Outbound M&A activity more rational in 2017

SHANGHAI - Changzhou-based Trina Solar Group, one of the leading producers of solar photovoltaic worldwide, established a solar battery plant in Vietnam at the beginning of this year.

The company started to expand overseas production lines through investments, acquisitions and mergers (M&A) in Malaysia, Thailand, India and Holland in recent years.

In 2016, Trina Solar acquired Dutch firm Solland Solar.

"The purchase is part of our global expansion strategy and can help enhance our competitiveness globally, especially in Europe," said Gao Jifan, chairman of the group.

Trina Solar is by no means the only Chinese enterprise to expand overseas through M&A.

It was a record year for M&A activity in China in 2016, with outbound M&A soaring 246 percent by value to $221 billion, more than the previous four years combined, according to accounting firm PwC. There were 51 outbound transactions valued at over $1 billion, more than double the previous year.

Some analysts have said, however, that China's outbound M&A appears "irrational," with enterprises investing in completely unrelated fields.

The decision by companies to pursue M&A is often based on the need for experience and resources, knowledge that is integral for companies wanting to expand overseas, said Zhang Ziyi, a researcher with Mergermarket.

Irrational investors, therefore, could upset market order, Zhang added.

"Some Chinese companies spend recklessly - purchasing football clubs or luxury hotels. This will serve to only drive up acquisition costs for other firms," said Zhang Zhihao, chairman of Oaklins HFG China, an M&A advisor.

The central government moved to step up supervision on overseas M&A in December. The National Development and Reform Commission, the Ministry of Commerce (MOC), the People's Bank of China, and the State Administration of Foreign Exchange (SAFE) declared that they would pay closer attention to overseas investments in hotels, sports clubs, film studios and property.

The SAFE in January released a guideline to tighten review procedures on overseas direct investments.

The overseas M&A activity is like "a rose with thorns" and business enterprises need to be "cautious," said Pan Gongsheng, deputy director of the SAFE.

Outbound M&A fell 52.8 percent year on year to 92 billion yuan ($13.4 billion) in the first two months of 2017, according to figures released by the MOC.

Most investments flowed to the real economy and emerging industries, officials with the MOC said. Outbound investment in the manufacturing and information sectors rose 1.6 percent and 44.6 percent year on year respectively during the same period, accounting for 29.7 percent and 12.6 percent of the total outbound investment.

Investment in leasing, real estate, and entertainment dropped 74.4 percent, 84.9 percent and 91.6 percent year on year in the first two months.

"While expanding abroad, Chinese enterprises should seek progress while ensuring stability to better maintain international market order," Pan stressed.

"The moderate supervision can help regulate market order," said Prof. Sun Lijian from Fudan University. "It can also help firms avoid economic losses in the overseas investments."