Foreign Curbs Cut Into Chinese Overseas M&A

Meanwhile, western investors see bright Chinese future

By: Toh Han Shih

For the first time in a decade, Chinese outbound mergers and acquisitions have fallen below inbound M&A as scrutiny of Chinese investment has increased by recipient countries including the US, Sweden, France, Germany and Australia. At the same time, however, western firms have been piling into China, with announced foreign M&A hitting US$9 billion in the first five months this year, surpassing Chinese outbound M&A activity in both volume and value.

But “The rest of 2020 is going to be bumpy for all parties as there is a realignment of trade and supply chains,” said Andre Wheeler, chief executive officer of Asia Pacific Connex, an Australian consulting firm focusing on business in the Asia Pacific.

China initiated its so-called Going Out Policy in 1999 to promote investment abroad, driving investment from US$3 billion in 1991 to US$136.71 billion in 2018 as the country went on a buying spree across the world, seeking to exploit expanding local and international markets.

But in an increasingly hostile international climate generated particularly by the Trump administration in Washington, DC, and with the Covid-19 pandemic driving a need to improve the domestic economy to stimulate growth, going-out is on hold.

The Trump administration, for instance, is on a global crusade to thwart the expansion of electronics giant Huawei Technologies both in the US and the EU over allegations that its electronic devices have a “back door” that would allow the Chinese government to listen to international transmissions. The US has restricted Huawei’s access to US semiconductor technology.

Thus the number of newly announced Chinese overseas M&A transactions dropped from around 90 per month during the peak period from 2016 to 2018 to barely 30 per month in the first five months this year, according to a June 18 report by international law firm Baker McKenzie and Rhodium Group, a US consultancy. New outbound deal-making by Chinese firms plunged by 71 percent in volume and 88 percent in value year-on-year during the first five months this year, according to the report.

"In comparison to the boom years China’s outbound investors are simply not in the same position to ramp up overseas buying at the moment," said Thomas Gilles, Chair of the EMEA-China Group of Baker McKenzie.

The overseas ambitions of Chinese companies are hampered by their heavier debt loads, tighter domestic liquidity, Beijing’s controls on outbound capital flows and increased trade and investment restrictions abroad, Gilles said.

For the first five months this year, China’s non-financial outbound direct investments (ODI), which is different from outbound M&A, fell 1.6 percent year-on-year to RMB296.3 billion (US$42.2 billion), said Gao Feng, a spokesman of China’s Ministry of Commerce, at a press conference in Beijing on June 18.

That is a far cry from the euphoric days of 2016 which saw 44.1 percent increase in Chinese ODI, when Chinese companies like HNA Group were spending billions of dollars buying assets in US and Europe. So far this year, all Chinese companies announced overseas deals totalling roughly US$6.5 billion, the price paid by HNA in 2016 to purchase of 25 percent of Hilton Worldwide Holdings, a major US hotel chain, said the report by Baker McKenzie Rhodium.

While Asia witnessed a 65 percent drop in the value of Chinese M&A in the first five months this year, announced Chinese takeovers in Europe plunged by 93 percent to US$1.4 billion from US$ 19.5 billion in Europe, and by 89 percent in North America to US$0.7 billion from US$6 billion.

“A significant impediment for China going forward is that there has been a breakdown of trust and target market economies have introduced significant barriers for Chinese investors,” Wheeler said.  

US President Donald Trump on June 18 tweeted that the US no longer welcomes Chinese investments in the US, saying “the U.S. certainly does maintain a policy option, under various conditions, of a complete decoupling from China. Thank you!”

The UK is expected to soon propose a new screening regime via a National Security and Investment Bill. The EU released in March updated guidance for screening of foreign direct investments (FDI), urging member states to support European public security by protecting “companies and critical assets” in health-related industries from foreign buyout. 

Similar measures recently took place in France, which reduced its investment screening threshold to 25 percent, and Spain, which imposed a 10 percent threshold on non-European FDI flows, while Sweden and Poland announced plans for screening legislation.

Australia announced temporary measures to drop investment review thresholds to zero for all economic sectors as of March 29. Sino-Australian relations have deteriorated, with the Chinese government in the past few days discouraging Chinese students and tourists from visiting Australia on the grounds of racism and racist attacks. Chinese investments in Australia fell by 62 percent to US$2.36 billion in 2019 from US$6.24 billion in 2018, marking a third consecutive year of decline, according to KPMG.

Foreign investment in China

In contrast to Chinese outbound M&A, foreign M&A activity in China rose to a 10-year high of US$35 billion in 2019 and totalled US$9 billion in the first five months of 2020, according to the report by Baker McKenzie and Rhodium. The announced value of foreign M&A deals in China soared from less than US$1 billion in January to over US$3 billion in May this year, according to Rhodium.

Ironically, while the EU and US are wary of Chinese investments, US and European firms were major drivers of the uptick in foreign M&A in China, said Baker McKenzie. One example of US investment in China is Pepsi’s US$700 million acquisition of Chinese snack brand Be & Cheery in February.

"China has relaxed a number of restrictions on foreign investment recently, while its leading position as a market in many industries makes it attractive to international companies seeking growth through acquisitions," said Tracy Wut, Baker McKenzie's head of M&A for Hong Kong and China.

Foreign firms are buying shares in their own joint ventures after China lifted foreign equity thresholds. For instance, German auto giant Volkswagen announced in May that it would take control of its Chinese joint venture with Anhui Jianghuai Automotive Group in a US$1.1 billion deal.

In past months, the Chinese government has announced so-called “big bang” measures to open up its US$45 trillion financial market to foreign investors. On June 18 for example, the China Securities and Regulatory Commission approved JP Morgan’s application to operate the first fully foreign-owned futures business. On June 13, American Express, a US credit card company, announced it has gained a license from the People’s Bank of China to clear transactions. On April 1, the Chinese government scrapped limits on the ratio of foreign shareholding in securities and fund management firms.

However, non-financial FDI did less well than inbound M&A. In the first five months, non-financial FDI fell 6.2 percent in US dollar terms to US$51.2 billion, said Chinese Commerce Ministry spokesman Gao.

Toh Han Shih is a Singaporean writer in Hong Kong.