The state of China's outbound M&A

On 23 January President Donald Trump signed an executive order formally withdrawing the USA from the Trans-Pacific Partnership (TPP) trade deal, calling into serious doubt its survival.

"The TPP would be meaningless without the United States," said Prime Minster of Japan, Shinzo Abe, in an in interview with the Financial Times

Eight years of negotiations with the United States of America (U.S.) and the TPP partnership ended abruptly. The TPP was to be a central policy for, specifically, the U.S. and Japan to enhance their economic competitiveness and foreign economic policy, and for the U.S. to provide leadership at a time of global uncertainty and tumult. The TPP encompassed 12 countries that together accounted for 40% of global GDP and 20% of global trade. 

U.S. think tank, the Brookings Institution, estimated that the annual benefit to the U.S. could have been US$77 billion and Japan potentially US$105 billion. The 11 remaining signatories must now decide whether to continue negotiations without the U.S. or abandon the TPP completely. Trade-hungry Asia-Pacific nations involved in the TPP are seeking an alternative, and attention has moved to China's rival Regional Comprehensive Economic Partnership (RCEP) - a proposed free trade agreement involving 16 countries of which seven, Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam, are signatories to the TPP. Apart from China, the other RCEP countries are Indonesia, Philippines, Thailand, Laos, Myanmar, Cambodia, South Korea and India. TPP countries Chile, Peru, Mexico and Canada appear to be out in cold. 

The RCEP member states, with a population of 3.4 billion, have a combined gross domestic product (GDP) of US$21.4 trillion, which is about 30% of global GDP. Without the U.S. asserting its leadership in Asia, China is poised to expand its influence and portray itself as the new leader in economic globalisation through the RCEP, its Asian Infrastructure Investment Bank, the BRICS Bank - both of which are headquartered in China - and its One Belt One Road (OBOR) project. 

The OBOR project was launched in February 2014 and stems from the overland "Silk Road Economic Belt" and the "21st-Century Maritime Silk Road" - both concepts were introduced by President Xi Jinping in 2013. This foreign economic development (like the celebrated Silk Road) has considerable financial power. China invested US$14.8 billion in countries along the Belt and Road in 2015, and in the first quarter of 2016, achieved two of the biggest deals to date by Chinese enterprises, namely ChemChina's acquisition of the Swiss giant Syngenta for more than US$43 billion and the Tianjin Tianhai Investment acquisition of Ingram Micro in the U.S. for US$ 6.3 billion. 

China's outward FDI between 2006 and 2015 grew almost seven-fold from US$ 21 billion to US$140 billion as the country's production costs rose and the country's strategic think tank reviewed its international competitiveness. New global markets and upgraded business models are driving Chinese enterprises outbound as companies seek advanced technology, new brands and talents to improve their competitiveness in the global market. I see China positioning itself to become more diversified and high-end with a focus on sectors such as consumer products, technology and the services industry. 

China's economic slowdown and overcapacity are encroaching on the profitability of its manufacturing industry. The global technology revolution is challenging traditional manufacturing, and high-end transformation has become a key priority. China will use its competitive advantages (advanced technologies and low cost construction experience) in building overseas infrastructure and repositioning its manufacturing sector through, for example, international high speed rail and nuclear power projects. China has built 19 000 km of high-speed rail, making it the world's leader. 

There are 24 nuclear power units under construction in China making it by far the front ranker, with Russia's eight units a distant second. The country plans to build 30 nuclear units in Belt and Road countries by 2034. China has a 20 plus year safety record and experience in multi-reactor management. 

China is developing international cooperation on production capacity and machinery manufacturing. I am certainly witnessing this with my Chinese clients who, to expand internationally, are discussing joint ventures with South African companies that have a multinational footprint. China has set a priority to enter high-end sectors and overseas markets to reflect a new international image of "China brand" and "Made in China". 

In the past five years, the proportion of mining and energy investment relative to China's total overseas M&A value dropped from 47% to 10.5% which indicates that China's overseas investment is shifting, and I see it shifting upstream in the value chain. I see a discernible new outbound investment focus to industrial upgrades and cooperation with experienced international joint venture partners. Technology, media and telecommunications, the automobile and transportation sectors and financial services are front runners as outbound targets. Power and utilities, oil and gas sectors, the internationalisation of machinery manufacturing and establishing overseas research and development centres are also high priorities. 

The "Made in China 2025" plan clearly requires enhanced multinational capabilities and international competitiveness by upgrading manufacturing technologies and cross-border capacities. China is finding and creating new growth engines, strengthening top-level strategic planning and coordination and searching for technical cooperation with foreign multinationals. 

Following a more focused and coordinated national strategy on China Outbound, in November 2016 the central planning body and key outbound investment approval agency, the National Development and Reform Commission, issued an internal note to restrict certain outbound capital account transactions. Chinese authorities will not grant approvals to proceed in the absence of convincing motivations for certain investments including: 

  • outbound investments in real estate made by state-owned enterprises with a Chinese investment amount of US$1 billion or more; 
  • outbound transactions outside the core business of the company of US$1 billion or more. 
Outbound investments with a high asset-liability ratio and low net assets yield will be monitored more closely. In conclusion, the vacuum left by the U.S. exiting the TPP may be encapsulated by the following quote - as reported by Bloomberg on 23 January - from Eric Altbach, vice-president at Albright Stonebridge Group in Washington and former deputy assistant U.S. Trade Representative for China affairs: 

"The U.S. is now basically in a position where we had our horse, the Chinese had their horse - but our horse has been put out to pasture and is no longer running in the race. It's a giant gift to the Chinese because they now can pitch themselves as the driver of trade liberalisation." 

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