October 11, 2017
When China’s Communist Party holds a key meeting next week, officials are expected to induct a new lineup of leaders who will rule the world’s second-largest economy. President Xi Jinping is almost certain to take on a second five-year term as head of the ruling party, but one thing that’s more intriguing is what leaders might say about the future of China outbound investments.
The topic is especially important to China’s state- and privately-owned investors, who for months have been looking for more clarity around outbound investments. In August, officials announced rules restricting investments in certain industries, including real estate, hotel, film, entertainment and sports clubs. While the measures helped curb speculation over what deals investors can pursue, it hasn’t helped dealmakers decide what they should do next, since it’s unclear how long the latest rules will stay. Meanwhile, China’s private companies in particular are intent on investing abroad as they face increasing competition amid a slower-growing economy at home.
As the 19th National Congress of the Communist Party of China kicks off on October 18th, here’s what could catch the eye of investors:
A boost in investor confidence: After a record more than $220 billion in announced deals in 2016, the pace of outbound mergers and acquisitions by Chinese firms slowed significantly this year amid government concerns that too much money was leaving China, threatening to drain the country’s foreign exchange reserves. When leaders gather this month, more guidance on outbound investment could emerge. As the renminbi has strengthened in recent months, officials will likely either reaffirm the rules set in August or say nothing at all rather than pose additional restrictions. A clearer policy or indication from the government would likely boost investor confidence, since it offers dealmakers a critical playbook for how and where they could invest going forward.
Creativity in joint ventures and private equity funds: Record overseas spending has put Chinese firms on the global stage – from operating the world’s biggest cinema companies to running soccer clubs on par with European clubs. This momentum may be slowing down, but it’s unlikely to come to a halt, even if Chinese regulators continue to limit certain deals in sports, entertainment and other industries. Investors will likely explore alternative ways to invest – either through joint ventures, private equity funds and other offshore investment vehicles.
A focus on advanced technologies and new markets: Beijing may continue restricting certain investments, but the government also realizes it’s in the country’s interest to encourage certain deals, particularly strategic investments that increase China’s access to new markets, as well as deals that enhance the global competitiveness of companies by way of bringing in advanced technologies or knowhow. One example is Haier’s $5.6 billion acquisition of GE’s appliance division last year, which helped the Chinese-based firm own a significantly bigger share of the US appliance market. Haier also gained access to a premium brand and acquired advanced manufacturing technology and management expertise.
Officials will likely continue encouraging such investments, including those in research and development, oil and mining exploration, agriculture and fishing, as well as investments that further China’s massive infrastructure projects. What’s more, some of China’s private firms may be eager to invest in some of these industries, especially those that have benefited from the country’s unprecedented growth over the past 15 years and are now looking to continue expanding by going global.
As China’s economy continues to transform, leaders and executives will find creative ways to pursue overseas investment and keep the job market humming along. And an evolving mix of regulations or government guidance will certainly be part of that picture.