The Chinese Government’s “Go Out Policy” or “Going Out Strategy” (走出去战略) dates from 1999, and has continued to evolve from that date on. The policy involves active government support to Chinese enterprises to promote and support overseas acquisitions.
That this has been a successful policy has been felt by the whole world: Chinese overseas acquisitions have grown rapidly, with 2016 breaking another record: Chinese outbound investment for the year until December totalled USD 146 bln. This amount does not include the significant Chinese government loans and grants to foreign governments to facilitate trade and business. Including that, the number is considerably higher still, at USD 355 bln for the first 9 months of 2016.
The Chinese regulators have recently issued new rules with regard to outbound investment, increasing the scrutiny of certain types of transactions, but these are only meant to prevent money flowing out of the country under the guise of overseas sham acquisitions staged in order to transfer money overseas. Bona fide acquisitions which make strategic sense, and fit the business of the Chinese acquirer, will still get approved going forward. The acquisition of so-called “trophy assets” and completely unrelated businesses will be more challenging.
While the very rapid growth of Chinese outbound investment both in nominal terms and as a percentage is extremely impressive, it is still a small percentage of China’s GDP at around 7% when compared to, for example, the US (20%) or Germany (47%) there clearly still is ample room for further overseas investments. This was also recently expressed at a recent conference in Beijing by a former Associate Minister of MOFCOM, Mr. Long Yongtu, who predicted that by the end of the current Five Year Plan in 2020, Chinese outbound investment will exceed USD 300 mln per annum.
In addition, the “Belt & Road Initiative” (or “OBOR”) will also be a strong impetus for Chinese companies to invest abroad in the OBOR countries. The first signs of this are already becoming evident.
There are however signs that China needs to handle this growing wave of foreign investments with care and a certain finesse: USD 40 bln of transactions were either not approved by foreign regulators, or pulled because it was evident that there were going to be regulatory or political issues. Certain countries have stated that they will implement new oversight bodies to scrutinise foreign investment transactions; most recently Australia. Clearly under the new government, the United States will become more challenging for potential Chinese investors.
As the United States Government turns to a more protectionist, isolationist mode many countries will turn elsewhere for their predictable, dependable strategic partnerships. This will cause major geopolitical shifts, and China looks to become a beneficiary of this. The Belt & Road Initiative, (which as we have explained in the past is much more than a strategy to deal with steel and cement overcapacity), should accelerate as China plays a more dominant role moving forward. This in turn will be the catalyst for even more Chinese outbound investment in the coming years. How this outbound mode will interact with the new US inbound mode will be one of the most important and interesting things to watch in the coming months.
Daniel P. de Blocq van Scheltinga
Daniel P. de Blocq van Scheltinga