6 minute read 1 Feb 2020
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What was the state of Chinese outbound investment in 2019

By EY Greater China

Multidisciplinary professional services organization

6 minute read 1 Feb 2020
Related topics Growth Entrepreneurship

Although the overall volume of China’s outward direct investment (ODI) has been decreasing since 2016, there are emerging signs of dynamism.

T

he global context for understanding the situation of China’s outward direct investment (ODI) activities in 2019 can be described as a trend toward a combination of protectionism and deglobalization. Together, these phenomena have resulted in an increase in restrictive investment regulations across the developed world, causing a subsequent shift in Chinese enterprises’ focus to markets that are more investment-friendly. Their growing interest in the markets of the Belt and Road Initiative (BRI) is evident of such shift.

Looking at the marked increase in mergers and acquisitions (M&A) activity in Asia, with total M&A value rising 19.1% YoY to US$22.3 billion, Asia looks like the region of choice for Chinese investment for the foreseeable future. Loletta Chow, EY Global Leader of China Overseas Investment Network (COIN): “With slipping investment confidence in Europe and North America, where foreign investment policies were tightened and uncertainty increased, many Chinese enterprises turned to Asia.” China’s shift toward Asia can be seen and understood from a number of perspectives, the first one is overall ODI. 

With slipping investment confidence in Europe and North America, where foreign investment policies were tightened and uncertainty increased, many Chinese enterprises turned to Asia.
Loletta Chow
EY Global Leader of China Overseas Investment Network

China’s ODI may be down but not out

China’s overall ODI volume has been decreasing from their most recent peak in 2016, when it amounted to US$196.2 billion. Fast forward to 2019, and overall ODI amounted to US$117.1 billion, a 9.8% drop YoY. Of this, non-financial ODI accounted for US$110.6 billion, down 8.2% YoY. Although these figures represent clear decreases, the structure of Chinese investment is also becoming more balanced, suggesting diversification in industry targets. The leading sectors of interest for investment in 2019 were leasing and business services, manufacturing, wholesale, and retail. 

These declines in China’s ODI can be attributed to multiple causes. First, the Ministry of Commerce (MOFCOM) increased restrictions on capital outflows which have curbed the volume of outbound investment[1]. Second, the increases in protectionism and investment restrictions in the US and Europe. Together, these circumstances are causing Chinese enterprises to revisit their going abroad strategies, tilting toward Asia.

M&A activities in Asia

In 2019, Chinese enterprises announced 591 M&A deals worth US$68.6 billion in total, a 23.5% decline in deal numbers and a 31% decline in overall value YoY. However, it is important to note that while the value of announced M&A deals was down 55.9% YoY in H1 2019, in second half (H2) of 2019, it was down only 2.8% YoY. This rebound represents increasing confidence by Chinese enterprises in their ability to find investment targets abroad. Although the global investment landscape is seeing more protectionist stances, there are also emerging opportunities in markets not in lockstep with this trend.

By continent, Asia was China’s primary overseas M&A destination in 2019, accounting for nearly 30% of its total M&A investments. It was also the region that bucked the downward trend seen in the European and North American markets. The sectors driving China’s M&A growth in Asia were the TMT, financial services, real estate, hospitality, and construction. 

Asia as a percentage of total M&A investment

30%

Asia saw the highest share of Chinese M&A activity globally

This increased focus on Asia is appropriate given the increasingly restrictive investment climate across the developed world. In Europe, the value of China’s announced M&A deals in 2019 declined to just US$20.5 billion, a 57.1% drop YoY. With this being the third consecutive year of decline, as well as the year with the lowest deal value since 2014, it can well be said that the future of Chinese M&A activities in Europe is uncertain. The deals that were done were concentrated in the TMT, consumer products, and financial services sectors. 

Top 10 destinations for Chinese overseas M&As in 2019 (by deal value)

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.

Sector analysis

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[2]. In Chile, China’s State Grid purchased Sempra Energy’s Chilean interests, comprised largely of power company Chilquinta Energia, for US$2.23bn[3]. 

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.

  • Show article references

    1. www.scmp.com/economy/china-economy/article/3027167/chinas-overseas-investment-fell-10-cent-last-year-government
    2. www.bakermckenzie.com/en/newsroom/2019/10/china-yangtze-power-company
    3. www.bnamericas.com/en/news/chile-wooing-china-with-us18bn-in-public-sector-projects

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.

Summary

With the relatively uncertain overseas investment climate, China is working to find new areas of growth. But with the UK officially leaving the EU and the China-US trade tensions showing signs of fatigue, what will 2020 bring to the market and the economy?

About this article

By EY Greater China

Multidisciplinary professional services organization

Related topics Growth Entrepreneurship