Don’t Fear China’s Overseas Acquisitions

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This has been the year that Chinese companies have truly gone global. Collectively, they have announced more than USD170 billion of acquisitions abroad during the first nine months of 2016 – more than in any previous year. 

Not all have been welcomed with open arms by politicians, regulators or the companies being targeted for purchase. Concerns are understandable when a country quickly becomes such a force in global mergers and acquisitions. 

But it is important to remember that there is a strong commercial rationale for China behind overseas acquisitions and that these investments present substantial opportunities to the companies and economies in question. 

Many more companies now have the scale and experience to make big acquisitions which they may have lacked just a few years ago 

While Chinese enterprises certainly need access to the brands, technology and – sometimes – growth prospects they can find in international markets, they also have a lot to offer. Chinese capital can provide welcome cash injections, and a Chinese investor also brings valuable experience of operating in the vast Chinese market that is critical to many firms’ growth plans. 

The initial impetus for China’s overseas M&A drive, 20 years ago, came from Beijing. The imperative then was for Chinese companies to venture beyond China in a bid to become globally competitive. The wave of activity over the past couple of years, though, is the product of more mundane drivers. 

First, consider the scale of China’s economy. China’s real gross domestic product in 2015 was 30 times the size it was in 1978. Many more companies now have the scale and experience to make big acquisitions which they may have lacked just a few years ago. 

Second, China’s economic rebalancing is influencing its outbound investment. Today, service-sector activity accounts for more than half of China’s GDP. The manufacturing sector is also becoming more technologically sophisticated. 

This shift has changed what Chinese companies are buying. A decade ago, China’s M&A forays overseas were mainly about securing the supply of natural resources and energy. Now, the mix of target industries is much wider. Consumer-related goods and services (entertainment, white goods, healthcare), high-technology industries (robotics, automotives), and information technology have moved up the list. China’s focus has shifted from basic resources to assets that meet the demands of an increasingly affluent consumer society. 

At the same time, the profile of those doing the buying has changed. Ten years ago, a typical overseas Chinese acquisition involved a giant state-owned enterprise. Now, with privately-owned business making up 60 per cent of China’s output, it is more likely to involve a private-sector company. 

Finally, China’s slower growth is a catalyst for overseas acquisitions. The “new normal” for China involves growing at a more modest, more sustainable pace. We forecast growth of 6.7 per cent this year and 6.5 per cent in 2017. This has fanned Chinese corporates’ desire to move beyond their home market in search of growth and diversification.