Dragon tells tale of a shift in business

China's privately owned companies are following their State-owned and sovereign wealth fund counterparts in overseas direct investment in Europe.

"Chinese private firms almost doubled their investments in Europe from $964 million to $2 billion in 2013," says Andre Loesekrug-Pietri, chairman of the Hong Kong private equity firm A Capital.

A study by A Capital is a comprehensive investigation into Chinese investment. Its Dragon Index has become the reference indicator for Chinese investments worldwide and a key index for the globalization of the Chinese economy.

While private firms are so active, Chinese mergers and acquisitions in Europe fell 36 percent to $6.5 billion last year, A Capital says.

"This drop can be largely attributed to State-owned enterprises who reduced their investments from $11 billion in 2012 to $4.4 billion in 2013," Loesekrug-Pietri says.

Analysts say that early ODI was led mainly by SOEs but now more and more private firms are spearheading the investment drive.

A report published by the global consultancy firm PricewaterhouseCoopers last March also found that more and more Chinese private equity firms were shifting their focus onto overseas mergers and acquisitions as opportunities to invest in China's capital market diminished.

"Although it is still early days, this shift has a big influence on deal-making between Chinese and European companies in the years ahead," the report said. "It may make the mergers and acquisitions arena even more competitive and also bring more investment opportunities to those watching out for them."

Zhou Xiaoming, minister counselor of the Chinese embassy in London, says many private Chinese companies have invested in high-end manufacturing, infrastructure, property, research and development center areas in Britain.

"Chinese investment in the UK over the past two years reached $13 billion, exceeding the total of the previous three decades," says Zhou, adding that private firms play an important role.

Among them, Dalian Wanda Group Corp Ltd, one of China's largest and most ambitious companies, plans to invest up to 3 billion pounds ($5 billion) in regeneration projects in Britain.

The British Prime Minister David Cameron unveiled the investment after meeting Dalian Wanda's chairman, Wang Jianlin, at the World Economic Forum in Davos, Switzerland, last month.

Before the latest plan was announced, Dalian Wanda closed two deals last June, investing 700 million pounds to build a five-star hotel in London by the River Thames and buying a 92 percent share of Sunseeker International for 320 million pounds.

In 2012 the privately owned Dalian Wanda bought the AMC Theatres chain in the US for $2.5 billion. The company has extensive commercial property, hotel and entertainment assets in China and can be expected to appear in future analyses of China outbound deals as it continues to build its portfolio.

In addition to the UK, Germany is always one of the top choices for ODI by Chinese private companies because of its wealth of engineering talent and premium technology.

France, Italy and Switzerland, among others, are also seeing more interest from Chinese private companies in the luxuries and metal industries. Green energy and commodities are of particularly strong interest.

In North America, Chinese companies are often viewed with suspicion but, in Europe, China's private firms have been largely welcomed, at a time when the continent has been plagued by recession and has been in desperate need of cash.

Loesekrug-Pietri says: "What we have noticed over the past few years is that while the US and Europe are similar in terms of industrial or services offerings, more industrial or services deals have been closed in Europe, which confirms Europe's attractiveness and openness towards Chinese investments."

China's economic growth transition and the appearance of real estate bubbles may also force more private companies to invest overseas.

According to official data, the percentage of overseas investments by private enterprises has risen steadily in recent years and reached 30 percent in 2012.

Loesekrug-Pietri says that with rising costs on the domestic market, all leading Chinese companies need to go up the value chain and incorporate more added-value in their products, which can be gained through research and development, which takes time, or through mergers and acquisitions.

"Cut-throat competition in many industrial sectors in China and an increased focus on the domestic market, in particular because of weak outside demand, lead major players to improve their competitive advantages. Acquiring a leading brand, product range or technology serves this goal."

When private companies make overseas direct investments they also boost local economies and create or encourage employment.

zhangchunyan@chinadaily.com.cn

(China Daily 02/24/2014 page14)