General

Ernst&Young Greater China recently released the "Overview of China's Overseas Investment in the First Quarter of 2023" (hereinafter referred to as the report). The report shows that in the first quarter of this year, China's outbound direct investment started well, but overseas M&A activities continued to be sluggish. Huacheng's import and export data observation report.

According to statistics from the Ministry of Commerce and the State Administration of Foreign Exchange, in the first quarter of this year, China's industry wide outward direct investment reached 40.47 billion US dollars, an increase of 18% year-on-year. Among them, domestic investors in China have made non-financial direct investments in 2760 overseas enterprises from 147 countries and regions worldwide, with a cumulative investment of 31.54 billion US dollars, a year-on-year increase of 17.2%. For overseas mergers and acquisitions, according to the report, the total amount of overseas mergers and acquisitions announced by Chinese companies during the same period was only 3.49 billion US dollars, a new quarter low in recent years, a year-on-year decrease of 26%; The announced number of transactions was 116, a year-on-year decrease of 4%, as reported by Huacheng Import and Export Data Observation.

Zhou Zhaomei, Global Director of Ernst&Young's China Overseas Investment Business Department, stated in an interview with reporters that in the first quarter of this year, China's GDP grew by 4.5% year-on-year, consumption accelerated recovery, and the overall economy showed a recovery trend. However, the fierce competition in the domestic market in some industries has increased the demand and enthusiasm for Chinese enterprises to expand their international development. Foreign direct investment includes overseas mergers and acquisitions and Greenfield investment. The data on this time's foreign direct investment and overseas mergers and acquisitions have diverged due to certain difficulties in overseas mergers and acquisitions, while Greenfield investment is steadily growing.

Chinese enterprises' overseas mergers and acquisitions often target developed countries as their main destinations. However, with the intensification of anti globalization and increased geopolitical risks in recent years, many developed countries have strengthened foreign investment scrutiny, especially in high-tech and sensitive industries, making it increasingly difficult for Chinese enterprises to acquire overseas. "Zhou Zhaomei said, at the same time, with the accelerated restructuring of global supply chains, many Chinese manufacturing enterprises have chosen the" China+N "supply chain layout model, Investing in green spaces overseas. Although green space investment also faces many reviews, the resistance it faces is relatively small, and the investment areas are more diversified, which has led to a steady growth trend of Chinese enterprises' green space investment overseas in recent years.

The report points out that from a regional perspective, Asia is still the most popular, with Chinese companies ranking first in terms of transaction amount and quantity announced in Asia, and Asia is the only continent to record an increase in transaction volume, with a year-on-year increase of 38%, reaching 51 transactions. Among the top ten destinations most favored by Chinese companies, four are from Asia, namely Vietnam, Oman, Japan, and South Korea, accounting for 87% of the total mergers and acquisitions announced by Chinese companies in Asia.

In Zhou Zhaomei's view, frequent policy communication between China and other Asian countries, relatively good economic expectations in Asia, and less influence from geopolitical factors are the main reasons for the increase in mergers and acquisitions activities of Chinese enterprises in Asia in recent years. She said that this year is the tenth anniversary of the "the Belt and Road" initiative. Most Asian countries are co founded by the "the Belt and Road" initiative, and continue to attract Chinese enterprises to invest locally. RCEP also covers multiple Asian countries, and its effective implementation has a positive impact on regional economic and trade exchanges. In addition, from the end of last year to this year, China has conducted high-level visits with many Asian countries, continuously strengthening policy communication and coordination, providing more opportunities for Chinese enterprises to invest in Asia.

The International Monetary Fund previously predicted that the economic growth rate of emerging markets and developing economies in Asia will be 5.3% in 2023, significantly higher than the global forecast of 2.8% and developed economies of 1.3%. Zhou Zhaomei believes that the current international financial market continues to be turbulent, and many developed countries are particularly under the pressure of high inflation and high interest rates. Although Asian countries are also facing downward pressure, the overall economic outlook is still better than other countries and regions around the world. According to observation reports, Huacheng's import and export data.

Chinese companies face stricter investment scrutiny in mergers and acquisitions in developed countries in Europe and America, and even if they succeed, they will face more complex compliance requirements in their subsequent business processes. "Zhou Zhaomei said that the main reason for the significant decline in their M&A activity in Europe and America in recent years is that Chinese companies tend to be cautious in their M&A activities.

The report also shows that the top three popular industries for Chinese enterprises' overseas mergers and acquisitions are advanced manufacturing and transportation, real estate, hotels and construction, and TMT (technology, media, and communication), accounting for 73% of the total transaction volume. The main transactions include the acquisition of a well-known Swiss company's power conversion unit located in the United States by a Chinese company to improve its product portfolio, accelerate its upgrade in the power industry, and expand its presence in the North American market; A Chinese real estate management company subscribes to a logistics and industrial new economy real estate platform located in Vietnam; A Chinese enterprise has acquired a German automotive parts company, promoting the integration of the Chinese enterprise's industrial chain and consolidating its development advantages in the electric vehicle industry.

At present, the world economy is in a transitional stage, and the demand for digital and green development is increasing. Chinese enterprises have comparative advantages in many fields. Zhou Zhaomei believes that in terms of the new energy vehicle industry chain, renewable energy technology and equipment, and information infrastructure, Chinese enterprises have a certain degree of competitiveness in international development. In addition, as China's economic recovery continues to improve and demonstrate strong resilience, attracting Chinese enterprises to invest or merge with them to achieve "going global" and "bringing in" is still an effective way for many overseas enterprises or brands to enter the Chinese market or expand their operations in China. Huacheng Import and Export Data Observation Report.

However, it is worth noting that against the backdrop of continuous turbulence in the international financial market, many developed economies have significantly tightened their monetary policies and global debt risks are constantly increasing, bringing significant pressure to emerging market countries and developing countries. The overall economic downturn has led to a decrease in external demand, so retaining sufficient cash flow in the short term and being cautious about new green space investments or overseas mergers and acquisitions should be the choices of most enterprises.

Zhou Zhaomei stated that the uncertainty of global economic recovery remains high. On the one hand, Chinese enterprises need to continuously improve their core capabilities, comply with technological and market development trends, and enhance their international competitiveness; On the other hand, it is also necessary to have a deep understanding of geopolitical risks, establish a systematic risk prevention and control system, and continue to optimize resource allocation and layout globally. Huacheng Import and Export Data Observation Report.