cent from a year earlier to 78.7 billion yuan (£8.50 billion), almost three times the rate in December.

Of the country’s total overseas direct investment in January, 92.5 per cent came from smaller enterprises, up 175.2 per cent on the same period last year.

Figures from Morning Whistle Group show that private companies completed 76.8 per cent of the M&A deals last year, while state-owned enterprises accounted for 20.3 per cent.

The target areas were technology, media and telecommunications, agriculture and food, and energy and mineral resources. That is likely to remain the same this year, analysts say.

A spokesman for the Commerce Ministry, Shen Danyang, attributes the trend to government policies aimed at promoting collaboration between Chinese entities and international companies.

Chinese investment in foreign manufacturing rose 87.8 per cent to 10.6 billion yuan in January year-on-year, with much of the money flowing into the telecommunications, electronics, pharmaceuticals and motor vehicle sectors, Mr Shen said.

And the data supporting the boom keeps coming. Chinese investment in the United States rose to 10.2 billion yuan in January, nearly four times the amount in the same month last year, according to the ministry data.

So what is driving this?

Diving commodity prices are making some foreign companies a cheap buy. In addition, many SOEs have the means to buy, and for private companies, big or small, historically low interest rates mean borrowing is easier.

Foreign investment: Chinese business interests are clearly expanding abroad on a far greater levelThe Belt and Road Initiative, seen by many as a key pillar in China’s foreign trade drive, means government cash may well be available to SOEs to help fund acquisitions and make investments.

The Silk Road Fund, a governmentowned investment vehicle, was launched at the end of 2014 with an injection of $40 billion (£28 billion). It aims to support infrastructure projects, mainly in Eurasian countries that lie along the proposed Silk Road Economic Belt and 21st Century Maritime Silk Road routes between China and Europe.

More to the point, Chinese state and private companies see the Belt and Road Initiative as a clear sign that the government wants them to look overseas.

“A lot of SOEs are fairly cash-rich,” Ben Cavender of China Market Research Group told Nasdaq.com recently. “One of the issues they are running into is they’re out of room to grow in their home market.”

In a transaction that has been under discussion the Chinese insurance conglomerate Anbang Insurance Group is offering to buy the US hotel chain operator Starwood. A consortium Anbang leads has offered $12.8 billion (£8.85 billion) in cash for the hotel operator, compared with an earlier offer by Marriott of $12.2 billion.

If completed, the transaction would be the largest acquisition by a Chinese company in the US, according to financial data provider Dealogic.

Another eye-catching deal was in February, when China National Chemical Corp, commonly known as ChemChina, agreed to pay $43 billion for the Swiss pesticide maker Syngenta AG. If regulators and the Swiss company’s shareholders approve the deal, it will be the largest-ever Chinese takeover of a foreign company. The chemical company also grabbed headlines by buying Italy’s premium tire maker Pirelli for $7.7 billion.

Chinese companies are being encouraged to seek merger targets abroad, buoyed by government policies that have reduced paperwork and eased restrictions on foreign investments, said Duncan Innes-Kerr, regional director for Asia at the Economist Intelligence Unit. “The slowdown in China’s economic growth has added momentum to the trend.”

Professor Alan Barrell of the Centre for Entrepreneurial Learning at the Judge Business School, University of Cambridge, said: “It makes enormous sense for a cash-rich economy such as China to spread wings and grow internationally by acquisition and to explore sectors as yet unexploited overall by M&A involving overseas companies and assets, notably technology, and not just real estate.’’

However, there are pitfalls. Ms Kyriakopoulou said the main challenges facing Chinese enterprises arise after deals have been struck.

“These are chiefly to do with the understanding of different regulatory systems and the clash of corporate cultures.”

Wanda chairman Wang Jianlin addressed the challenge of linguistic problems in M&A when he addressed students in Oxford. “English is our greatest challenge. We have a lot of senior employees in Wanda. However, when going global in tourism, sports and entertainment, inadequacy in English is a huge challenge.”

Last, but by no means least, is the effect of the fluctuating yuan on China’s overseas M&A activity.

Ms Kyriakopoulou said that surprisingly, the recent fall in the yuan has had little or no influence on M&A activity.

“If anything, we expect a potential continued devaluation of the yuan to actually intensify the incentives among Chinese companies to proceed with M&A deals as they seek to acquire assets whose values are stable.

“Fluctuations on China’s stock market, on the other hand, could be potentially more damaging to the prospects of such deals by making it harder for Chinese companies to secure funding,’’ although she added that many rely on bank loans, state finance, or what she calls the shadow banking sector.