Deals

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

After a $1 trillion river of capital flowed out of China during 2015, the government has been working furiously to avert a flood.

There was a clampdown on offshore purchases of insurance policies, and restrictions on currency trading by branches of overseas banks and withdrawals using UnionPay cards. Beijing is even thrashing out plans for a Tobin tax on foreign-exchange trading, according to people with knowledge of the matter.

While the nation has been pulling up the drawbridge for retail money flowing out, things look rather different at the top end of town.

ChemChina made a $43 billion bid for the Swiss agritech company Syngenta last year, without waiting for its $8.4 billion offer for tiremaker Pirelli to complete, and then threw in the $1 billion purchase of Germany's KraussMaffei in January. That month, Haier paid $5.4 billion for General Electric's appliances unit, more than $2 billion above what Electrolux was prepared to pay before its bid was blocked by the U.S. Justice Department.

Now the hitherto low-profile Anbang Insurance Group is turning itself into a global hotels brand. Fresh from buying New York's Waldorf-Astoria from Blackstone Group last year, it agreed to pay the same seller $6.5 billion for the Strategic Hotels luxury chain, according to people familiar with the matter, and muscled in on Marriott's attempt to take over the Starwood group with a $12.8 billion counter-offer.

The scale of this outbound investment wave is so great that the value of deals announced in the third quarter of 2015 exceeded China's current-account surplus for the same period, according to data compiled by Bloomberg. That trick will be repeated in the current quarter, unless China puts in its best current-account performance since 2008.

Go West, Young Man
The value of China's outbound M&A since January outstrips a typical quarter's worth of trade surplus
Source: Bloomberg data
Note: Current account data records actual transfers during a quarter. Value of outbound M&A records proposed, pending and completed deals during a quarter, and won't necessarily indicate transfer of capital during the same quarter.

Such deals are on track to run this year at five times the pace of 2015, according to Goldman Sachs's co-head of mergers and acquisitions, Gregg Lemkau. ``It feels like this outbound M&A from China is driven from the top; it's a desire to get capital outside of China and invest it around the globe," he said in a video posted on the bank's website. A possible motivation could be a desire to acquire assets in dollars and euros ahead of a devaluation of the yuan, he said.

All this could be seen as a welcome opening of the economy. The preponderance of private money in the recent flood, however, lends a murkier quality to the trend. 

Fully 63 percent of the value of outbound deals announced since the start of 2015 was driven by closely held companies, rather than those traded on public markets and accessible to ordinary investors, according to data compiled by Bloomberg. That's up from 47 percent over the previous five years, the data show.

Trickle Becomes a Flood
Money from closely held companies is accounting for a growing proportion of China's outbound M&A
Source: Bloomberg data

That China is investing overseas rather than hoarding capital at home can only be a good thing. But ordinary Chinese citizens, frustrated by the restrictions on moving relatively small sums out of the country, could be justified in asking who benefits from these transfers by companies with vast pools of cash.

That's particularly the case if any devaluation is in the offing. With China potentially facing worryingly low levels of foreign-exchange reserves by July, according to economist and Bloomberg View contributor Christopher Balding, smaller investors hoping to diversify their exposure to the economy are running out of luck. All those new restrictions on capital flight are clogging up the exits, while bigger investors with better connections get on the lifeboats.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net