China’s outbound direct investment will enter an "ice age" in 2017, due to the country’s continued tight control over capital outflows. But in the long term, more Chinese companies will seek acquisitions overseas and the sector still has significant room for growth, says a report issued by Sino-Europe private equity firm A Capital.
China's announced outbound M&A deals totaled US$23.8 billion during the first three months of 2017, a drop of 75% from US$95.1 billion recorded during the same period a year ago. In 2016, outbound deals worth over US$75 billion were reportedly aborted for reasons related to newly implemented capital control measures, compared to just US$10 billion in 2015. More than 30 investments in European and American companies were aborted last year due to capital controls.
Despite the new restriction, 2016 was the first year in which China's outbound direct investments exceeded incoming foreign direct investment, which was estimated at US$139 billion. While A Capital expects this trend to continue in the near future, uncertainty over the global trade and political environment may hinder the pace of outbound investments.
Chinese outbound investment currently accounts for 10.5% of GDP, a relatively low percentage compared to 33% for the U.S. and 30% for Japan, according to the report. A Capital still believes there will be significant room for outbound expansion by Chinese companies, assuming the global trade and investment landscape remains stable.
China’s non-financial outbound direct investment reached US$170 billion in 2016, up 44.1% year-on-year. Chinese companies invested in a total of 7,961 overseas enterprises in 164 countries and regions. Additionally, US$14.53 billion was invested in the One Belt and One Road countries, according to China's Ministry of Commerce.
While Europe and North America continue to account for the majority of China's outbound investment flow, deals in Oceania, South America and Africa were also sizable, worth a total of US$20 billion. Private Chinese companies continue to catch up with state-owned enterprises in terms of overseas M&A investments, with their share of total deals rising from 36% in 2015 to 43% in 2016, according to the report.