Takeovers in North America and Europe to form backbone of Chinese corporate expansion
Chinese outbound direct investment (ODI) will likely accelerate in coming years as Chinese companies take over international rivals, according to HSBC.
Chinese ODI, which has grown by about 19 percent a year since 2009, will probably grow by 20 percent a year for the next several years as the government encourages private companies – rather than just state-owned corporations – to expand overseas, writes Spencer Lake, HSBC’s global head of capital financing, in an analysis piece.
ODI reached $116 bn last year, nearly matching the $120 bn in foreign direct investment (FDI) China received, though FDI into China has been growing at only 5 percent a year, HSBC says.
‘The increase in China’s ODI is driven by the central government’s strong encouragement of domestic companies to invest overseas in a bid to boost their international competitiveness,’ Lake writes. ‘Slow global economic recovery and depreciating foreign currencies have provided a decent tailwind to this endeavor.’
The analysis piece notes that the focus of the investment is shifting, too, from the traditional Chinese emphasis on coal, oil and other natural resources to infrastructure such as rail, shipping and ports. Chinese companies are also moving away from a focus on investment in Africa, Latin America and emerging Asia to target North America and the European Union.
In the first quarter of this year, outbound Chinese mergers and acquisitions rose an annual 36 percent to a record $20.2 bn and the number of deals in the period increased 33 percent from a year earlier to a record high of 77, HSBC says. Non-state-run companies are also helping shift the focus of overseas investment, including M&A, toward technology, real estate, high-end manufacturing and agri-business.
‘The opportunities, however, come with challenges,’ Lake writes. ‘Acquiring value-added assets is likely to remain extremely difficult. Chinese companies are still not well understood overseas. Cultural integration can be a challenge. To adapt to these challenges, we have seen private enterprises hiring local management and applying local operating models in a bid to retain talent and cut acquisition risk.’
