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
Polarwide Ltd.
Daniel P. de Blocq van Scheltinga
Polarwide Ltd.
