In the aftermath of the 2008 Global Financial Crisis, Chinese companies emerged as the world’s most swashbuckling cross-border investors. Insulated from the financial shocks that hit the U.S. and Europe, and emboldened by ready access to cheap credit at home, little-known Chinese companies embarked on a multi-billion dollar global spending spree that left them in control of Hollywood studios, European football teams, a Swedish auto manufacturer, and New York’s Waldorf-Astoria Hotel.
China’s enthusiasm for overseas assets peaked in 2016, curbed partly on orders from President Xi Jinping who saw big-ticket foreign investments as high-risk “gray rhinos” that threatened the stability of China’s domestic economy. But the global economy’s sudden collapse this year has inspired dire warnings that China’s big spenders will return, exploiting the pandemic to snap up financially distressed companies in the U.S. and Europe on the cheap.
So far, though, the Chinese buying binge hasn’t materialized. A new report by the Rhodium Group, a global consultancy, argues that Chinese investors will find it difficult to capitalize on the current economic crisis and far are more likely to focus on opportunities at home.
“Compared to the boom years, Chinese companies with global ambitions face a very different environment today, due to the combination of heavy debt loads, tighter domestic liquidity conditions, Beijing’s controls on outbound capital flows and an activated political allergy to Chinese investment abroad,” the report’s authors, Thilo Hanemann and Daniel H. Rosen, conclude.
In the first five months of 2020, Chinese outbound mergers and acquisitions declined 71% in volume and 88% in value terms compared to the same period last year, the authors note. The number of newly announced outbound transactions in January-May 2020 sank to 30 per month, compared to an average of around 90 per month between 2016 and 2018. The average monthly value of outbound transactions so far this year is $1.3 billion, a far cry from the $20 billion monthly average in 2016 at the height of China’s foreign acquisition boom.
Political allergy to China has been manifest on both sides of the Atlantic in recent months. The European Commission this week announced new measures designed to prevent foreign investors from using government support to outbid competitors for European assets. European business leaders still lament the Chinese appliance maker Midea’s 2016 acquisition of German robotics maker Kuka and Zhejiang Geely Holdings’ 2010 purchase of Sweden’s Volvo. Until recently the latter of those two deals had been seen as a success; Geely invested billions in Volvo and granted near-complete autonomy, and revenue grew tenfold over the past decade. But this year Geely CEO Li Shufu announced plans to merge Volvo Cars with Geely Auto, creating an entirely new global company—and provoking consternation in Sweden.
In the U.S., a group of seven U.S. senators warned Treasury Secretary Steven Mnuchin in a letter last month that “government-backed Chinese companies are reportedly approaching banks to identify and facilitate the purchase of American and European companies affected by the pandemic.” The group urged Mnuchin to move swiftly to protect U.S. companies from Chinese predators.
President Donald Trump, whose administration has implemented sweeping new measures to prevent Chinese firms from acquiring U.S. companies with technology pertinent to national security, took to Twitter on Thursday to threaten China with “complete decoupling.”
Hanemann and Rosen find that, while Chinese outbound investment has slowed, foreign investment in China remains resilient. Historically, foreign investment in China has tended to be for big greenfield projects rather than acquisitions. Over the past decade, foreign M&A activity in China has averaged $20 billion to $25 billion per year, which the authors dismiss as paltry for China’s $13 trillion economy. Since mid-2018, however, foreign deal-making has picked up. Last year, it reached a 10-year high of $35 billion.
The COVID-19 outbreak reduced foreign investment in China in the five months of this year to $9 billion, a big drop compared to the same period in 2019. But the authors note that foreign investment in China has been rising steadily since January and that so far this year the value of foreign M&A deals in China exceeds the value of Chinese outbound deals—the first time that’s happened in a decade.
What is stoking the global appetite for Chinese assets? Hanemann and Rosen argue the big factor is that foreign firms are betting that the continued rise of China’s middle class is still the world’s best growth story. Consider Walmart, which in April, on the day the lockdown ended in Wuhan, announced plans to spend $425 million in the city over the next five years. Or Starbucks, which recently announced plans to invest $130 million to build a roasting plant in the eastern Chinese city of Kunshan and hasn’t backed off its plan to have 6,000 stores on China’s mainland by 2022, up from the 4,200 it operates there now. Or Tesla, which aims to build 250,000 cars a month at the $5 billion Gigafactory it opened near Shanghai in January.
“[F]oreign appetite for assets in China will remain robust, despite the chorus of political decoupling and economic re-shoring talk, as long as China represents a sizable share of global growth,” Hanemann and Rosen write. “Over the past 18 months, we have recorded levels of foreign M&A into China that were not seen in the previous decade.”
It helps that Beijing has loosened restrictions on foreign ownership in key sectors including autos and financial services, enabling global firms to buy shares in their own joint-ventures. Volkswagen, for example, recently announced it would take control of its joint venture with Anhui Jianghuai Automotive Group in a $1.1 billion deal, while J.P. Morgan is acquiring full control of its Chinese mutual fund joint venture for $1 billion.
And, as Chinese companies mature, more and more foreign firms are concluding they can grow faster in China by acquisition than to insist on building from scratch.
During the lockdown, China’s local government’s scrambled to support the operations of foreign manufacturers in their region. To speed reopening of Tesla’s gigafactory in Shanghai, the government there provided more than 10,000 face masks, cases of disinfectant, and helped find accommodations near the plant for workers. Officials in Hubei helped Ford cut through red tape to speed procurement of car lamps produced from Valeo SA, a supplier based in the province.
Because China has been far more effective in containing the virus than Western economies, the China-based operations of global businesses have been able to reopen quickly than operations in North American and Europe. Many economists expect China’s economy to post solid growth in the second half of this year, while few expect a U.S. recovery before next year.
All of which means that “decoupling,” however sure-fire an applause-getter on the campaign trail, remains an unappealing prospect in many boardrooms.
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