China investment

By Spencer Lake, HSBC

Chinese companies have been stepping up their global investment spree in the past 12 months. Mergers and acquisitions by private Chinese investors are becoming the key drivers of the country’s outbound direct investment.

In what has been called the ‘Third Wave’ of China outbound direct investment (ODI), the focus of investment has been on companies in the developed economies in high-tech and services. Previous ‘waves’ have focused on supporting developing economies and investing in commodities and extraction industries. Read more

China is in the early stages of a domestic M&A boom unlike any other elsewhere in the world. Deal pricing, timing, terms, financing and structure are all markedly different than in other major economies, with likely consequences, good and bad, for global corporations and buyout firms eyeing M&A transactions in China.

For these two, as well as companies wishing to find a buyer in China, the game now is to learn the new rules of China M&A and then learn to use them to one’s advantage.

Chinese companies mainly pursue M&A for the same reasons others do – to improve margins, gain efficiencies and please investors. The main difference, and it’s a striking one, is that in most cases domestic Chinese corporate buyers, especially the publicly-quoted ones who are most active now trying to do deals, have no money to buy another business. Read more

By Joel Backaler, Author of “China Goes West”

On March 22, China National Chemical Corporation (CNCC) reached an agreement with the controlling shareholders of Italian tire-maker Pirelli to move forward with a €7bn takeover. If successful, the deal will be one of the largest overseas acquisitions of a European company by a Chinese firm to date.

While CNCC may not have the global recognition of Chinese firms such as Alibaba, Huawei and Lenovo, CNCC and its chairman, Ren Jianxin, are experienced international acquirers. Ren has acquired either directly, or via government driven consolidation, 107 domestic firms and four international businesses in France, Australia and Israel. Read more

By Noor Menai, CTBC Bank USA

In a thinly veiled admonishment, the White House recently accused the UK – our closest ally – of “a policy of constant accommodation” towards China. The parallel drawn to the historical appeasement of Germany by an apprehensive Europe was lost on no one, nor indeed the overwrought nature of the underlying concern.

The proximate cause of this spleen-venting was the surprise breaking of ranks by the UK to join as a founding shareholder the nascent China-led Asian Infrastructure Investment Bank (AIIB.) This initial $50bn fund has as its’ agenda the financing of overdue infrastructure in Asia. Read more

By Gavin Bowring, Asean Confidential

With the China-led Asian Infrastructure Investment Bank (AIIB) gaining support from a growing number of global economic actors, one big question remains. Where will the bank itself be headquartered?

Beijing might seem the obvious choice. But given the political sensitivities surrounding the bank’s formation, it may seek to alleviate fears of Sinocentrism and opt for a neutral, regional destination. A similar calculation resulted in the decision by the Asian Development Bank (ADB) – in which Japan is the largest shareholder – to pitch its regional headquarters in Manila. Read more

By Kevin P. Gallagher and Margaret Myers

Despite the economic slowdown that is gripping Latin America, Chinese finance to the region rose to $22bn in 2014, a 71 per cent jump over 2013. These latest estimates from the China-Latin America Finance Database put 2014 as the second highest year on record for Chinese lending in Latin America and raise the stock of Chinese finance in the region to $119bn since 2005, when China’s banks started reaching out to the Americas.

This new finance couldn’t come at a better time. After a decade-long commodity boom, the International Monetary Fund (IMF) estimates that Latin America’s economic growth may only reach 2.2 per cent in 2015. As the economy cools, the region’s traditional sources of capital are turning to the United States, beckoned by faster growth and rising interest rates. Read more

By Marty Sun, Goldman Sachs

The launch of the Shanghai-Hong Kong Stock Connect last November has made it easier for international investors to access China’s equity markets.

The link got off to a smooth start largely thanks to the money from hedge funds worldwide flowing into Shanghai.

But unlike their hedge fund cousins, less than one-third of Hong Kong’s long-only fund managers (who buy stocks hoping their prices will rise) are using the link to buy Shanghai-listed shares, according to a recent survey by the Hong Kong Investment Funds Association (HKIFA). Access from Europe has been even more measured, with only a few Luxembourg funds approved for the programme, even though a fast track application process has been put in place. Read more

By Stuart Rae and John Lin, AllianceBernstein

Despite a slow start following its launch in November, the Shanghai-Hong Kong Stock Connect share trading scheme has significantly increased foreign access to China equities and created new investment opportunities. Two sub-sectors are particularly noteworthy for global investors; the food, beverage and tobacco segment and the household durables segment.

A key trend to watch in 2015 will be the likely increasing usage of Shanghai-Hong Kong Stock Connect. This important capital market reform was launched by the Chinese government last November to help increase the inflow of foreign capital to the Shanghai equity market, while also facilitating greater participation by mainland investors in Hong Kong-listed equities. Read more

Guo Guangchang, an entrepreneur who claims inspiration from China’s oldest sages - as well as from the “sage of Omaha”, Warren Buffett – has topped an inaugural ranking of the wealthiest Chinese investors with a personal fortune estimated at $4.5bn.

Guo (above), 48, typifies the eclectic acquisitiveness of China’s emerging cohort of investors. His company, Fosun International, this month won the longest takeover battle in French history by beating Italian investor Andrea Bonomi to take control of Club Méditerranée, the vacation organiser, after a 16-month wrestling match. Read more

By Hayden Briscoe, Shamaila Khan and Jenny Zeng, AllianceBernstein

China’s economy isn’t headed for a hard or soft landing — instead, it’s more likely to be a long landing. That’s our perspective, based on our team’s recent visit to China to get an up-close look at the economic landscape.

The country’s economy clearly faces another few years of uncertainty and negative headlines, but we think the risks will be contained as long as the government sticks to its reform agenda. On our China trip, we assessed conditions in important cyclical sectors such as banking, basic industries and property. Read more

China’s new charm offensive in Asia – using infrastructure development to garner soft power at the expense of rivals US and Japan – has reached new heights in recent weeks. Multi-billion US dollar deals with strategic partners such as Sri Lanka and Pakistan aside, even countries with reservations about China’s rise have begun taking a more pragmatic view toward using China’s huge foreign exchange reserves to their benefit.

Earlier this month, Indonesian leaders travelled to Beijing seeking to tap financing for power and transport projects, notwithstanding the new administration’s strong emphasis on both national and maritime security. Chinese companies are challenging Japanese bids for high speed rail contracts in Malaysia and Thailand. This week, a team from Indian Railways flew to Beijing to discuss a potential Delhi-Chennai high speed rail link.

Yet in spite of the huge stashes of money available in Beijing, Chinese financing for existing energy projects in Vietnam – an economy with high dependency on China – has been all but frozen as a result of bilateral tensions over the South China Sea, according to research by Asean Confidential, a research service at the Financial Times. Read more

By Alastair Campbell and W. John Hoffmann, Exceptional Resources Group

“There is no difference between reform and anti-corruption: both must be implemented within the framework of law”.

So said Chinese leader Xi Jinping, and with the end of a high level Communist Party meeting last month, the significance of Xi’s “Rule of Law” campaign has become crystal clear. It is a key tool in his attempt to restructure the framework of Party political power and decision-making via the four new Party central leading groups which he chairs. Read more

If there’s one subject on which policymakers around the world seem to agree, it’s that foreign direct investment is a Good Thing.

The annual tables of inward foreign direct investment (FDI) are treated by governments of rich and poor economies alike much as football fans treat rankings in the English Premier League, crowed over by countries in the leading pack and quietly forgotten by those in the relegation zone.

There is no doubt that FDI can do a lot of good: it can add to an economy’s productive capacity and import not just capital but technology, production skills and better management. China, which not only welcomed FDI but witnessed intense competition between different provinces to attract it, stands as a shining example. Read more

A huge bonfire of the brands awaits auto manufacturers in China as some 90m car owners prepare to disregard loyalty when they chose their next model.

A survey of some 2,400 car owners conducted by the Boston Consulting Group (BCG) found an itch to switch brands among 83 per cent of respondents who drove domestic Chinese brand cars. Of these, only 30 per cent said they would drive another domestic brand as their next car, while a full 40 per cent said they planned to plump for a Volkswagen.

The findings suggest that the next big trend for auto manufacturers in the Chinese market – which has expanded tenfold since 2000 to register annual sales of around 20m units – may not be so much concerned with chasing growth as with inculcating brand loyalty. Read more

By Anil K Gupta and Haiyan Wang

Chinese president Xi Jinping’s visit to India this week will likely be the most significant meeting between the leaders of China and India since Rajiv Gandhi’s visit to Beijing in 1988. Indeed, India’s leading business daily has gone so far as to suggest that Xi will bring along with him commitments to invest $100bn over the next five years. But while ties between India and China are growing quickly, such estimates remain highly unrealistic and risk saddling this burgeoning relationship with unrealistic expectations.

An article in the Economic Times newspaper quotes China’s consul-general in Mumbai: “On a conservative estimate, I can say that we will commit investments of over $100bn or thrice the investments committed by Japan during our President Xi Jinping’s visit next week. These will be made in setting up of industrial parks, modernization of railways, highways, ports, power generation, distribution and transmission, automobiles, manufacturing, food processing and textile industries.” Read more

By Andrew Colquhoun, Fitch Ratings

Does China invest too much? The country has been investing about 48 per cent of its GDP annually since 2010, which is unprecedented for any decent-sized economy, post-war. This investment is funded by a stock of leverage that will reach about 230 per cent of GDP in 2014 on Fitch’s estimate. Everyone has heard about the ghost towns and empty airports, leading some analysts to conclude China must be heading for a reckoning.

But you do not have to look far for evidence that China remains an underdeveloped country. Its rail network is only 13 per cent as extensive as Japan’s and only 64 per cent of its roads are paved, according to the World Bank. Almost exactly four years ago, one of the country’s main arteries, Highway 110, saw a 60-mile, 10-day traffic jam. Read more

By Gordon French, HSBC

China has been the growth story of the past three decades. It has also been largely out of reach for portfolio investors. That is about to change.

Shanghai-Hong Kong Stock Connect opens a new chapter in China’s financial integration with the world, and will in time reshape the dynamics of global investment flows.

Expected to launch in October, Stock Connect will for the first time allow mainland Chinese citizens to invest directly in foreign equities, and give global investors direct access to China’s stock market. Read more

China’s property market – seen by some as the biggest risk facing the global economy – appears to be weakening across the board as construction activity cools, land sales slow, apartment sales slide, unsold inventory rises, financing grows tighter and the sentiment of developers slumps markedly, according to a quarterly survey conducted by Standard Chartered Bank.

“Our Developers Sentiment Index suggests that the worst times are still ahead for many developers,” concluded the Standard Chartered report authored by Lan Shen and Stephen Green. The survey polled 30 senior managers at real estate developers in June-July in six cities – Hangzhou, Foshan, Huangshi, Baoding, Lanzhou and Nanchong – on current market conditions and expectations.

The results were almost uniformly gloomy Read more

By Andy Rothman, Matthews International Capital Management

Statistics announced on Wednesday do much to challenge the view that sub-par Chinese consumer spending is to blame for the sluggish rebalancing of the world’s second largest economy away from an over-reliance on investment. For too long this opinion has obscured the crucial truth that China is actually host to the world’s best consumer story.

Real retail sales rose 10.7 per cent in June and 10.8 per cent in the first half of this year, compared to the year earlier period. The strong momentum of this spending springs from solid foundations, with real urban household disposable income rising 7.1 per cent, up from 6.5 per cent a year ago. Read more

By Joel Backaler, Author of “China Goes West”

On a recent trip to London, I was shocked at how much evidence of corporate China was all around me. As I rode in a black cab, I remembered that Geely, a Chinese firm that acquired Volvo in 2010, had bought iconic British cab producer Manganese Bronze in 2013. Arriving at Heathrow, I recalled that China’s sovereign wealth fund, the China Investment Corporation, owns 10% of the firm that operates the international airport. In line at the gate, I stared at a giant display for a laptop by Lenovo, the Chinese firm that made headlines in 2005 for acquiring IBM’s ThinkPad brand.

In only a few short years, Chinese companies have gone West in a big way. However, many questions remain about what drives Chinese firms to expand beyond the boundaries of the Middle Kingdom, and what the ultimate costs and benefits of their global investments will be. Read more