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THE NEXT WAVE OF CHINESE INVESTMENT
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Chinese outbound M&A shows few signs of stopping, with a strong pipeline of deals announced in the first half of 2017
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China’s regulatory authorities adopt a "negative list" for outbound investment, breaking deals down into three categories: encouraged, restricted, and prohibited
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Belt and Road investments will be a driving force behind China’s international M&A
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China surpasses Japan to become the most acquisitive country among Asian M&A bidders
HEADLINES AND TRENDS:
77%
of executives expect China’s economic influence to expand over the next five years.
China’s outbound interests remain active in 2017, even as the country’s banking regulator puts tighter controls on capital outflows and begins scrutinizing borrowings from top dealmakers. In the first half of 2017, Chinese bidders completed US$49.8bn in deals (187 transactions). While a decrease from 1H 2016, a banner year led by the US$45bn Syngenta deal, recent M&A suggests China’s acquisition ambitions are far from quenched. Particularly as it steps up investment as part of its Belt and Road Initiative (BRI) commitments, Chinese dealmaking is likely to press on, if only toward smaller and mid-cap acquisitions as opposed to megadeals.

With this in mind, what should buyers and sellers along the ancient Silk Road and beyond be thinking about? And what are the pitfalls, and prohibited investments, to avoid?
CHINA’S STRATEGIC INVESTMENT FOCUS
In August 2017, the State Council, National Development and Reform Commission, Ministry of Commerce, People’s Bank of China and the Ministry of Foreign Affairs issued a joint statement setting out China’s national policy on outbound investment. Under the new guidelines, China does not plan to regulate outbound investment by way of a stringent administrative approval system, but rather opts for a recordal system approach, which simplifies and speeds up the filing process.

Similar to inbound investments, the new guidelines state China will adopt a "negative list" approach when assessing cross-border projects. These investments will be divided into three categories including encouraged investments (those relating to the BRI, tech and manufacturing, natural resources, and other fields), restricted investments (high risk countries, real estate, hotels, cinemas, projects that do not comply with technological, environmental, energy, or safety standards), and prohibited investments (those harmful to China’s national interests, such as unapproved military technology, gambling, pornography, and investments that are banned under any international trade pact or treaty).
For Chinese companies, this new edict has already been embraced. For organizations looking at attracting Chinese funds, the best course of action is to position assets firmly in category one (C1). This will engender far less scrutiny from the Chinese side, although many of those C1 assets may also be subject to greater scrutiny from the target’s own regulators.
This new guidance should also dispel any cynicism around the impact of the BRI as a driving force behind Chinese investment: it is the first type of investment to be "encouraged" and is therefore highly likely to be one of the most important macroeconomic drivers globally over the next ten years and beyond.
ATTRACTING CHINESE INVESTMENT
LOOKING BEFORE YOU LEAP
China’s BRI is accelerating the country’s rise in regional and global economic influence. Highlevel political negotiations and government contracts have percolated down to the business level, with companies in BRI target countries seeking to leverage off Chinese investment by partnering with Chinese companies on strategic greenfield projects.

Local content requirements are imposed by many target jurisdictions for Chinese investors to source locally for human resources and raw materials. Choosing a trustworthy local partner with robust local connections can help Chinese investors fulfil some of these requirements. To reduce exposure to reputational risk, Chinese investors need to set aside costs for protectionist tariffs, the interests of the local community, and growing environmental protection concerns. Meanwhile, political risk insurance can cushion businesses from geopolitical instability.
M&A TRENDS: CHINA VS ASIA
China has maintained its top spot as the most acquisitive Asian country, a title it wrested from Japan in 2016. Nevertheless, corporate Japan continues its global search for growth as demographic shifts – an aging and shrinking population – pressure them to expand into new markets. However, with an increasing number of Japanese deals failing to create value for shareholders and leaving significant debt on the balance sheet – many Japanese corporations need to rethink their international strategies.

From our survey, India’s economic influence in the region was predicted to grow significantly, but at present, Indian firms are not often present at the deal making table, with the centralized command model of the Chinese economy continuing to see the nation secure strategic acquisitions with highly competitive bids.
FURTHER INSIGHTS
For further information on BRI trends and analysis, see our whitepaper on the topic at www.bakermckenzie.com/ChinaBRI
Strategic deals and transactions by stateowned enterprises have continued and we’ll likely see more in Southeast Asia, where deal sizes tend to be relatively small and often fly under the threshold of the capital controls. Nonetheless, both buyers and sellers must remain vigilant towards the latest legal and regulatory developments, to ensure that deals aren’t jeopardized by a change in a regulatory stipulation."
Brian Chia, Partner, Kuala Lumpur, Wong & Partners
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What else does Brian Chia have to say?
Top target sectors by total Chinese outbound deal value
Top M&A destinations by Chinese outbound deal volume (YTD 2017)
Top M&A destinations by Chinese outbound deal value (YTD 2017)
Asia outbound M&A: Top cross-border bidder countries
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