China Inc.'s Shopping Spree
Here's what Chinese companies now own: Pirelli tires, Volvo cars, the Inter Milan soccer team and its crosstown rival AC Milan, New York's Waldorf Astoria hotel and the Hollywood studio behind “Jurassic World.” Corporate China has been on an unprecedented shopping spree, broadening its horizons as the domestic economy slows with a record $245 billion of overseas deals in 2016. But the spending bonanza has begun to wane thanks to obstacles both at home and abroad. There's anxiety among foreign governments that the close ties between China Inc. and the state expose countries to something more sinister than a welcome injection of investment. And there's concern among Chinese authorities about money fleeing the country and the nature of the investments by the nation's huge private conglomerates. Even so, 2017 is on course to be the second-biggest year in history for Chinese overseas acquisitions — assuming the deals get completed.
In September, Donald Trump blocked a Chinese-backed investor from buying a U.S. semiconductor business, just the fourth time in a quarter-century that a U.S. president has nixed a foreign takeover on national-security concerns. Opposition to Chinese buyouts has also mounted in Europe, the main target for China's companies in the past two years. In Germany, where China Inc. struck deals at a rate of almost one a week in 2016, the former economy minister called on the European Union to give national governments more powers to block takeovers. The European Commission has signaled that overseas buyers will face tougher scrutiny. Meantime, China has imposed tighter restrictions on moving Chinese currency out of the country and put under scrutiny some of the biggest corporations that have led the acquisition charge, including Dalian Wanda Group Co., Anbang Insurance Group Co., HNA Group Co. and Fosun International Ltd. China's regulators worry that those companies' purchases may destabilize the financial system, weaken the currency and deepen the country's debt woes. Even so, the government is encouraging investment by state firms in assets such as ports that are consistent with the goals of its Belt and Road Initiative. For much of 2016, China rivaled and at times led the U.S. as the world's most acquisitive nation, often by forging unlikely partnerships: A little-known property developer is buying the Chicago Stock Exchange and a loss-making iron ore producer purchased a U.K. computer-game developer.
China’s trade forays began as early as 130 BC when merchants pioneered the Silk Road through central Asia to Europe. Chinese emperors for centuries considered the country self-sufficient, and foreign trade only opened up after Deng Xiaoping began unlocking China's borders in 1979. The priority soon became energy and commodities in emerging markets to feed China's breakneck industrialization. The aperture has since widened to include established companies in developed economies and varied industries — Lenovo's purchase of IBM’s personal computer business in 2005 marked a watershed. The government had encouraged the recent overseas push, as rising overcapacity at home left Chinese companies seeking new customers. They also covet cutting-edge technologies and brand power, while the weakening yuan gave them an added incentive to spend cash sooner rather than later. Unlike in Europe, the U.S. has a regulator to vet deals for national security threats. That body — the Committee on Foreign Investment in the United States — has seen its workload soar as allegations of Chinese cyberespionage put a spotlight on technology deals. Chinese investments in a Philips NV unit and Western Digital collapsed after involvement from the regulator, which also opposed the takeover of Aixtron, a Germany technology firm with U.S. operations.
Critics say China should loosen restrictions and give foreign companies the same freedom that Chinese firms enjoy when making overseas acquisitions. They argue that China Inc. gains an unfair advantage from easy financing for deals provided by government-backed banks. Managers at state-owned enterprises fall short of international standards and are preoccupied with short-term goals, according to Wang Jianlin, one of China’s richest men. Former U.S. Treasury Secretary Hank Paulson has argued that Chinese investment should be embraced — one report found that Chinese takeovers had saved many American firms from bankruptcy and that most had resulted in expansion. A study in Germany drew similar conclusions. Doomsayers warn that Chinese overseas investment could turn into a Trojan horse that introduces China's politics and values. That view represents a Cold War mentality, critics respond, recalling the unseemly backlash against Japan’s takeover spree in the 1980s.
The Reference Shelf
- A Bloomberg infographic on China's M&A splurge.
- A Rhodium report concludes that Chinese deals are not attracting increased U.S. scrutiny, it just seems that way because there are so many more of them.
- The U.S. Treasury's FAQ on the CFIUS and a guide by law firm Baker Potts on the committee's workings.
- A study by Rhodium Group and Mercator Institute for China Studies considers the reasons behind a record year of Chinese investment in Europe.
- An article by Chinese state news agency Xinhua refutes the notion that China is “buying up the world.”
- The Brookings Institution says China's M&A engine may be sputtering.
- Bloomberg QuickTake on China's Silk Road.
First published June 14, 2016
To contact the editor responsible for this QuickTake:
Grant Clark at firstname.lastname@example.org