In 2020, China launched the dual circulation economic strategy to promote development. The country enhanced supply-side reforms to drive domestic demands and experienced a vibrant economic recovery in the second half of the year. On the other hand, it fostered multilateral international cooperation and reached major breakthroughs with Asia-Pacific and the European Union (EU) economies. The signing of the Regional Comprehensive Economic Partnership (RCEP) gave birth to the world’s largest free trade zone. The on-schedule conclusion of the negotiations for the Comprehensive Agreement on Investment (CAI) will pave the way toward deeper economic and trade cooperation between China and EU countries. This is good news to the Chinese investors going abroad, who can be benefitted by a set of consistent investment rules under the CAI when investing in the EU, which can alleviate investment costs, lower trade barriers and enhance business environments. It is believed that these developments have strengthened confidence and motivation to the recovery of the world economy. The overseas market development is necessary to complement domestic circulation, which forms the foundation and protection of the Chinese economy. Chinese enterprises will continue to actively participate in international cooperation and competition, and this will contribute to a healthier and more sustainable development in the internal circulation within China. Though the pandemic is expected to continue to impact global cross-border investment in the short term, Chinese enterprises may utilize opportunities brought by the recent breakthroughs in multilateral cooperation and achieve more stable and longer-term development in overseas markets.
Steady growth in ODI and B&R investment rose relatively quicker
Data of the Ministry of Commerce (MOFCOM) showed that, in 2020, China’s overall ODI amounted to US$132.9 billion, up 3.3% YOY, and non-financial ODI amounted to US$110.2 billion, down 0.4% YOY. The investments mainly went to leasing & business services, wholesale & retail, scientific research & technical services, and electricity production & supply areas. The investments in leasing & business services were up 17.5% at US$41.8 billion, wholesale & retail up 27.8% at US$16.1 billion, scientific research & technical services up 10.3%, electricity production and supply up 18.1%, respectively. B&R non-financial ODI reached US$17.8 billion, up 18.3% YOY amid the downward trend, representing 16.2% of the total and 2.6 percentage points higher than that of the previous year. The investments mainly went to the ASEAN, UAE, Kazakhstan and Israel.
Figure 1: China’s non-financial ODI, 2016–2020 (US$ billion)
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Health care and life sciences sector grew amid the downward market; China overseas M&As rebounded sharply in Q4
In 2020, the total announced value of China overseas M&As reached US$46.4 billion, down 46.2% YOY. There were 530 deals, down 18.5% YOY. However, the momentum for China overseas M&As rebounded sharply in Q4 and the announced transaction value increased by 122% from Q3.
Figure 2: Announced value of China overseas M&As, 2016–2020 (US$ billion)
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Sector analysis
- By deal value, TMT, consumer products and advanced manufacturing & mobility were the top three sectors. Among which, TMT made up 36% of the total, well ahead of announced deal value of other sectors. Investments were primarily made in low-sensitive hardware manufacturing, software development, IT services, etc. Notably, the health care and life sciences sector was the only one that saw China overseas M&A value increasing during the year at US$2.3 billion, up 7.2% YOY. Major invested segments were biotechnology, drug research & development, medical devices, etc. The absolute value of overseas health care M&As may look small but the sector is likely to present a promising future for Chinese investors following the COVID-19 pandemic.
- By deal volume, TMT, financial services, and advanced manufacturing & mobility were the top three sectors, representing 52.1% of the total. We only saw increases in the financial services (up 12.7%) and TMT (up 0.7%) sectors by deal volume while that of other sectors decreased.
Figure 3: Top five sectors of China overseas M&As in 2020
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Geographical analysis
- The announced value of China overseas M&As in North America dropped 38% to US$13.9 billion in 2020, mainly in the sectors of TMT, consumer products and financial services. As the new US administration assumed office in 2021, there could be greater stability and continuity in the country’s policy-making. The pandemic severely affected the US economy and led to rapid digital transformation. More cooperation and competition could be observed among businesses from China and the US in the area of the digital economy. Considering the evolving Sino-US relations and that the US is one of the major markets for Chinese multinational enterprises, Chinese investors are recommended to make use of a systematic and quantifiable approach toward geo-political risks to ensure responsive and resilient risk management.
- The announced value of China overseas M&As in Asia was US$13.7 billion, down 44.1% YOY. Key sectors were consumer products, financial services and TMT whereas Saudi Arabia, South Korea and Singapore were popular destinations. Chinese announced deals in Asia accounted for 40% of the total volume, up 4.3% YOY, which was the only continent that recorded growth. Robust economic interaction and lowered trade barriers might be seen in the Asia-Pacific region following the signing of the RCEP. A new free trade partnership has been created between China and Japan as well as between Japan and South Korea. Under the RCEP, a consistent standard on the place of origin will be adopted in the region, providing enterprises with greater flexibility and convenience. This will enhance the integration of the regional supply chain and encourage further intra-region investments within the RCEP signatories and foreign direct investment by other geographies into the RCEP region⁴.
- The announced value of China overseas M&As in Europe was US$12.5 billion, down 48.6% YOY. Key sectors were TMT, real estate, hospitality and construction, as well as advanced manufacturing & mobility; higher growths were recorded in countries like Germany and Italy. China overseas M&As in Europe decreased markedly these years and the value of announced China overseas deals in Europe during 2020 was just 13% of that of 2016 at its peak. The conclusion of the negotiations for the CAI was on schedule and it will pave the way for more investment room among businesses in China and the EU. Under the CAI, a set of consistent investment rules are expected to be applicable to the 27 EU members to lower trade barriers and enhance business environments. The higher level of market openings between China and the EU will benefit Chinese investors looking for outbound opportunities. Chinese outbound investors are expected to be active in Europe potentially in the sectors of renewable energy, digital economy, etc.
Figure 4: Deal value and volume of China overseas M&As by continent in 2020 (deal value in US$ billion)
Figure 5: Top 10 destinations of China overseas M&As in 2020 (US$ billion)
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Divestments rose quickly during the pandemic
The COVID-19 dealt a great blow to the global economy and increased the financial pressures on some Chinese companies relatively rapidly. The announced value of China overseas divestments reached US$49.3 billion in 2020, up 124% YOY, and it exceeded the total M&A value in the same year for the first time. As the stock of China outbound investment continue to grow and their international development becomes more mature, Chinese investors may navigate through the capital agenda more often. It will be important to make thorough planning for efficient capital circulation and value maximization including in the event of exit.
Figure 6: China overseas divestments by value, 2016–2020 (US$ billion)
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China overseas EPC contracts made steady progress and newly-signed large projects focused on infrastructure
Data from the MOFCOM showed that the total value of newly-signed China overseas EPC contracts dipped 1.8% YOY to US$255.5 billion in 2020. About 80% of them, more than US$200 billion by value, were related to infrastructure involving more than 5,500 projects. Among which, newly-signed EPC contracts of general and hydraulic construction increased by 37.9% and 17.9% respectively. The movement of expatriates on contracted projects was affected by the pandemic and recorded a 30% reduction. The total EPC turnover was US$155.9 billion in 2020, down 9.8% YOY. In B&R countries and regions, the value of newly-signed EPC contracts reached US$141.5 billion, down 8.7% YOY. The EPC turnover in B&R countries and regions was US$91.1 billion, down 7% YOY.
Figure 7: Value of newly-signed China overseas EPC contracts, 2016–2020 (US$ billion)
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Summary
The COVID-19 pandemic added financial pressures on some Chinese companies. In 2020, the announced value of China overseas divestments reached US$49.3 billion, up 124% YOY, and it exceeded the M&A value in the same year for the first time. China overseas engineering, procurement and construction (EPC) projects continued to develop steadily. The total value of newly-signed EPC contracts slightly dropped 1.8% YOY to US$255.5 billion and about 80% of them were related to infrastructure. The EPC turnover was US$155.9 billion, down 9.8% YOY.
