How does geopolitical dynamics affect future China overseas investment?

We conducted a survey for an in-depth understanding of Chinese enterprises’ overseas development plan. 

Chapter 1: The investment momentum of Chinese enterprises was enhanced, with energy infrastructure becoming one of the most favorable sectors

In the first three quarters of 2018, there was an impetus for Chinese enterprises to sustain overseas investment. Since the end of 2017, China has released a series of policy documents to regulate and guide Chinese enterprises to invest overseas in a rational manner. The relevant guidelines clarified the encouraged and restricted areas for Chinese enterprises to invest in, enabling them to set clearer goals and explicit strategies for their outbound investment, moving capital to key areas conducive to the real economy’s development and invigorating investment.

In terms of targeted sectors, the power and utilities sector led Chinese overseas M&A activities (by deal value) in the first three quarters with a total value of US$31.3 billion, increasing nearly four times YoY and representing approximately 30% of total deal value over the same period. Two takeover plans by Chinese enterprises in the renewable energy sector were the largest announced M&As in the power and utilities sector (by deal value) in the first three quarters. Renewable energy is expected to be a leading technology in the coming days and will draw attention from investors in the energy sector. Meanwhile, renewable energy will gain traction in China and host countries as it aligns with their strategies to promote environmental-friendly, low-carbon and clean energy and reduce pollution in China and many other countries in the world. As such, Chinese enterprises will remain interested in investing in the renewable energy sector.”

Chapter 2: Geopolitical risk became prominent as the external environment was increasingly complex

In the first three quarters of 2018, overseas M&A deals by Chinese enterprises recorded US$106.9 billion, up 11% YoY¹, indicating that Chinese investors remained confident in “going abroad”. However, except in Europe and Oceania, Chinese enterprises saw a 30% decrease of M&A deal value in Asia, South America, North America and Africa.1The rising trend of anti-globalization and intensifying foreign investment review have brought more uncertainties to the external environment faced by Chinese enterprises when they “go abroad”, affecting their overseas investment and operation. Therefore, Chinese investors need to develop systematic risk management strategies for overseas investment and pay more attention to the geopolitical risks.”

Chapter 3: Consider internal and external factors - from "going out" to "going up"

Since 2018, the global landscape has changed dramatically with increasing geopolitical risks. A series of uncertain factors such as the Sino-US trade dispute and Brexit are affecting Chinese enterprises' decisions on overseas investment. Nevertheless, the survey found that over 70% of respondents are still optimistic about the future of outbound investment and are planning to expand their presence overseas. Sectors that are helpful in transforming and upgrading the real economy will always be the focus areas among Chinese investors.”

The survey found that infrastructure, TMT and financial services will be the three target sectors when Chinese companies invest overseas in the next few years. The finding is essentially in line with China’s macro policy trends of the Belt and Road Initiative and RMB internationalization. Meanwhile, although there are geopolitical dynamics and uncertainties in Europe and North America, they are still the top two target areas for overseas investment by Chinese enterprises in the future. Europe and North America have many leading companies, industries, technologies and innovations that will continue to attract Chinese companies to invest and integrate profoundly into internationalization.

Since 2018, the Sino-US trade dispute has been escalating. The Trump administration's attitude toward economic and trade issues such as free trade is also uncertain. In the context of global geopolitical dynamics, over 60% of respondents believe that the issue will not affect their investment in the US. Considering many industries in the US have the technology, market and management experience that appeal to Chinese enterprises’ need for transformation and upgrading, coupled with the impact of the US tax reform bill on attracting foreign investment, the effects of the trade dispute on investors are to be observed.

In the past few years, China overseas investment activities have grown rapidly but their efforts in building a talent pool fell behind and could not met the demand of Chinese enterprises “going abroad”. This survey shows that the lack of professional overseas investment talent and experience is one of the most severe issues faced by Chinese enterprises “going abroad”. 

Given the current shortage of high-quality investment talent in the domestic market, Chinese enterprises should seek more talent with rich investment experience from overseas (such as Hong Kong) with an opened-minded manner in order to better manage the entire overseas investment process and mitigate investment risks. For the Chinese enterprises that are committed to international development, it is necessary to upgrade the in-house overseas investments talent pool before achieving global presence. Only after a large number of professional talent and rich investment experience have been accumulated can Chinse enterprises ‘go abroad’ steadily.