China’s Outbound Investment To Remain Subdued As Capital Controls Weight On Deals

The number of newly announced Chinese acquisitions in North America and Europe has already declined in the second half of 2016 and early 2017, and is likely to remain subdued for the first half of this year, says a report released by law firm Baker & McKenzie.

In the long run, however, the expansion of China’s corporate footprint in North America and Europe should continue, if growing concerns among government authorities, business leaders and the broader public about equal market access can be addressed through bilateral investment agreements and other policies, says the report.

In the absence of reforms to increase the role of markets and level the playing field for foreign companies in China, the risk of a broader backlash against Chinese foreign direct investment in North America and Europe will continue to rise.

As a result, it is clear that Chinese investors need to manage foreign investment review risks early in their transactions, even in sectors not typically associated with national security risks. In transactions involving assets in multiple jurisdictions, Chinese investors also need to develop coordinated regulatory strategies to account for increasing coordination among governments.

At the same time, political and regulatory uncertainties weigh on a bullish outlook for Chinese foreign direct investment in 2017. Although China’s temporary measures to slow capital outflows don’t appear to represent a fundamental break with its "going out" policy of encouraging Chinese companies to expand overseas, they increase uncertainty about the ability of Chinese companies to transfer funds offshore and complete transactions.

China’s short-term controls could also discourage new investments in areas targeted for greater government scrutiny, including mega-deals over $10 billion, financial investments, real estate and entertainment transactions, and acquisitions in sectors outside an investor’s core business.

In the U.S., the risk appetite of Chinese buyers may also be tempered by uncertainty about President Trump’s foreign investment policy and the potential for new legislation that could expand the country’s foreign investment review board’s mandate beyond its narrow focus on national security.

Concerns about investment-related national security risks are not confined to the U.S., as demonstrated by a recent German government decision to withdraw its initial approval of a now-aborted bid by a Chinese investment fund to acquire Aixtron SE, a German chip equipment manufacturer with U.S. operations.

But over the long term, Chinese foreign direct investment should still be optimistic, said the report. For example, 2017 is likely to be another strong year for Chinese foreign direct investment in both regions as large deals announced last year come to a close.

If ChemChina’s US$43 billion acquisition of Syngenta goes through as expected in the second quarter, it will almost single-handedly set a new record year for Chinese investment in Europe. Other pending acquisitions include HNA’s purchase of a 25% stake in Hilton Hotels for US$6.5 billion, Zhongwang’s investment in U.S. aluminum maker Aleris for US$2.3 billion, and LeEco’s acquisition of U.S. television manufacturer Vizio for US$2 billion.

Chinese President Xi Jinping said during this year’s World Economic Forum that Chinese outbound investment will total US$750 billion in the next five years. Europe and North America stand to attract a significant share of those future flows, given their strong economic fundamentals and attractive assets. Chinese companies are still under-invested globally, and their push to catch up is a secular trend backed by the government’s pursuit of a new growth model, says Baker & McKenzie.

Caishen.Co - Primary Data for China Secondary Investment and Stock Markets
Caishen.Co - Primary Data for China Secondary Investment and Stock Markets