The Outlook for Chinese Outbound Investment in 2017

Chinese outbound investment, its M&A activity in particular, has received much attention the past few years. China’s outbound M&A accounted for more than a quarter of all global mergers and acquisitions in 2016, and increased 40% year-over-year. Several factors are expected to spur outbound investment and M&A activity in 2017.

Chinese outbound activity is driven by a variety of factors. The domestic economy is entering a period of slower growth, although estimated growth forecast for 2017 will still be more than 6%. In addition, domestic stock markets seem overvalued providing limited opportunities for further investment, and the Chinese Yuan is under pressure due to concerns over devaluation.

Finally, and most importantly, demand for technology and know-how will continue to drive outbound investment.  The primary focus of Chinese companies when investing is not as much acquiring market share, but rather to gain knowhow and capabilities that can provide the companies leverage in Chinese domestic markets. As China intends to move away from a manufacturing- and export-focused economy to higher added value manufacturing and domestic consumer demand, Chinese companies will continue to look for European and US companies that can bring technology, know-how and branding into China.

Regions & Sectors

China’s economic restructuring is reflected in the make-up of its investment flows. While the majority of FDI was invested in manufacturing industries for the past 10 years, services industries represent more than 60% of China’s FDI. The investment into manufacturing is increasingly aimed at high-tech manufacturing needed to upgrade China’s own manufacturing industry as well as provide services for the growing middle class in China. With the growing need for foreign technology, increased investment and M&A activity for the coming years is expected in industries such as healthcare, logistics, information and communications technology and consumer goods. Another interesting trend is that privately owned companies, rather than state-owned companies are currently responsible for the bulk of foreign investment.

Challenges

There are of course also some challenges. In Europe and the US, amongst rising anti-globalist sentiments, M&A activities by Chinese companies are bound to face more scrutiny from regulators.On the Chinese side, while on one hand government promotes outward FDI and the acquisition of knowledge and technology by Chinese companies, recently currency controls have been tightened in light of China’s foreign exchange outflows and its effect on the Chinese currency. The government has announced plans for stricter controls on any overseas investment above $10 billion, or $1 billion if the investment is in a noncore business. As most investment by private companies is considerably lower than this threshold, such measure will not influence investment by private companies too much. However, this tightening will make it more difficult, or at least time-consuming, for some companies to execute their planned investments. 

However, if president Xi Jinping recent address at the World Economic Forum in Davos is any indication this will not change the Chinese government’s general policy of promoting its companies to go outward, and we will see plenty of Chinese M&A activity in 2017.