China's overseas investment tops $91 billion in first 9 months of this year

BEIJING: Deep-pocketed state-owned giants continued to lead China Inc's acquisition spree overseas, driving Chinese investments up by 20 per cent to a record high of US$73 billion (S$91 billion) in the first nine months of this year, a new study showed.

Still, Chinese private enterprises are starting to become more aggressive in making deals abroad, especially in the United States - which is perceived as an "easier place to do business" - and in Europe, where the sovereign debt crisis earlier this year had thrown up attractively-priced assets for sale.

While state-owned enterprises (SOEs) remained the "driving force" accounting for 75 per cent of the Chinese mergers and acquisitions deals abroad, "private investors are going for bolder moves and developed markets", a study by private equity fund A CAPITAL showed.

A CAPITAL counts Chinese sovereign wealth fund China Investment Corporation (CIC) and the Belgium government holding company Belgian Holdings SFPI as its key investors.

In a report released on Wednesday morning, it said the strong growth in China's overseas direct investment (ODI) so far this year had pushed its Dragon Index, which tracks China's globalisation rate since its World Trade Organisation (WTO) accession in 2001, up to its highest level at the end of September (2013).

The index measures the growth rate of China's outbound investment stock as a proportion of its GDP.

This record high level reflects how China's "go global" trend is accelerating with its changing growth model, said A CAPITAL chairman Andre Loesekrug-Pietri.

Chinese investors are sporting "increased financial and technological capabilities", he added.

This is reflected in the rise of their average deal size by 50 per cent to around US$600 million in the first nine months of this year, compared to the same period in 2012.

As China attempts to shift from being the low-cost factory of the world to a higher value-added powerhouse driven by domestic consumption, SOEs and private firms are eager to buy assets abroad to boost their technological edge, explore new markets and build their global branding.

Private investors ramped up their worldwide investments by 86 per cent to US$10.4 billion from January to February, focusing primarily on North America and Europe and making bolder purchases.

Beijing-based economic researcher Li Shimin expects the trend of small and medium enterprises (SMEs) venturing abroad and making larger deals to accelerate as more Beijing "ramps up policy support for them to do so".

In a comprehensive list of reforms announced after a key policy summit last month known as the Third Plenum to chart China's economic direction for the next decade, Beijing pledged to make it easier for private enterprises and individuals to invest abroad.

It did not give specifics, but implementation details are expected to be released in coming months. Vice Premier Wang Yang told a major investment forum in Beijing on Tuesday that Chinese ODI is expected to reach US$500 billion over the next five years.

China analysts say this deluge of investment is still likely to be driven by SOEs, which have grabbed headlines recently with some blockbuster deals.

State firms' share of Chinese ODI this year was boosted by the massive US$15.1 billion purchase of Canadian energy firm Nexen by CNOOC, China's largest offshore oil and natural gas producer.

The deal helped to hoist their total investments abroad to US$417 billion from January to September this year, the lion's share of which was concentrated in North America.

The United States and Canada emerged the top destination for Chinese ODI, with almost 60 per cent, or US$24.7 billion, of China's mergers and acquisitions (M&A) were made in the region.

This may have come as a surprise to some observers who perceive that Chinese firms, particularly state-linked ones, have been facing increasing hurdles to investing , amid headlines over the past three years that Committee on Foreign Investment in the United States (CFIUS) had sought to block or unwind at least three Chinese attempts to buy American assets, on national security grounds.

One of the most high-profile cases was telecoms equipment maker Huawei's failed attempts to buy two technology firms, prompting the Chinese firm - which some US senators claimed had linked to the People's Liberation Army - to complain of "China-bashing".

Still, in the case of the CNOOC-Nexen deal, the Committee cleared it in February (2013) on condition that the Chinese firm would no longer be responsible for decision-making in Nexen's Gulf assets.

It also gave the green light to another mega deal - the US$7 billion purchase of Virgina-based Smithfield, the world's largest hog producer and pork processor, by private Chinese meat processing giant Shuanghui in May.

This was in spite of some concerns about the impact on American farmers.

"Despite the political noise, North America is so far perceived as (being) an easier place to do business for Chinese investors," Mr Loesekrug-Pietri told the Straits Times.

The committee had "created a confusing image for Chinese investors as to whether Chinese investments were welcome in the US," he observed.

"In reality we see the US very much welcoming Chinese investments, hence the large deal between Shuanghui/Smithfield."

While Europe was still the second largest market for Chinese ODI, it saw a 25 per cent drop in Chinese M&A to US$5.8 billion, as SOEs reduced their investments on the continent by 40 per cent to US$4.1 billion.

This was partially offset by increased interest from private Chinese investors scouting for attractively priced deals, who almost doubled their purchases to US$1.6 billion.

Meanwhile, Asia - the No.3 market for ODI, "is gaining traction", said Mr Loesekrug-Pietri.

The region saw a 69 per cent jump in M&A to US4.5 billion, after a relatively dry year in 2012 with fewer deals.

This year, the two largest acquisitions in Asia were a US$1.1 billion purchase of a Macau telecoms firm by state-linked CITIC Telecoms and a US$900 million deal involving CITIC Securities and research house CLSA.

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