The year 2016 was a massive year for Chinese companies out to buy Western companies or majority shares in them. Only in the first three months of 2016, Chinese groups spent around US$103 billion on mergers and acquisitions of big firms in the U.S. and Europe. Prior to that, in 2015, Chinese investors had spent US$107 billion total on foreign mergers and acquisitions.
China is not just interested in transportation and connectivity projects like railways, ports, and highways anymore; Chinese investors have been dropping the big bucks for companies related to technology, telecommunications, food, hotels, and industrial and consumer spaces.
Why the interest?
The Chinese intent for buying up new companies across a huge range of industries and sectors is to bring back home the Western advancements in business strategies, technology, and knowledge to give China the push it needs to compete and overcome their Western counterparts.
It all aligns well with China’s aim to develop the country in its local manufacturing capacity by 2025. At the same time, with the growing development in the country, the wages of Chinese people are also increasing. This will gradually decrease China’s global advantage of low wages, making it crucial for Chinese firms to join hands with Western companies, increase their consumer base, and take advantage of their technical edge.
Chinese firms are also looking to push themselves away from the domain of basic manufacturing and want to create a strong base of high-end finished products. As a result, any mergers and acquisitions of the same in Western nations will provide the Chinese firms the foundation to build China’s polished image.
Another reason why enterprises, specifically state-owned enterprises, are looking to spend outside of China is that they have almost reached a plateau when it comes to domestic growth. Additionally, state-owned enterprises are backed with large investors and have the financial capability to close major deals. Furthermore, China’s economy has slowed down a bit, which is also pushing Chinese firms to venture outside, especially in the West.
Food for thought
Another interesting factor in the rise of foreign investments is the large amount of state funds available for Chinese companies to invest abroad. This, unfortunately, raises the question of how independent these mergers and acquisitions are from the intentions of the Chinese government. This year, 2018, the U.S. administration has imposed tariffs totaling US$50 billion against Chinese imports as a consequence of China’s theft of intellectual property. Chinese firms are accused for their intent to acquire Western technical know-how to enhance domestic units. When you connect government financial backing to the transfer of Western technology and increasing Chinese investments in foreign firms, it is important to question how independent these choices are.
What happened to the interest?
In 2018, on the other hand, we witnessed a drop in the number of Chinese acquisitions. This is largely due to tightening capital controls in China and growing regulatory scrutiny of acquisition of U.S. tech firms. The report also suggests that China is trying to rein in capital outflows due to slowed economic growth, as well as high fluctuations in the yuan. At the same time, the U.S. has become wary of their technology easily flowing into the hands of their Chinese competitors through these abundant mergers and acquisitions. As a result, the U.S. government has blocked several of these Chinese takeovers, specifically in the technology sector, making their national security a priority.