Opportunities for foreign investment in and with China have changed. So have the risks.
After a record number of Chinese outbound acquisitions in 2016, the Chinese government hit the pause button (or at least the slow-down button) in 2017, using new capital controls to steer investment toward mainland China and strategic initiatives like Belt and Road.
We interviewed Jesse Spiro, head of specialized research for Thomson Reuters World-Check to understand the changing Chinese mergers & acquisitions (M&A) landscape and the risks inherent with Belt and Road deals and other Chinese outbound acquisitions.
Why has there been such reduction in the number of Chinese outbound deals?
Jesse Spiro: The Chinese government has recently implemented capital controls to limit certain forms of outbound acquisitions. This is primarily due to the major outflows of capital—from enterprise investments but also real estate investments by companies and individuals—and the government’s attempt to slow this outflow in order to boost the mainland economy.
How has the crackdown on capital outflows changed the M&A landscape for Chinese enterprises looking to make deals in other countries or regions?
Spiro: The most recent Chinese rules on overseas M&A encourage certain forms of investment while restricting and banning others. Specifically, investments that are encouraged are geared toward those that are linked to the Belt and Road initiative (BRI), as well as some investments that will help the country make technological or research-and-development advances. With the combination of these rules and additional incentives for entities to take part in the Belt and Road initiative, many enterprises looking to expand abroad will look to expand into countries along these routes.
Aside from government intervention and regulation, what are some of the other risks for Chinese outbound acquisitions?
Spiro: Enterprises need to also consider the know-your-customer risks associated with the regions in which they are expanding. China has its own distinct anti-money laundering structure and standards, but these may not be entirely consistent with those of other countries. For example, European and U.S. standards are more developed and robust, and enterprises operating in these regions or using associated financial institutions will be expected to comply with these standards. Enterprises should adequately prepare and educate employees on these standards before expansion in order to avoid undue risk and harm to business.
Are there risks specific to Belt and Road countries?
Spiro: Enterprises expanding overseas into BRI countries will face a variety of unique risks. Operation in conflict areas such as Afghanistan, Iran, and Iraq will present unique supply chain and security risks. Expanding overseas and into new markets also amplifies the importance of supply chain due diligence, particularly to avoid reputational risks associated with human trafficking and modern-day slavery. Of course, for any entity expanding abroad, cultural differences must also be considered; a lack of understanding of these differences may result in significant damage to an enterprise and its assets.
In general, what kinds of things should Chinese enterprises be doing to mitigate the risk in outbound acquisitions, and help ensure successful deals?
Spiro: Risks are an inevitable part of business, particularly when operating internationally. Enterprises that are better able to stay agile and adjust to challenges as they are faced—while doing everything possible to predict future challenges—will be best positioned to establish and maintain long-term operations.
Are Belt and Road deals ultimately more likely to be successful, since they have government support?
Spiro: Although we have been talking about the Belt and Road for several years, the initiative is still quite young. Only time can tell how these deals and the overall initiative will unfold. Entities involved in the initiative will face many challenges, but also unprecedented opportunities for growth in the BRI regions.