Abu Dhabi, UAEFriday 15 November 2019

Chinese focus turns abroad as domestic market stalls

China outpaced the United States as the biggest driver of cross-border M&As, totalling US$173.9 billion in the first three quarters of 2016.

China is rewiring its business relations with the West in an attempt to boost growth in the midst of a sluggish economy at home.

On Tuesday, the Chinese private equity firm, Fosun International, announced it will nearly double its stake in a leading Portuguese bank, Banco Comercial Portuges (BCP), to as much as 30 per cent.

“After the completion of the transactions, BCP is expected to become an important investment of the group and become the comprehensive financial service platform to help the group extend its business in Europe and Africa,” Fosun says.

This is a big move that is bound to please Chinese authorities amid market speculations that Chinese acquisition of foreign assets will slow down this year.

A day earlier, Alibaba’s chairman Jack Ma met the US president-elect Donald Trump. That came soon after the Barack Obama administration blacklisted Alibaba’s online trading platform, Taobao, placing the firm on the US “notorious marketplace” list reserved for companies suspected of counterfeiting.

Mr Trump said after the meeting that he and Mr Ma will “do some great things”.

“The president-elect is very open and listens. I have told him my ideas of how he can support trade, especially small businesses,” Mr Ma says.

Although the promise of creating one million jobs by promoting US companies in his online malls looks exaggerated. Zhang Zhouping, the chief analyst at the China E-commerce Association, says: “Jack Ma is using jobs [creation] as a bargaining chip in exchange for better treatment and favourable polices in the US.”

China outpaced the United States as the biggest driver of cross-border M&As, totalling US$173.9 billion in the first three quarters of 2016 – an increase of 68 per cent compared with the same period in 2015, according to the US-based financial data provider Dealogic. Although final numbers are still to come, analysts say Chinese purchases of overseas assets will have exceeded $200bn in 2016 – double the previous year.

The situation is opposite within China. Chinese firms have drastically reduced their investments in the domestic economy. One driving factor is the sharp rise in input costs such as labour, land and electricity. Manufacturing is receiving less attention, and most of the new investment is focused on financial services and internet-based companies.

“I think rising labour, energy and other input costs are combining with slowing revenue growth to create a lot of struggling manufacturing and industrial companies. Shifting investments into services is certainly a solution to that but not one that most manufacturers and local governments can do,” says Jeffery Towson, a Peking University professor and the co-author of The One Hour China Book.

The manufacturing sector, the core of Chinese business, was in third place last year on both the number of M&As and the total transacted values they involved. Most M&A activity was in internet and IT. In terms of values, the finance and resources sectors led the way.

“A more common solution is to shift investments into things that increase manufacturing productivity, that enable a manufacturer to do more with less,” Prof Towson says. He cites investment in factory automation, R&D and foreign acquisitions as examples of productivity enhancing solutions.

Mergers and acquisitions activity slowed down the world over last year, and China was part of the overall funding squeeze. M&A in the domestic market slowed by a sharp 28.5 per cent over 2015, according to the China Securities Regulatory Commission (CSRC). But abroad, Chinese companies more than doubled purchases of foreign firms. CSRC has recently released figures showing that only 8,380 M&As were started in China last year and 6,642 were completed. Completed transactions had a combined value of $540.6bn, 31 per cent lower than 2015, CSRC says.

There are also signs of some foreign companies pulling out of China in view of the economic slowdown, competition from local players and regulatory restrictions. The latest is the global fast-food juggernaut McDonald’s, which this week sold 52 per cent of its China and Hong Kong stores to Citic, a Chinese financial services conglomerate, for a reported $1.7bn.

Updated: January 11, 2017 04:00 AM

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