A global shopping spree

Last year was a record year for Chinese foreign merger and acquisition activity, with the closing of 382 deals totalling $67.4 billion, according to PwC. China’s Ministry of Commerce reckons Chinese overseas direct investment topped $118 billion in the 12 months to December 2015.

One of the reasons behind this foreign push is that China’s economic slowdown has urged the government to accelerate the restructuring of the country’s development model from an export-oriented to a domestic consumption-driven economy. This, in turn, has prompted Chinese businesses to increasingly look overseas for diversification opportunities, explains a Chinese fund manager, triggering investment in a wide range of industries from real estate and manufacturing to infrastructure.

Chinese investors are partly going abroad to bring back the kind of useful expertise that will create synergies with their domestic businesses. Eric Lalauze, head of infrastructure for Europe and Australasia at CITIC CLSA Securities, sees such strategic synergies as one of the main advantages of Chinese corporates when bidding overseas. This allows them to pay a premium for the future benefits to be derived from a business’s integration.

Lalauze says that is one of the reasons why State Grid Corporation of China is recognised as a strong contender for the privatisation of Australian transmission network Ausgrid. According to him, State Grid has the expertise and knowledge to strengthen Ausgrid’s operations and integrate the asset into its wider portfolio, in addition to the requisite financial firepower.

Achieving such synergies requires exceptional management skills during the post-investment stage. However, some Chinese investors are being challenged by regulatory differences and unfamiliar business practices. Lalauze points out that many OECD infrastructure assets are highly regulated monopolies, forcing Chinese firms to adjust their business strategies to comply with these regulatory frameworks.

SECURITY CONCERNS

Also, while Chinese investors’ appetite for overseas assets continues to grow, the political sensitivity around Chinese foreign investment remains an obstacle.

In Australia, the Foreign Investment Review Board announced last month that it will formally review the sales of critical state-owned infrastructure assets to private foreign investors. While some believe it will not go as far as to restrict foreign investment – including from the Chinese – it does demonstrate national regulators’ concerns over foreign ownership of strategic infrastructure assets.

A well-known Antipodean example is the award of a 99-year lease for Port of Darwin to China’s Landbridge Group in October. The lease debate centred on security concerns over the port, part of which is used as a defence vessel facility. It also included a high-profile dressing down from US President Barack Obama.

“It’s all about preparation,” Lalauze comments on Port of Darwin. “All stakeholders, including the local government, need to work better with the community and investors on communication strategies to address perceived issues and alleviate concerns from the community.”

Daniel Hu, a managing director at China Everbright, agrees that when it comes to investing in overseas markets, it takes more work for Chinese investors to make themselves thoroughly understood about what they will do with an asset and to address the sensitivities faced by local communities.

Last year, a Chinese consortium secured France’s fourth largest airport, Aéroport Toulouse-Blagnac. “This demonstrates that regulators and investors from the West are gaining more confidence and understanding on Chinese investors. It takes time for the world to be familiar with and to distinguish between the different types of Chinese investors. Progress is being made. Hopefully the sensitivity will subside over time,” he said.

He also stressed that the situation is not limited to Chinese investors. “If investors from other emerging markets start investing abroad [in such a scale], they may encounter the same challenges,” he argued.

Still, with overseas asset allocations relatively small compared to Chinese corporates’ enterprise values, expect their global shopping spree to continue in the years to come.