IFLR takes a peek at the changes that have been occurring in Chinese outbound investment patterns and how target markets are adapting
The sudden acceleration in Chinese outbound investment over 2015 and 2016 across all sectors underwent a fundamental change in 2017 to become more targeted and in many ways, more mature.
Over 2017, the market saw the effects of capital controls in China that were implemented in November 2016. The controls acted to restrict the flow of outbound foreign direct investment (OFDI), curb irrational investments and tackle high leverage ratios in the finance sector. The controls were then codified in August 2017, breaking OFDI into three categories: banned, restricted and encouraged.
The immediate results of this change were dramatic. Last year saw the first drop in OFDI in over a decade. Bloomberg reported a 67% drop in OFDI from China in the first four months of 2017 compared to the same period in 2016. Full-year figures were more nuanced however, with a notable pick up in the second half of 2017. Data from the PRC's Ministry of Commerce (Mofcom) and State Administration of Foreign Exchange (Safe) registered overall declines in OFDI by Chinese companies of 29% and 53%, respectively.
On the receiving end, the US and some European markets have been under pressure to ramp up scrutiny on inbound Chinese investments. One example of this is the increasing interested by the Committee on Foreign Investment in the United States (Cfius) in tech investment by Chinese firms. In Germany, Midea's acquisition of Kuka (completed in 2017) overcame a very public effort from objectors to prevent the deal.
More practically, the additional risk that the new controls in China imples has made targets warier of Chinese buyers and whether they could successfully meet deal timetables. Break fees of as much as 10% were not uncommon.
Pattern of investment
The key takeaway however, says head of Asia M&A at UBS Samson Lo, is that the various obstacles to Chinese FDI at source have not created insurmountable headwinds for record levels of Chinese investment. This record level of investment seems set as a feature of the market. Despite the well documented drop in FDI, 2017 was still the second biggest year in record, and still four to five times pre-crisis levels.
Markets including Bangladesh, Lebanon and Turkey have made concrete efforts to attract investment and make investor frameworks friendlier
The new environment has impacted the sectors into which Chinese investment is flowing and the structure of the deals being made. The scrutiny on private companies has meant that the balance has shifted back to state owned entities (SOEs), which now account for the majority of investments. Some of the biggest examples of these in 2017 included China Investment Corporation's €12.3 billion (approximately $152.2 million) acquisition of Logicor or Cosco's acquisition of a stake in Spain's Noatum port.
Another change has been the influence of private equity and financial sponsors. Chinese strategics are happier to work with private equity to beat capital controls. "We've seen companies team up with not just one but a number of Chinese sponsors to help circumvent capital controls, meet funding requirements and secure foreign currency approval," says Lo.
A third development has been a rise in Chinese non-FDI investment, such as venture capital and portfolio investment stakes of under 10%.
The view from target markets
While some private practice lawyers record a drop in volume in 2017 compared to 2016, they all point to a changing landscape in terms of investment rules and the types of Chinese investments they are seeing.
French law firm LPA-CGR notes a drop from $2.4 billion to $1 billion in Chinese FDI into France from 2016 to 2017 and a trend of transactions being on hold for long periods. They do however predict growing interest due to a warming relationship between the countries and more attractive tax rates in France.
Offshore markets have worked hard to keep their positions as conduits for the vast majority of Chinese outbound investments, according to Harneys, with new structures on offer to attract investors. Niederer Kraft Frey, in Switzerland, draws on recent acquisitions by ChemChina, HNA and Dalian Wanda Group and notes the increasing presence of privately owned enterprises (POEs) in M&A, driven by an interest in new technology and boosting market share.
Markets including Bangladesh, Lebanon and Turkey have made concrete efforts to attract investment and make investor frameworks friendlier. Turkey has seen a recent flurry of Chinese investment into energy and infrastructure in particular. South Africa and China signed a memorandum in 2015 to develop economic opportunities and ENSafrica expects increasing activity from POEs as they migrate into the consumer-facing market.
What is clear is that Chinese investment, whether at record levels or just below record levels, has settled in for good and legal tools are shifting to keep up.