ODI develops steadily with investment in some real-economy sectors show increases
China’s Ministry of Commerce (MOFCOM) statistics showed that China overall ODI reached US$106.8 billion in the first three quarters of 2022, down 0.3% YOY and the Q3 figure increased 10% from that of Q2. China non-financial ODI reached US$85.9 billion in the first three quarters of 2022, up 6.3% YOY. Investments in leasing and business services reached US$29.3 billion (up 26.7% YOY) and those in manufacturing, wholesale & retail, construction and other sectors were also on the rise. For instance, in the green development realm, a number of Chinese electric vehicle and battery manufacturers have raised factory capacities in countries like Germany and Hungary for increased overseas presence and business development. The B&R non-financial ODI reached US$15.7 billion, up 5.2% YOY and representing 18.2% of the total. The investments were made mainly in ASEAN, Pakistan, the United Arab Emirates, Serbia and Bangladesh.
Figure 1: China overall ODI (US$ billion)
Figure 2: China non-financial ODI along the B&R (US$ billion)
China overseas M&As continued to slow without turning point in sight
In the first three quarters of 2022, the value of China announced overseas M&As reached US$23.5 billion, down 49% YOY to a historic low compared to the same period in the past years. There were 379 China announced overseas M&A deals during the period, down 6% YOY.
Figure 3: Value of China announced overseas M&As (US$ billion)
Figure 4: Deal value and volume of top five sectors of China overseas M&As in the first three quarters of 2022
Figure 5: Geographical distribution of China announced overseas M&As by sector in the first three quarters of 2022 (by deal value)
In the first three quarters of 2022, the top three sectors of China overseas M&As were TMT, advanced manufacturing & mobility, and health care & life sciences, collectively accounting for 60% of the total value. Mining & Metals was the only sector to see growth, up 228% YOY to US$2.9 billion, with the sector-wise largest deal being the acquisition of two lithium salt lake mining rights in Argentina by a Chinese lithium mining giant in response to the fast-developing new energy vehicle market in the world and the growing demand for lithium ore resources. Notably, the health care & life sciences sector remained quite popular recording the largest value of announced overseas M&As in Q3 2022.
Sector-wise by deal value, the health care & life sciences, oil & gas, power & utilities, as well as consumer products sectors recorded a higher regional concentration, with over 60% of the deal value in each of these sectors being made on a single continent. In addition, geopolitics considerably impacted the geographical distribution of cross-border M&A activities of Chinese enterprises. For instance, following the more stringent investment policies concerning the US technology sector, less TMT M&A deals by value were made in the US, from 55% of the total China overseas TMT M&As in 2019 to 9% in the first three quarters of 2022.
- Asia: The value of China announced M&As in Asia reached US$8.2 billion during the period, down 59% YOY. There were 127 announced deals, up 9% YOY. Asia was still the top destination for China overseas M&As, mainly in South Korea, Japan and Singapore, accounting for 60% of the total in Asia. TMT, advanced manufacturing & mobility and financial services were the top sectors for investment by Chinese enterprises in Asia, with TMT accounting for 46% of the total in the continent. With reference to the IMF forecasts3, developing countries in Asia showed greater resilience in the current economic slowdown. India, Indonesia, China, Saudi Arabia and Turkey were expected to be the top five fast-growing G20 countries in 2023 and they are situated in Asia. In addition, the 20th National Congress of China continued to promote quality development of the BRI. Countries in Asia may further attract attention of Chinese investors.
- Europe: The value of China announced M&As in Europe reached US$6.3 billion, down 55% YOY. The investments were mainly made in the Netherlands, the UK and Italy, accounting for over 70% of the total in Europe. TMT remained the top sector, accounting for 42% of the total. There were 127 announced deals, up 1% YOY. This year, the tension between Russia and Ukraine and its impacts have deeply affected the economy of Europe and energy supply. There were also high inflation rates and sharp currency depreciation against the US dollar. Chinese enterprises have become cautious in investing in Europe. The deal value reached a record low in Q3 2022 to, for the first time, less than US$1 billion in a single quarter. With reference to the IMF forecasts, Russia will likely continue its negative economic growth since this year while other countries, such as Germany and Italy, might enter a recessionary cycle in 2023. Hence, in the short-run, it is essential to thoroughly assess the risk portfolio before prudent decision is made for cross-border investment.
- North America: The value of China announced M&As in North America reached US$5.5 billion, down 24% YOY. There were 63 announced deals, down 46% YOY. The investments were mainly made in the sectors of health care & life sciences and advanced manufacturing & mobility, accounting for 49% and 27% of the total in North America respectively. Inflation in the US was among the highest levels in almost three decades and its economy might not have sufficient momentum for growth. The Federal Reserve has increased interest rates to higher levels in a decade whilst geopolitical uncertainty between China and the US has been on the rise. In the short-run, China M&As in the US may further slow.
Figure 6: Deal value and volume of China overseas M&As by continent in the first three quarters of 2022
Figure 7: Top 10 destinations of China overseas M&As in the first three quarters of 2022 (By deal value: US$ billion)
Figure 8: Top 10 destinations of China overseas M&As in the first three quarters of 2022 (By deal volume)
Relatively smaller and promising EPC projects might be more attractive amid rising risk of global economic slowdown
Newly-signed China overseas EPC projects decreased 7.9% YOY to US$147.1 billion in the first three quarters of 2022. For instance, a Chinese enterprise recently signed up the largest transportation and public infrastructure project in Saudi Arabia that had a contract value of about RMB7.9 billion. Another Chinese enterprise signed up a project related to iron ore exploration in Kazakhstan that had a contract value of about US$650 million4. Overall, the volume of newly-signed mega-scale projects decreased and that of relatively smaller and promising projects increased. Relatively smaller projects are generally less risky, more financeable and manageable, whilst being close to people’s livelihood and needs. These beneficial factors might lead to higher priority for relatively smaller projects going forward. Overseas EPC turnover was US$107 billion, down 0.4% YOY. The value of newly-signed China EPC contracts in the B&R countries and regions reached US$76.7 billion, down 5.1% YOY, accounting for 52.5% of the total. The completed turnover was US$57.3 billion, down 7.2% YOY, accounting for 53.6% of the total.
Figure 9: Value of newly signed China overseas EPC contracts (US$ billion)
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- Source: China MOFCOM
- Sources: Refinitiv; Mergermarket, including data from Hong Kong, Macau and Taiwan, and deals that have been announced but not yet completed, data was downloaded on 6 July 2022; EY analysis
- Source: World Economic Outlook, October 2022, International Monetary Fund (IMF)
- Source: Public domain information
EY releases the Overview of China outbound investment of the first three quarters of 2022. The overview shows that China ODI was generally stable during the period as investment in some real-economy sectors showed increases and more Chinese enterprises have taken on greenfield investment. Nonetheless, the outbound M&A activities continued to slow recording a value drop of 49% YOY. Asia remained the top overseas M&A destination during the period.