An un­wel­come but needed brake on in­vest­ment abroad

China Daily (USA) - - VIEWS - The au­thor is a se­nior writer with China Daily. zhuqi­wen@chi­

As Chi­nese com­pa­nies are speed­ing au­da­ciously ahead with mas­sive cross-bor­der merg­ers and ac­qui­si­tions, it is frus­trat­ing for them to en­counter an in­creas­ing num­ber of red lights in someWestern coun­tries.

But while the for­eign reg­u­la­tory ob­jec­tions that have thwarted some high-pro­file Chi­nese deals may be eas­ily in­ter­preted as po­lit­i­cally-driven, they ac­tu­ally make an un­in­tended case for a timely and cool­headed re­viewof the on­go­ing surge in China’s over­seas in­vest­ment.

Lat­est of­fi­cial sta­tis­tics showed that China’s out­bound di­rect in­vest­ment jumped 53.7 per­cent year-on-year to 882.78 bil­lion yuan ($134.22 bil­lion) in the first three quar­ters of this year.

That means Chi­nese com­pa­nies have al­ready com­pleted more over­seasM&A projects in the first nine months of this year than the to­tal of last year in terms of trans­ac­tion value.

The speed of China’s out­bound di­rect in­vest­ment growth is re­mark­able. It turned from a net im­porter of cap­i­tal into a net ex­porter when its out­bound FDI sur­passed in­bound FDI for the first time in 2014, and it jumped to be the world’s sec­ond largest source of out­ward FDI last year. It is es­ti­mated by Dealogic, a com­pany that of­fers an­a­lyt­ics and tech­nol­ogy to in­vest­ment banks, bro­ker­age firms, and in­vest­ment ad­vis­ers, that so far this year, China has for the first time done more deals than the US, the top cross-bor­der ac­quirer since 2008.

An over­all re­view of the ris­ing tide of Chi­nese out­bound in­vest­ment is badly needed to avoid pay­ing a too dear price for learn­ing risk man­age­ment.

Yet, even be­fore Chi­nese com­pa­nies can give them­selves a pat on the back, they must pre­pare to weather the storm gath­er­ing on the hori­zon.

Reg­u­la­tory moves byWestern gov­ern­ments to re­sist in­vest­ments by Chi­nese com­pa­nies have re­port­edly ru­ined planned Chi­nese ac­qui­si­tions worth up to nearly $40 bil­lion since mid-2015. Ac­cord­ing to bou­tique in­vest­ment bank Grisons Peak, Chi­nese com­pa­nies have dropped 11 big M&A deals since July last year, mainly be­cause of scru­tiny by au­thor­i­ties in the United States, Aus­tralia and else­where. And the to­tal value of these foiled deals amounted to as much as one-sev­enth of all deals Chi­nese com­pa­nies an­nounced over the past 16 months.

It is note­wor­thy that these failed deals do not even in­clude ChemChina’s planned $44 bn ac­qui­si­tion of Syn­genta, which would be the largest over­seas ac­qui­si­tion by a Chi­nese group. ChemChina has failed to of­fer con­ces­sions to a Euro­pean Union com­pe­ti­tion in­quiry ahead of a dead­line, though both com­pa­nies in­sist that they re­main fully com­mit­ted to the trans­ac­tion and are con­fi­dent it will go ahead.

Most of the foiled Chi­nese ac­qui­si­tions are osten­si­bly be­cause of com­pe­ti­tion or se­cu­rity con­cerns, but each of them has come amid a grow­ing cho­rus of pro­tec­tion­ism in­Western coun­tries.

Eco­nomic dif­fi­cul­ties at home have made it dif­fi­cult for pol­i­cy­mak­ers in these coun­tries to sell the mer­its of glob­al­iza­tion pro­pelled by trade and cross-bor­der in­vest­ment. But they should re­sist dis­crim­i­nat­ing against Chi­nese in­vestors; backpedal­ing on open­ing-up to Chi­nese in­vest­ments will not help eco­nomic growth.

For Chi­nese com­pa­nies and pol­i­cy­mak­ers, the in­creas­ing scru­tiny byWestern reg­u­la­tors should not only be deemed as an un­wel­come brake on the surge in Chi­nese takeovers. It may have un­fairly dis­rupted some Chi­nese com­pa­nies’ le­git­i­mate plans for over­seas ex­pan­sion. But tight­en­ing reg­u­la­tory re­views should also serve as a timely warn­ing on the sus­tain­abil­ity of China’s over­seas in­vest­ments.

The cur­rent speed is faster than such op­ti­mistic pre­dic­tions as China’s over­seas in­vest­ments will grow 10 per­cent a year and ex­ceed $2 tril­lion by 2020.

Both Chi­nese com­pa­nies and pol­i­cy­mak­ers can­not af­ford to ig­nore the high risks as­so­ci­ated with over­seas in­vest­ments. In­vest­ment records in­di­cate that many Chi­nese in­vest­ments abroad have failed since 2005, mainly be­cause of a lack of over­seas in­vest­ment ex­pe­ri­ence.

An over­all re­view of the ris­ing tide of Chi­nese out­bound in­vest­ment is badly needed to avoid pay­ing a too dear price for learn­ing risk man­age­ment.

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