M&A activities North America did not fare much better though there are now signs of recovery. The announced value of China’s M&A deals there was US$13.5 billion in 2019, down nearly 30% YoY. This represents the lowest deal value since 2012 and can be linked directly to a rise in geopolitical risk and FDI restrictions. However, in Q4 2019, Chinese M&A investments in North America rose 41% quarter-on-quarter, reflecting easing China-US trade tensions in light of the signing of a phase one trade deal. The North American sectors that received the most investments were TMT, mining and metals, and consumer products
The attractiveness of Asia as a target for Chinese investment is particularly apparent when contrasted with the uncertainty seen in Europe and North America.
China’s overseas M&A deals were primarily in the TMT, consumer products, and power and utilities sectors, with these three sectors representing 54.8% of the total sectors invested in. With digital transformation underway across these and many other sectors in China, the focus on the TMT sector is particularly telling in light of China’s aspiration to lead in advanced technology.
Another sector of interest for Chinese investors was power and utilities, which saw an increase in deal value of 121.8% YoY, driven by two massive deals in Peru and Chile. Along with Asia, Latin America is also proving to be a relatively fertile ground for M&A activities. The deal in Peru involved China Yangtze Power Company buying Sempra Energy’s Peruvian business, as well as an 83.6% stake in Luz del Sur S.A.A, for US$3.59 billion. In Chile, China’s State Grid purchased Sempra Energy’s Chilean interests, comprised largely of power company Chilquinta Energia, for US$2.23bn.
It is also worth mentioning the M&As in the financial services sector, which increased 50% YoY, with more than 50% of these deals taking place in Asia. It is not unexpected that Asia and Latin America were successful M&A regions, given increasing protectionism in the US and Europe. The targeting of these regions reflects a shift in the strategy of Chinese enterprises looking to internationalize and exert greater control over their value chains.
EPC contracts and the BRI
The BRI, as an initiative spanning multiple continents including Asia, is also providing opportunities for Chinese investment. For example, the total value of the country’s overseas engineering, procurement and construction (EPC) contracts in 2019 amounted to US$260.3 billion, a 7.6% increase YoY. However, along the BRI, the numbers were even more impressive, with EPC contracts across BRI countries amounting to US$154.9 billion, an increase of 23.1% YoY. Given that BRI-related EPC contracts represented 59.5% of the total overseas EPC contracts, it can be reasonably expected that these BRI countries will continue to be primary targets for Chinese enterprises in the future.
The growth in overseas EPC contracts reflects the value that Chinese investment can bring to destination countries. One example is the 800,000 jobs created in host countries by Chinese companies carrying out EPC projects. But the benefits go both ways, with China’s equipment and materials exports exceeding US$14 billion in 2019, driven at least in part by its overseas EPC contracts.
The size of China’s EPC projects is also worth mentioning. In 2019, there were 506 contracts valued at over US$100 million, an 8.4% increase YoY. This shows that not only is the number of EPC contracts but also the size and value of these projects are increasing.
This growth in EPC contracts suggests that the economic ties between China and the host countries are tightening. This strengthening bonds come at a time when protectionism and deglobalization have shifted the global investment landscape and increased uncertainty.
The year 2019 was full of challenges and opportunities for Chinese ODI. It was a challenging one due to China’s increasing capital control and the trend toward protectionism and deglobalization in developed markets. However, this context precipitated an interesting shift by Chinese investors toward Asia, as evidenced by the M&A figures. How permanent this shift will be is yet to be seen.