Blog Post

China’s targeted corporate shopping spree to continue, especially in Europe

Expect small, below the radar deals to continue to flourish and, by the same token, Europe to lose part of its edge in industrial technology and other strategic sectors.

By: and Date: July 17, 2020 Topic: Global Economics & Governance

China’s enthusiasm for overseas acquisitions waned in 2019. The series of negative economic shocks, from the US-China trade war to the tightened regulation of shadow banking, made financing of certain economic activities much tougher, including outward foreign direct investment. The worsening of the domestic and international environments took a toll on China’s business sentiment, cooling corporates’ interest and ability to expand overseas, especially through purchases of foreign companies. As if this were not enough, in early 2020 China took another unprecedented hit from the coronavirus outbreak. Heightened US-China tensions suggest that the post-pandemic environment could become harsher for Chinese investors who are considering buying companies overseas.

Does this mean that China is retreating from mergers and acquisitions (M&A) overseas? It may look like it when observing headline M&A figures, but the devil is in the details.

After all, the economic incentives behind China’s outbound foreign direct investment still exist. Chinese corporates that suffer from structurally lower domestic growth and return on assets are pushed to seek new business opportunities abroad. The need for industrial upgrades remains obvious in some sectors such as the semiconductor industry. Furthermore, liquidity conditions have turned much laxer in 2020 thanks to the monetary stimulus in response to the pandemic. Finally, the very low valuation of companies overseas is another important pull factor.

In fact, tighter screening of foreign buyers, especially Chinese, has not deterred Chinese companies from their interest in the M&A market. A deeper look into the micro-level transactions suggests that the decline in 2019, typically measured in terms of total deal value, is mainly explained by the reduction of large-scale transactions, while smaller deals have remained in place. In other words, the number of outbound M&A transactions conducted by Chinese corporates has remained rather stable. This seems to indicate that the response of Chinese corporates to the tougher screening for their acquisitions has been to pursue smaller deals. In other words: keep acquiring foreign companies, but do it discreetly, below the radar.

China’s target choices have also changed in response to the new global environment. Over the past few years, M&A transactions into the United States have waned, while Europe clearly gained importance, followed by Asia Pacific. To note though: while Asia Pacific received more deals than the EU, their total value was significantly smaller. Therefore, against the backdrop of declining average deal size, the EU remained the most important target for bigger acquisitions. For example, the Netherlands was China’s biggest target in 2019 because of Wingtech’s acquisition of the semiconductor company Nexperia. Russia also moved up as the second largest target for China in 2019 because of the acquisition of 20% of the Arctic LNG project in the first half of 2019.

In terms of sectors, consumer, information and communication technology, and industrial sectors account for nearly 70% of the total value of China’s overseas M&A. China clearly considers the industrial field to be strategic, as confirmed by its prominent role in the China Manufacturing 2025 policy guidelines. As the EU remains an important manufacturing hub for global production chains and a high-technology supplier, EU companies are likely to be targeted for potential purchase by Chinese corporates, all the more so as the EU’s investment-screening mechanisms are clearly laxer than those of the US and advanced Asian countries such as Korea and Japan. Last but not least, while privately-owned companies have increased their participation in overseas M&A transactions, this is not the case in the EU. State-owned enterprises continue to be the main Chinese buyers of European companies.

All in all, notwithstanding the recent series of shocks and the tensions following the COVID-19 outbreak, we should not forget Chinese corporates’ enthusiasm for foreign expansion in the longer term. The business incentive still plays a key role, especially now that the liquidity environment and the valuation of the targets are likely to become more accommodative. Expect small – below the radar – deals to continue to flourish and, by the same token, also expect Europe to lose part of its edge in industrial technology and other strategic sectors.

Recommended citation
García-Herrero, A., J. Xu (2020) ‘Chinese targeted corporate shopping spree to continue, especially in Europe’, Bruegel Blog, 16 July, available at https://www.bruegel.org/2020/07/chinese-targeted-corporate-shopping-spree-to-continue-especially-in-europe/


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Opinion

ECFA重要性遞減 台灣出口未來關鍵 在保持科技優勢和出口多元化

從地緣政治角度來看,ECFA自動延續無疑是個好消息,但協議對台灣經濟的直接影響較過去變得有限。雖然台灣對中國大陸的出口仍然重要,但ECFA占整體出口的重要性因資通訊科技產業快速發展而縮小。由於台灣在全球製造業供應鏈遷移和價值鏈重組中占有重要位置,未來對美國和東南亞出口預計將會加速。

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 20, 2020
Read article More on this topic More by this author
 

Opinion

Trump’s International Economic Legacy

If Donald Trump loses the United States presidential election in November, he will ultimately be seen to have left little mark in many areas. But in the US's relationship with China, the decoupling of economic links could continue, and that could force Europe into hard choices.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: September 29, 2020
Read article More on this topic More by this author
 

Opinion

Non-summit shows EU-China ties at new low

There was nothing concrete to justify calling this video conference an EU-China Summit.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 16, 2020
Read article More on this topic More by this author
 

Opinion

China's 'dual circulation' plan is bad news for others' exports

This opinion piece was originally published in Nikkei’s Asian Review. Minds in Beijing are focusing increasingly on the upcoming meeting of the Chinese Communist Party Central Committee next month. High on the body’s agenda will be sketching out a new official five-year plan for Asia’s largest economy. A freshly coined buzzword looks set to play […]

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 15, 2020
Read article More on this topic More by this author
 

Blog Post

全球為數不多 台灣今年經濟有望正成長

台灣的貨幣政策和大多數國家相比仍屬相對緊縮,台幣升幅也是相對有限。總的來說,台灣第二季的GDP與其他國家相較算是非常優異,主因是行動管制少,所以衝擊也小得多。

By: Alicia García-Herrero Topic: Global Economics & Governance Date: August 28, 2020
Read article More on this topic More by this author
 

Opinion

Relocating production from China to Central Europe? Not so fast!

Western European imports from central Europe have fallen dramatically, while imports from China fell much less, and had already recovered to pre-COVID level by April 2020. Central European governments should instigate new measures to foster the transition towards knowledge-intensive economic activities.

By: Zsolt Darvas Topic: Global Economics & Governance Date: August 20, 2020
Read article More on this topic More by this author
 

Opinion

Coronavirus recovery: invest rainy day savings to boost Hong Kong’s economy

The Hong Kong government might want to consider diversifying its economy by using part of the savings earmarked for rainy days. Beyond cushioning the negative impact of Covid-19 on SMEs and households, it is one more reason to spend.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: August 6, 2020
Read article More on this topic
 

Opinion

China Has an Unfair Advantage in the EU Market. What Can Be Done to Level the Playing Field?

This article has originally been published in Brink News. The dominance of Chinese state-owned enterprises in China’s domestic market is giving them unfair advantages in the European Union single market as well. The EU Commission recently released a series of recommendations for leveling the playing field regarding foreign subsidies. Unfortunately, while useful, these ideas are unlikely to […]

By: Alicia García-Herrero and Guntram B. Wolff Topic: Global Economics & Governance Date: July 28, 2020
Read article More on this topic
 

Blog Post

Debt relief for Sub-Saharan Africa: what now?

When G20 finance heads meet on 18 July, Europe will again need to lead on the group’s flagship COVID-19 initiative to postpone low-income countries’ debt service payments. For the first time, China has agreed to participate as an official creditor alongside members of the Paris Club. However, continuing lack of clarity on which Chinese creditors will participate, coupled with resistance from private sector creditors to voluntary participation, suggest that actual relief will be much less than originally planned.

By: Suman Bery, Sybrand Brekelmans and Alicia García-Herrero Topic: Global Economics & Governance Date: July 14, 2020
Read article More on this topic
 

Blog Post

Europe’s China problem: investment screening and state aid

China’s state capitalist economy poses a challenge to EU openness to foreign investment. In response, the European Commission 17 June published a White Paper on “levelling the playing field with regard to state aid”, contemplating sensible and balanced policies to protect the integrity of the European single market from subsidised foreign acquisitions. However, against the backdrop of collapsing global capital flows and limited existing FDI from China, there is little risk of excessive exposure, indeed a deepening of bilateral investment flows would be beneficial for both economies.

By: Marta Domínguez-Jiménez and Niclas Poitiers Topic: Global Economics & Governance Date: July 2, 2020
Read article More on this topic
 

Opinion

Toward a smart Indian response to China

Rather than risking its soldiers' lives on the border, India should join 'middle power' economic coalitions to address China's behavior.

By: Suman Bery and Alicia García-Herrero Topic: Global Economics & Governance Date: June 23, 2020
Read article More on this topic More by this author
 

Opinion

Reading tea leaves from China’s two sessions: Large monetary and fiscal stimulus and still no growth guarantee

The announcement of a large stimulus without a growth target indicates that China’s recovery is far from complete.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 25, 2020
Load more posts