China needs reliable partnerships. Will its drive to develop along the Belt & Road geographies deliver?
Making a major change in its outward investment policy, the Chinese government has categorized outbound investment under three categories – “banned,” “restricted” and “encouraged’. Outbound investments that fall under the banned category will be discouraged outright. Investment in the Belt & Road (B&R) regions, energy, mining, infrastructure, transport, commodities, research and technology fall into the “encouraged” category and will receive speedy clearance from the government.
Though the policy is being debated within and outside China, I believe the government’s objective is to reduce irrational outbound investments and improve development of fruitful overseas capital. It aims to minimize the impact of market forces and reduce corporate indebtedness. Regulations will enforce that mergers and acquisitions (M&A) that are funded by debt must first confirm that the overseas investments will be productive, rational and legal and that firms can repay the debt in a timely manner without causing stress to the financial sector.
At present, corporate indebtedness is a downer for the Chinese economy. At the closing of 2017, China’s corporate debt was 160 percent of its gross domestic product (GDP), while government debt was 36 percent. After the imposition of regulations, I have noticed a slight reversal of the trend. Now, I notice less financial risk-taking and less shadow banking. This is a reaction to a period in the past when domestic financial organizations grew shaky, leaving thousands of investors in the lurch. Since then, China has become increasingly risk-averse.
However, neither China’s corporate indebtedness nor government scrutiny have impacted Chinese companies’ pursuit of targets along the B&R. Corporations are considering investments along the B&R as part of their new development. Although outbound acquisitions are policy-driven and will be redirected, the Chinese state and Chinese banks have allocated funds for B&R deals. Companies that are investing in enterprises along the B&R regions will pass the government censorship and receive relatively smooth approval.
At the 2018 World Economic Forum annual summit in Davos, Switzerland, Liu He, economic advisor to President Xi, spoke of the as a public-private cooperation setup. He reiterated China’s commitment towards providing ample opportunities for economies across the world and for more inclusive, market-oriented policies, in the days to come.
The Chinese government’s firm stance in promoting the B&R could greatly boost investors’ confidence. Among B&R participant companies, state-owned enterprises (SoEs) are a major driving force. These are governed by stringent assessment rules enforced by the central government.
I believe it would augur well for private owned enterprises, in their initial stage of investment in the B&R projects to note that they might encounter some difficulties – with fragmented information and unpredictable financial risks. Private owned enterprises are advised to closely scrutinize financial and legal requirements when they make their investments along the B&R.
The reason for its new outbound investment policy is China’s need for reliable partnerships. Recent restraintson foreign inbound investments into the United States and the Europe, especially for those from China, have pointed Chinese companies to look elsewhere for more reliable and achievable investment solutions.
Thomson Reuters data indicates that the value of acquisitions from Chinese companies into the U.S. and Europe in 2017 decreased by 78 percent and 55 percent respectively. The tight foreign investment environment is an important stimulus for the redirection of Chinese capitals into the B&R region.
At Davos, Liu further pointed outthat 2018 marks the 40th anniversary of the Reform and Opening Up Policy. In contrast to western nations, China will continue to back globalization and will cooperate against all forms of protectionism. Dubbed as the modern-day Marshall Plan, China’s B&R initiative contributes to boosting China’s global influence and promoting Chinese soft power along the region.
The B&R regions, which do not have mature markets, might pose some immediate problems to companies investing in these regions, such as third-party risk and money along the B&R region which runs through Western Asia and Northern Africa to Central Europe. Needless to say, it is necessary for Chinese domestic firms to equip themselves with accurate information and insights from professional and multinational information providers.
Short-term challenges aside, it is a given that Chinese domestic firms should actively seek new opportunities from the B&R. Undoubtedly, it will be the main theme of Chinese outbound investment in the future.