China outbound investment set to rise despite political headwinds

Cross-border M&A deals rose 19.5% in the first 10 months.

China's outbound investment will continue to be elevated over the coming quarters despite rising political headwinds, said BMI Research.

The research house adds that Chinese firms will continue to favour developed markets such as Western Europe, North America and developed Asian economies.

Chinese companies started a shopping spree in the global mergers and acquisition (M&A) market in Q315. According to Bloomberg, a total of 852 cross-border M&A deals were announced in the first 10 months of 2016, which marks a 19.5% y-o-y increase when compared with the same period in 2015.

Additionally, the total value of the announced deals came in at USD294.4bn in the January to October period, which is approximately 160% higher than the number of announced deals in the same period in 2015.

However, BMI notes that the growing number of deals is attracting more government scrutiny from both Beijing and foreign governments. 

"While Chinese investors could face rising political headwinds, we expect them to continue conducting a large number of outward M&A deals over the coming quarters in an effort to move up the value chain and to hedge for currency and economic risks, it said.

Here's more from BMI:

We expect Chinese firms to continue facing political obstacles when conducting cross-border M&A activities. We believe that foreign governments could increasingly intervene in Chinese companies' M&A attempts on the back of national security concerns and rising populism. For example, in August, the Australian government blocked the sale of a 50% stake in Australia's largest network operator, Ausgrid, to Chinese and Hong Kong bidders due to 'security concerns'.

Chinese appliance-maker Midea also currently faces political resistance to it finalising the legal process of a takeover of German robot-maker Kuka Ag, despite the fact that it now holds approximately 94.5% of Kuka's shares. As Chinese firms start to target household names, major regional employers or companies that possess key technology, the odds of greater resistance by local governments will increase further. This, combined with rising protectionism encouraged by growing populism, will continue to weigh on China's outward investment.

Meanwhile, resistance from the Chinese government could also increase on the back of concerns over rising capital outflows. Indeed, on September 22, the State Administration of Foreign Exchange (SAFE) stated that in an effort to ease capital outflows, it will crack down on fake overseas mergers and acquisitions conducted by domestic firms.

The Chinese government has also become more concerned about the abnormally high premiums that Chinese firms are willing to pay for cross-border M&A deals. For example, according to Caixin, objections from the SAFE and other regulatory agencies were one of the reasons why Anbang, a Chinese insurance company known for its strong government connections, withdrew its bid for Starwood Hotels in March.