As Beijing Opens its Doors Foreign Firms invest into Chinese Companies, Despite Political Tensions

30/06/2020

FDI rose $9.87 billion and more foreign businesses are buying into China, including deals in the more sensitive industries of finance and technology

 

The pandemic outbreak depressed equity values around the globe, triggering fears across the Europe, Asia and United States of a distressed asset buying spree by Chinese companies. Thus, many governments enacted policies – some temporary, some permanent – to shield their national brands from Chinese takeovers. Several months into the pandemic, the data tell a different story about cross-border M&A (mergers and acquisitions) trends.

There are no signs of a Chinese outbound investment boom, like the one seen after the global financial crisis a decade ago. Instead, takeovers are headed in the other direction: into China. Over the past 18 months, we have recorded levels of foreign M&A into China that were not seen in the previous decade,” research firm Rhodium’s partner Thilo Hanemann and founding partner Daniel H. Rosen wrote in an online report released Thursday.

 

 

Compared to the boom years, Chinese companies with global ambitions face a very different environment today. And surplislngy, most of these investments has been driven by American and European.  So, what is driving foreign appetite for Chinese assets?

First, Chinese consumption. “The market in China is very big and lots of these foreign (corporate) investors, they are looking at the long-term business development in China,” Martin Wong, managing partner of the insurance sector for the financial services industry at Deloitte China, told to CNBC last week. “They’r’e not looking at the short and medium term.” Consumption has taken a hit in China – as it has everywhere else – but the economy is slowly recovering, sales are back and firms are still betting on the secular rise of China’s middle class. 

Second, opening and policy liberalization. Through the years, the Chinese government has peeled back restrictions on wholly-owned foreign operations, moreover has gradually increased the industries in which foreign businesses can operate. Volkswagen announced it would take control of its joint venture with Anhui Jianghuai Automotive Group in a $1.1 billion deal, and JP Morgan is acquiring full control of its Chinese mutual fund joint venture for an estimated $1 billion.

At a high-level annual financial conference in Shanghai that wrapped up Friday, China’s top regulators emphasized that the world’s second-largest economy would keep opening up its local capital markets to foreigners.

Third, Chinese firms have matured becoming leaders in some industries. For the first time, foreigners are buying Chinese technology and industrial assets rather than build from scratch. 

 

 

Since Trump’s administration began its own Trade War against China two years ago, the political campaign has spread to technology and finance. Then the pandemic outbreak in Wuhan has only strained Washington – Beijing realtyons further. But the rising business interest in China contrasts with an increasingly tense geopolitical environment. In the first five months of 2020, foreign M&A into China totaled $9 billion, surpassing Chinese outbound M&A activity in both volume and value terms for the first time in a decade.

Amid the economic and geopolitical pressures foreign entrepresis are investing in China, even american one. China has kept its markets closed long enough to develop its own giants in many industries. But other sectors are still in the early stages of development. At the intersection of a rising middle class and looser financial ownership restrictions is the insurance industry.

The economic shock of coronavirus-induced restrictions on business activity caused the gross domestic product in both the U.S. and China to contract in the first quarter. Many economists expect US GDP will fall by more than 40% in the second quarter, and China’s to eke out some growth, ahead of a rebound later this year. Amid the economic and geopolitical pressures, Chinese companies are investing less overseas, according to data disclosed Thursday by China’s Ministry of Commerce. But foreign investment rose 7.5% from a year ago in May to $9.87 billion.

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