By Business & Finance 
China will invest more overseas than it’s taking in and the country will spend $80-90bn in overseas direct investment (ODI), writes Mark Godfrey. Within two years it’s likely to reach a target set in the Communist Party’s current Five Year Plan to equalise FDI and ODI.
Whereas the focus has been on money flowing into China to capitalise on opportunities here, it’s notable that China’s outbound investment is up 20% on last year at RMB73bn in the period up to the end of September. ODI then is growing much faster than GDP growth here (likely 7.5% in 2013). But why?
China’s appetite for natural resources is key –but it’s not the only reason. Another reason is diversification as Chinese companies and investors go in search of value overseas which they no longer find at home. Consider that the return on equity on the Shanghai Stock Exchange has this year been stuck in single digits. Consider too that costs of labour and other inputs here are rising sharply. Thus, to sustain margins, Chinese firms are investing overseas. Asset diversification means the Dalian Wanda Group (run by China’s richest man) went for British yacht maker Sunseeker while leading Beijing real estate developer SOHO has been buying properties in New York.
Indeed, the deals have been coming thick and fast in the past two years. Irish watchers may have noticed China National Offshore Oil Corporation (CNOOC) last year spent $1.4bn on a 33% stake in Tullow Oil’s exploration assets, getting access to its Ugandan oil prospects. Another State oil giant, Sinopec, took a 49% stake in UK-based Talisman Energy for $1.5bn. The sovereign investment vehicle, China Investment Corp has a 10% stake in Heathrow Airport Holdings and a 9% stake in Thames Water Utilities. Shanghai-based (State-owned) Bright Food Group bought Weetabix while the State Grid Corp of China took a 25% stake in Portugal’s main power provider, REN.
Overseas spending
China started out spending overseas in developing countries which previously looked safe bets for long-term growth, while shying from a seemingly unstable West. But in the past year the destinations of choice have changed. The EU and US are seen as turning a corner whereas Brazil was hot five years ago and now seems a less than safe bet.
Tie ups between Chinese and Western firms are however as much about China as any opportunity in the West. China looks like accounting for 40% of global growth in 2013 so winning here is essential. And companies not exposed to emerging markets are in big trouble given traditional markets like the EU and US which have been printing money but struggling to find growth.
Smart deals
Deals work when Chinese investment boosts the firm in Western markets before taking it back to China. Some firms go out to add value in China. The recent purchase of the US pork firm Smithfield by Chinese meat processor Shuanghui, was smart on several levels: it opened the world’s largest pork market for Smithfield but the Chinese side also got access to premium overseas and thus has an international leg and that makes it much more attractive to go for a stock listing here or in Hong Kong.
Similar deals include leading American cinema chain AMC Theatres, acquired also by Wanda which is busy rolling out cinemas across China. French utilities firm GDF Suez likewise got itself a significant Chinese play by taking a $4bn investment from the China Investment Corp. Getting investment from the Shanghai-based Fosun Group meanwhile ensured sluggish European holiday resort operator, Club Med, has upped its occupancy rate globally with the swelling waves of Chinese tourists now heading abroad. This has stabilised Club Med’s cashflow and made a western firm with a newly credible strategy in China suddenly much more valuable to investors.
One of the challenges to Chinese overseas M&A is control. Control is an issue, if not an obsession for Chinese CEOs of State-owned firms doing the bulk of the buying. As a State enterprise boss in China, if you only have 20% you’re not seen as big, you may be digested rather than digest. But the problem is good companies are not often up for sale. This has in turn led to some questionable pricings and overpayment: consider the 65% premium paid for Canadian-based oil and gas firm Nexen Inc by CNOOC for $15.1 bn.
Another challenge is the perception of Chinese enterprises, not helped by their secretiveness: consider how difficult it is to get an interview with a Chinese CEO. This helps explain why the takeover of troubled French car maker Peugeot by Dongfeng Motors has met fierce opposition in France. There’s an image problem – being bought by Google or GE is seen as cool but being bought by a Chinese corporation, especially a State-owned one, is a less certain prospect.
Challenges
Andre Loesekrug-Pietri, founder and managing partner of China-based investment fund A Capital, lists four ‘don’t dos’ to Chinese investors, some of them his clients. He tells them not to go for bankrupt companies like Thomson, the French TV maker acquired by Chinese appliances maker TCL, especially if you’ve never done an outbound investment before. Likewise, he tells them not to decline local counsel: CNOOC learned that on the Unocal deal by not hiring a lobbyist until four weeks before they tried to close the deal. But then, ask any western investment banks about the problems of getting paid by Chinese firms. Pietri also advises Chinese firms against investing alone overseas – most have been reluctant to take a local partner in on a deal.
Chinese bureaucracy is another challenge. Chinese companies have been put at a competitive disadvantage by the approval process required by China’s government – including approvals to convert and transfer currency abroad. It was the delay this caused that meant General Mills purchased French dairy brand Yoplait ahead of Bright Foods which was offering a higher price – because of the uncertainty for the Chinese firm. A new free trade zone in Shanghai is not going to liberalise, rather to simplify. There’s a limit to the number of days a deal can take to approve: five, 10 or 15 days, so there’s an end to the uncertainty which is crucial in a $330m deal.
But with a liberalisation of Chinese currency controls and convertibility of the RMB those controls will become less relevant. Not just a destination for investment then, China is becoming a spender overseas too, and given the demand for quality products and resources here, its spending will grow to be very significant.
Losing face is an issue. Bank of China considered a stake in Rothschild but that was blocked due to instability. Nokia would have been a turnaround case: Chinese firms don’t want the risk of failure because their image and China’s image will both be seen to have been damaged.
