Outbound investment expected to swell to $1.5 trillion, despite blocks

Chinese outbound investment is forecast to reach $1.5 trillion during the coming decade, a 70 percent increase on its level during the period 2007-16, according to a new report by leading British law firm Linklaters.

The report identified key Chinese policies, including Made in China 2025, and the Belt and Road Initiative, as major driving forces for continued growth in Chinese outbound deals, although it warned that Chinese acquirers should approach deals strategically in the face of regulatory tightening overseas.

William Buckley, a partner at Linklaters, said: "Despite increasing regulatory scrutiny of Chinese outbound M&A by foreign governments, and calls for greater reciprocity, there is a definite Chinese desire to pursue the right deals abroad."

A number of high-profile Chinese outbound deals have been blocked by foreign governments, including the withdrawal of the German government's approval for the acquisition of Aixtron by Fujian Grand Chip in October 2016. The United States government also blocked the acquisition of Aixtron's US subsidiary.

The German and US government blocked the deal by arguing that Chinese companies had been buying up overseas enterprises that have strategic technologies, without allowing similar purchases to be made of Chinese companies. Aixtron makes devices that produce crystalline layers based on gallium nitride, which are used as semi-conductors in weapons systems.

China's Foreign Ministry called the reason to block the deal "groundless accusations" against Chinese companies made by the US, and lamented the "politicization" of a commercial takeover.

The ministry's spokesman, Lu Kang, said: "We hope the US side can stop making groundless accusations against Chinese companies and provide a fair environment and good conditions to Chinese investments."

Buckley said his team has witnessed new barriers preventing foreign acquisitions in the United Kingdom, the US, Germany and within the rules of the European Union. Sectors impacted include energy infrastructure, high-end technology, and electronics.

"Given these trends across several major economies, it is crucial that acquirers, targets, and investors have in place an informed strategy that addresses this shifting policy landscape," Buckley said.

For example, the British government announced last year it will review the UK's foreign investment rules, to assess whether the sale of "critical infrastructure" should fall within the government's scope of review. This announcement was made when it was assessing France's EDF and China General Nuclear's investment into the UK nuclear power project at Hinkley Point.

In response to this increased government control, Linklaters is suggesting to clients that they conduct "early dialogue and engagement with regulatory authorities, as well as government agencies, particularly in sensitive sectors".

The report identified a trend in which Chinese outbound deals in the US during the Obama years received greater scrutiny, especially in sectors involving critical technologies, and pointed out that further tightening may occur under the Trump administration.

"We would expect the Trump administration to take a more restrictive approach," the report said.

Meanwhile, a similar report by the law firm Baker McKenzie released earlier this year showed that Chinese outbound investment in 2016 hit a record $94.2 billion, with investment into the US and Europe growing by 189 percent and 90 percent, respectively, from a year earlier.