An unwelcome but needed brake on investment abroad

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.