Caixin
Jan 19, 2017 09:25 AM
BUSINESS & TECH

Business Leaders Call for Rational Overseas M&A, as Slowdown Looms

(Davos) – Overseas investment by Chinese firms could slow this year due to tighter capital controls and rising Western protectionism, providing a needed break to address some unhealthy practices, according to business leaders at the World Economic Forum this week in Davos, Switzerland.

One of those predicting outbound investment would slow this year was Zhang Yichen, chairman of Citic Capital Holdings Ltd., a unit of one of China’s oldest and largest financial conglomerates.

“China’s overseas investment has grown rapidly for over a decade, but some problems hide behind that,” said Zhang, speaking at a session organized by Caixin during the Davos meeting.

For instance, he said, many overseas acquisitions by Chinese firms last year simply sought to profit from arbitrage opportunities due to valuation gaps between domestic and overseas markets.

“The government has tightened rules on outbound investment to help the market return to rationality, which is a good thing,” he said.

China’s outbound investment has continued to hit new highs since official data became available in 2002. Last year, total investment in nonfinancial sectors soared more than 40%, the fastest pace since 2008, to $170.1 billion, according to the Ministry of Commerce. Chinese investors spent $107.2 billion on 742 outbound M&A deals last year, more than double the $54.4 billion in 2015.

But a recent report by the Chinese Academy of Social Sciences (CASS), a government think-tank, forecasts a slowdown in China’s overseas investment this year, citing factors such as the government’s tightening of capital outflows and the prospect of new protectionist measures by countries like the U.S.

Since late last year Beijing has issued a slew of rules on foreign currency exchange and overseas M&A. The state-owned asset regulator on Wednesday also issued new regulations tightening supervision over foreign investment by state-owned enterprises.

“We will be more prudent (in overseas investment deals) this year due to uncertainties. We will wait and see,” said Zhang, whose company recently bought 52% of fast-food giant McDonald’s Corp.’s China and Hong Kong stores, in a deal that valued those assets at $2.1 billion.

Wang Jianlin, founder and chairman of Wanda Group and one of China’s richest men, also called for a rational approach to overseas acquisitions. “Overseas acquisition can’t be carried out blindly,” Wang told Caixin at Davos.

The top consideration should be whether such acquisitions improve the buyer’s competitiveness, rather than simply price, said Wang.

Wanda has invested over $10 billion overseas, covering a wide range of industries from property to sports and movies. Last year alone, Wanda announced major acquisitions of two cinema operators in the U.S. and Europe and two Hollywood film production companies, each worth $1 billion or more.

These deals have made Wanda the world’s largest cinema chain operator and given the company greater bargaining power in the industry and higher profits from film distribution, said Wang.

Chinese President Xi Jinping said in a keynote speech delivered to the Davos meeting on Tuesday that he expected China’s outbound investments to total $750 billion over the next five years. He also invited foreigners to invest $600 billion in China during that period.

Xi said Chinese companies have invested more than $50 billion yuan under his signature “One Belt, One Road” initiative, which he instituted in 2014 to boost regional trade and economic cooperation.

Liu Mingkang, former chairman of the China Banking Regulatory Commission, said Chinese investors must change their mindset to pay more attention to economic and social outcomes of their overseas projects, while keeping good communication with all local stakeholders, not just the government.

More importantly, he said, the key to success is making sure the deals are legitimate, beneficial to green development, and transparent.

Contact reporter Han Wei (weihan@caixin.com)


You've accessed an article available only to subscribers
VIEW OPTIONS
Share this article
Open WeChat and scan the QR code