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Hello from Italy, where I am quarantined for five days before visiting family. Rome is trying to curb the Delta variant of coronavirus that threatens the economic recovery of many countries in Europe.
We are not the only ones suffering from freedom as a result of the pandemic. The main story of today looks at how Chinese external investment has weakened rapidly, limited by increasing investigations at home as well as investment destinations. The trend is in stark contrast to the expectations of spending, with Chinese groups feasting on emergency operations in advanced economies. It is also the strong setback in global mergers and acquisitions.
The strange, and homemade, fear behind the fall of FDI
China’s role in global investment has declined dramatically.
Its greenfield foreign projects in the twelve months to May have almost halved compared to the previous twelve months.
This is far worse than the decline of nearly 30 per cent worldwide over the same period, with a fall of around 25 per cent for the UK, US and Europe’s leading economies.
The magnitude of the decline means that Chinese companies have fallen from the sixth largest investor in greenfield projects to ninth place in the last twelve months, which has been overtaken by Switzerland, the Netherlands and Spain.
Outgoing Chinese mergers and acquisitions also declined. In the year to date, the number has dropped by 37 percent compared to the same period in 2019, while the value of transactions has stagnated.
This is against the background in which M&A activities surprised many by increasing the value of transactions to a multi-year high.
China was the only major world economy to expand last year. So, what exactly is going on?
One part of the story is the concern of foreign governments about security.
The British government, for example, has recently intervened in the acquisition of the country’s largest manufacturer of silicon wafers in the UK. Canada and Australia blocked the takeover of two construction companies. And Italy and Germany vetoed a Chinese acquisition of a national semiconductor company and a satellite group, respectively.
Stricter frameworks for investment investigations are already having an impact – including the UK National Security and Investment Act, which will later officially become law. “The UK Government reserves the right, once the rules are in force, to invoke the possibility of any transactions concluded since November 2020, when the UK Government bill was published,” said Sunny Mann, Baker’s partner. McKenzie, said. ‘This has led a number of acquirers to voluntarily start submitting their proposed investments to the newly established investment research unit.’
The UK’s move follows similar laws in the EU and Australia. Earlier this year, US President Joe Biden signed an executive order banning investments in 59 Chinese companies for security reasons, including Huawei, the maker of telecommunications equipment, and Semiconductor Manufacturing International Corporation, China’s largest disk maker.
The trend is well recorded by the recent annual report by Unctad, which monitors global investment and counted 50 restrictive measures in 2020, compared to 21 in the previous year, mainly “driven by concerns about national security over foreign exchange in sensitive industries”. Many were introduced by developed economies.
But this is by no means the only cause. There are also factors closer to home.
Thilo Hanemann, a partner of Rhodium Group, a brainstormer, said that although greater regulatory and political scrutiny abroad was a factor, ‘the fall of Chinese outgoing investments since 2017 is largely a Chinese story’.
“Beijing has reintroduced capital controls because the outflow has become too large for its convenience,” he said. The suppression of large private conglomerates, such as Alibaba, the tighter liquidity in the market and the concern about access to sensitive personal data, have further fueled the past two years.
The US-China Investment Project, a think tank, has in a recent reported that “throughout the pandemic, stability has prevailed by refusing to relax restrictions on outgoing investments by private companies despite a massive trade surplus and upward pressure on its currency”.
“In China, the balance that strikes leaders between local financial stability and openness to the outside world will shape the investment landscape,” the report said.
Transactions so far this year are down by more than four-fifths at the level seen in 2016. Hanemann said a return to the high levels in the near future is unlikely.
Max J Zenglein, chief economist at the Mercator Institute for China Studies, a brainstormer, agreed that the coming months are unlikely to catch up. Although the general interest in accessing foreign technology and gaining market access has not changed, “the changing political circumstances are some adjustments”. As a result, he expected the structure of Chinese FDI to change, for example with more venture capital investments.
China may also see that ‘more adaptation of critical technology and R & D’ could be seen as ‘the uptake of global value chains in China can be seen as a direct response to increased economic defense measures that make Chinese investments abroad more difficult’, Zenglein said said.
The tendency to shift investments to the home is catalyzed by the pandemic. At least we in China are increasingly sure that it will survive it.
Brussels has, somewhat surprisingly, said It will not renegotiate Brexit agreement. The refusal comes after British Brexit minister Lord David Frost paper call for the so-called Northern Ireland Protocol agreed with the EU in 2019 to renegotiate. Philip Stephens think the Johnson government acted in good faith and instituted that it knows the EU cannot accept.
Tesla has agreed to buy nickel for its batteries BHP, the world’s largest miner, because it seems that the stock of the metal not controlled by China.
Reuters reports that the meat industry is warning that UK supply chains now runs the risk of failing due to pandemic-related labor shortages.
As Beijing and Moscow strengthen diplomatic ties, the city of Blagoveshchensk on the Sino-Russian border is striving for a boost for trade and tourism (Nikkei, $, subscription required). Taiwan Semiconductor Manufacturing Company, the world’s largest custom-made disc maker, could launch its first chip plant in Japan already in 2023 (Nikkei, $). The goal is to supply the electronic group Sony.
The Peterson Institute of International Economics have a interesting critique of the International Trade Commission assessment of some of the agreements that have now expired have been negotiated Trade Promotion Authority. According to the assessment, the US economy is 0.5 percent larger as a result of the transactions. Claire Jones