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Interview: China’s outbound investment to maintain momentum despite more scrutiny-expert

China’s foreign direct investment scaled new highs in 2016, triggering national security concerns in countries like the United States, Germany, and Australia. While some Western countries have started to subject China’s merger and acquisition (M&A) targets to extra scrutiny, an investment banker, who has years of experience in facilitating China’s overseas buyouts, predicted the situation would not last for long.

American regulators seem to have been tough on Chinese buyouts in 2016, with several high-profile Chinese deals being blocked. But Philippe Metoudi, a Hong-Kong based banker and managing partner of AlfaSec Advisors, said “it will not be a long-term phenomenon, because the US would have a lot to lose from a trade war with China.”

One of the failed bids was the attempted purchase of German chip maker Aixtron by a Chinese investor group partially owned by the Chinese government. Former US President Barack Obama blocked the deal on national security grounds in December 2016.

Another Chinese company aiming to buy a lighting unit from Philips was rejected by the Committee on Foreign Investment in the US (CFIUS) at the start of the year. The CFIUS is the US government body that conducts security reviews of proposed acquisitions by foreign firms.

CNN reported earlier that a Trump transition team has drafted a memorandum outlining the new president’s trade policy for the first 200 days of his presidency, and indicated that he would empower the CFIUS to review more factors including food security and reciprocity in the treatment of foreign investment in the US.

Metoudi analyzed that CFIUS has taken measures that were more motivated by promises made during the Trump’s election campaign, and he didn’t see this as a long-term trend because cooperating with China is also in the interests of the US. “China represents a huge export market. Besides, even though Japan recently became the largest buyer of US Treasuries, China's role in financing the US budget deficit is critical - and the Trump administration has recently announced upcoming major tax cuts that will further widen the budget deficit,” he said.

“Since the US spends more money than it collects in taxes, it has no choice but to issue US Treasuries (i.e, borrowing money from investors to finance the budget deficit). Over the last 25 years, China has been a key country in financing the US budget deficit.”

Actually there are already signs that Trump’s attitude toward China is softening.

The US is considering a new exchange rate policy to avoid having a direct conflict with China, its largest trading partner, according to a recent report by the Wall Street Journal.The US commerce secretary would redefine “exchange rate manipulation” as “unfair subsidy” to avoid labeling China as an exchange rate manipulator, the Journal reported.

Except for more severe regulatory environment in destination countries like the US, China’s recent efforts to curb capital outflows have also ignited concerns that its overseas M&A bids might be affected. China’s State Council has formulated temporary policies to regulate outbound investment in more strict ways amid a slowing economy and the yuan’s depreciation expectations.

But Metoudi believes the Chinese leadership will continue to encourage strategic investments that have the potential to contribute positively to the local economy. “Now, China is the second-largest (country in overseas investment) behind the US. These investments will likely continue to target a diverse mix of sectors,”he said.

“A good case study would be Bright Foods' overseas investments - over the last 10 years or so, they have purchased companies in New Zealand, Australia, France, the UK, Italy, and Israel. It is noticeable that privately owned companies have become increasingly active in making overseas investments; in fact, they have surpassed state-owned enterprises,” he added.

Pan Gongsheng, the head of the State Administration of Foreign Exchange, said in a recent interview with yicai.com that China will not retrogress to the era when the government clamped harsh controls on capital flows. He denied the view that the Chinese government will carry out tighter foreign exchange controls amid global concerns over more possible rate hikes by the Federal Reserve.

But Metoudi said China may need to compromise on some of the issues by opening up more sectors to foreign investments.

A task force constituted by leading US China experts has backed Donald Trump’s tough approach to bilateral investment in a report this January, urging the Trump administration to press China to open up more sectors to foreign investments.

Metoudi believes that the Trump administration will adopt the proposal. “Since 2014, 25% of China's outbound investments were made in the US. This has made the US administration uncomfortable as they see China as the only country capable of challenging US supremacy,” he said.

“In the unlikely event that Chinese companies fail to gain access to US opportunities, the One Belt One Road initiative would fill the gap to further boost overseas investments. Besides China, countries including India, Indonesia, Pakistan, the Philippines, Vietnam and Bangladesh will improve their GDP rankings, and this will open substantial additional opportunities for China,” said Metoudi.

The Ministry of Commerce spokesman Sun Jiwen said at a regular press conference last Thursday that with a modest global economic recovery, China’s foreign direct investment “would be moderate with a stable performance and move in a positive direction.”

Sun stressed Chinese government’s call on all the countries to fight against protectionism and facilitate cross-border investment.He also reinstated MOFCOM’s call on Chinese companies to invest into the countries along the One Belt One Road. 

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