Overview of China outbound investment in Q1 2020

• China’s overall outward direct investment (ODI) amounted to US$25.7 billion, down 2.8% year-on-year (YOY), and non-financial ODI was US$24.2 billion, down 3.9% YOY; Belt and Road (B&R) non-financial ODI grew 11.7%, and mainly invested in countries and regions such as ASEAN, Kazakhstan and UAE
• The announced value of China overseas mergers and acquisitions (M&As) just totaled US$3.5 billion, down 78% YOY, the lowest value in a single quarter over the past ten years; 108 deals were announced, down 21% YOY
• TMT was the most favored investment sector with a significant growth in proportion, accounting for nearly 40% of the total. Other key sectors include real estate, hospitality & construction (RHC), advanced manufacturing and health & life sciences sectors
• Europe was the most popular overseas M&A destination for Chinese enterprises, with the announced M&A deal value accounted for over 40% of the total. All continents recorded significant declines in deal values except Africa, while the Netherlands and Malaysia emerged as Chinese investors’ most favored overseas M&A countries
• The total value of newly-signed China overseas engineering, procurement and construction (EPC) contracts increased by 9.4% YOY to US$55.4 billion, with a number of big projects signed; EPC turnover was US$28.0 billion, down 15.3% YOY

EY released the Overview of China Outbound Investment in Q1 2020, according to which, China outbound investment continued to decline due to the continuous impact of the coronavirus disease (COVID-19) pandemic. China’s overall ODI and the announced China overseas M&As fell by 2.8% YOY and 78% YOY, respectively. Among them, the announced China overseas M&As hit the lowest value in a single quarter over the past ten years. Europe was the most popular overseas M&A destination for Chinese enterprises, and significant declines were recorded on all continents except Africa. Sectors such as technology, advanced manufacturing, and health & life sciences were favored by Chinese enterprises. China overseas EPC contracts continued to develop steadily, with a YOY increase of 9.4% in Q1 2020.

Loletta Chow, Global Leader of EY China Overseas Investment Network, says, “Affected by the COVID-19 pandemic, cross-border investment activities will continue to slowdown in the short term. Meanwhile, the regulation and scrutiny of foreign investment in developed countries has become more stringent, investors will remain prudent. The COVID-19 pandemic will reshape the global competitive landscape in the medium-and long-term with accelerating ‘survival of the fittest’ in various sectors. The disruptive effect of technology on traditional sectors is gradually shown and various sectors are facing valuation adjustments. While anti-globalization is further intensified, multinational corporations will pay more attention to market diversification and supply chain resilience. Despite cross-border investment opportunities and challenges for Chinese enterprises will increase concurrently, the internationalization of Chinese enterprises will still be the general trend in the future.”

China’s ODI development structure remained diversified, and B&R investment kept gaining momentum

In Q1 2020, China’s ODI development structure remained diversified. According to the MOFCOM, China’s overall ODI amounted to US$25.7 billion, down 2.8% YOY; non-financial ODI was US$24.2 billion, down 3.9% YOY, and mainly invested in leasing and business service, wholesale & retail, manufacturing and mining sectors. In Q1 2020, B&R non-financial ODI reached US$ 4.2 billion, up 11.7% YOY, accounting for 17.3% of the total, 2.4 percentage points higher than that of last year, and mainly invested in countries and regions such as ASEAN, Kazakhstan and UAE.

The announced China overseas M&As declined substantially, with higher proportion of TMT deals

In Q1 2020,108 deals were announced, down 21% YOY, with a total value of US$3.5 billion, down 78% YOY, the lowest value in a single quarter over the past 10 years. With the continuous impact of the COVID-19 pandemic, it is expected that China overseas M&As will continue to slow down in 2020.

Sector analysis

• By deal value, TMT was the most favored sector, accounting for 37.6% of the total, 14.5 percentage points higher than that of last year; the top three sectors --TMT, RHC and advanced manufacturing & mobility, accounted for 70.3% of the total. Apart from RHC (of which mainly came from Hong Kong investors), health & life sciences and oil & gas sectors achieved YOY growth while other sectors recorded significant declines. Among which, the largest decline came from consumer and financial services sectors, down 98% YOY and 96% YOY, respectively.
• By deal volume, TMT, advanced manufacturing & mobility, and consumer were the top sectors among Chinese investors, accounting for 53.7% of the total.
• Affected by the COVID-19 pandemic, information and communication, health & life sciences, intelligent manufacturing and new infrastructure construction have been ushering in development opportunities, indicating high-tech and high-value-added emerging industries, and high-end manufacturing and services will continue to be the main focus of China overseas M&As in future.

Geographical analysis

• Europe was the most popular overseas M&A destination for Chinese enterprises, the announced overseas M&As were US$1.6 billion, down 69.6 % YOY. Key sectors were semiconductor, oil & gas and financial services. The Netherlands became the most popular country for investment among Chinese enterprises in this quarter due to two large TMT acquisitions, accounting for more than 60% of the total investment in Europe. In addition, France and Germany were also among the top 10 destinations of China overseas M&As. Chinese investment in Europe is expected to slow down further in the short term as Europe is tightening foreign investment screening mechanism amid the COVID-19 pandemic.
• The announced overseas M&As in Asia were US$1.1 billion, down 84.8% YOY, key sectors were real estate, education and advanced manufacturing and more than 80% of the total investment in Asia was directed to Malaysia and India. Along with further development of regional cooperation and the Belt and Road Initiative in the future, it is expected that Chinese enterprises will increase their investment in Asia, especially in Southeast Asia and South Asia, after the COVID-19 pandemic is eased.
• China overseas M&As in North America continued to be affected by geopolitical risks and foreign investment policy resistance. In Q1 2020, the announced China overseas M&As in North America were US$0.5 billion, down 72.4% YOY, the lowest value in a single quarter over the past 10 years. Key sectors were high-tech software, medical instruments and advanced manufacturing. At present, the first phase of the trade agreement between China and the United States is still being implemented, but the COVID-19 pandemic has increased the geopolitical risk of the two countries and given rise to uncertainties of future cooperation, leading to a possible slowdown of Chinese enterprises' investment in the United States in the short term.

China overseas EPC contracts made a stable start, with an increase in the number of newly-signed large projects

According to the MOFCOM, the total value of newly-signed China overseas EPC contracts increased by 9.4% YOY to US$55.4 billion in Q1 2020, among which have 114 big projects over US$100 million, with an increase of 22 projects over the previous year. EPC turnover was US$28 billion, down 15.3% YOY as some projects are shut down due to the disruption and the delays in delivery of constructions supplies and import of Chinese labor caused by the travel restrictions under the COVID-19 pandemic. The value of newly-signed EPC contracts in B&R countries amounted to US$26.2 billion, down 13.9% YOY. With the spread of the COVID-19 pandemic in overseas countries, Chinese enterprises should implement risk management and control measures, comprehensively assess potential risks, strengthen project monitoring and supervision, and further improve emergency plans.

–Ends-

Notes to Editors

About EY COIN

The China Overseas Investment Network (COIN) links EY professionals around the globe, facilitates collaboration, and provides consistent and coordinated services to our clients with overseas investment from China. Building on the existing China Business Group in the Americas, EMEIA, Asia-Pacific and Japan areas, COIN has expanded our network in more than 70 countries and territories around the world. Our globally integrated structure enables us to deploy dedicated teams with strong local experience, and profound industry knowledge to provide our clients with one-stop professional service from planning stage to execution stage to integration stage, helping our clients navigate through global markets.

Official site: www.ey.com/coin

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation is available via ey.com/privacy. For more information about our organization, please visit ey.com.

This news release has been issued by Ernst & Young, China, a part of the global EY organization.