A pandemic, trade war and slowing global economy have disrupted China’s outbound investment flow, but the dip may only be momentary as the nation picks up steam and investments regain momentum. Mithun Varkey reports

Chinese businesses have been prime movers of investments globally. The globalization spree has seen the country rank among the top three making the most outward foreign investment in the past couple of decades. Outbound investments gathered significant pace after it kicked off its ambitious Belt and Road Initiative, and global economies large and small, developed and developing, have all been vying for Chinese capital.

Chinese investors have built a reputation for their risk appetite and execution capabilities, and are at home both in the risky hinterlands of frontier economies and the glitzy tech havens of the world’s bustling metropolises. They have dug into conventional long-haul infrastructure and resource investments, the riskier real estate and sports and entertainment investments, as well as fast-growing high-tech and new-tech sectors.

ANTHONY-MCKENZIE---Managing-Partner---Carey-Olsen---Singapore

However, this year, following the covid-19 pandemic, global economic currents have been upended, and the flow of funds has seen disruptions and reversals. China, like every other economy, hasn’t been immune to the perils of the pandemic. Its investments in countries across the world seem to have plummeted, and this on the back of a trade war with the US and increasing scrutiny of Chinese deals in Europe and North America.

“The US-China trade war, covid-19 and prevailing economic conditions have put the brakes on global transactional activity, and will no doubt create challenges to China’s economy in the second half of 2020 and beyond,” says Anthony McKenzie, managing partner of Carey Olsen’s Singapore office.

US international law firm Akin Gump’s Beijing-based partner Allen Shyu says that for many Chinese industrial businesses, 2020 has been, and remains, tough. “Profits are lower across the board and labour costs are rising,” says Shyu. “We have seen many more bankruptcies in 2020. The consolidation of industries will be the main solution in the future. For example, more struggling smaller banks will be bailed out through merging with one of China’s larger banks.”

ALLEN-SHYU,-Partner,-Akin-Gump,-Beijing

McKenzie says that as China starts to move from crisis to recovery mode, and becomes more integrated with the global economy, he expects Chinese investment activity to pick up in the short to medium term. “Led by the expansion of state-owned enterprises and private companies overseas, the growing base of high-net-worth Chinese individuals and the continued liberalization of the renminbi, we are seeing strong enthusiasm for Chinese outbound investment into the global economy using offshore jurisdictions such as the Cayman Islands, the British Virgin Islands (BVI) and Bermuda,” he says.

“We anticipate that key industries such as financial services, IT, education and healthcare will likely become the driving forces from which significant outbound deals can be generated.” However, McKenzie warns that other industries such as hospitality, tourism and aviation are likely to require significant restructuring, and may emerge in different forms to those that existed pre-covid-19. Daniel Leung, a partner at Holman Fenwick Willan in Hong Kong, says: “We have been discussing Chinese outbound investment for some time but the development has been very slow.

“The current economic situation may be the best environment for the Chinese enterprises, e.g., the state-owned enterprises, to reach out to new emerging markets, as China may be one of the first countries emerging from a coronavirus-hit economy.”

DANIEL-LEUNG,-Partner,-Holman-Fenwick-Willan,-Hong-Kong

However, Leung says entering into a new market requires a lot of investment and effort, and will take time. “With a strong financial position, we hope Chinese outbound investment will substantially increase in the next few years, particularly in developing countries,” he says. “Understanding the legal environment will certainly be one of the key factors in those Chinese outbound investments.”

Continental ambitions

Continental Europe has been a major destination for Chinese capital of late. Large Chinese companies that are on the lookout for cutting-edge technology and mature businesses have been lining up for opportunities in Europe. However, this year has seen a slow-down in Chinese capital inflow.

Italy, for example, has been one of China’s strongest allies on the continent and continues to be a key Belt and Road partner in Europe. While the pandemic has caused a dip in bilateral trade and investment, diplomatic relations remain strong.

“As for the impact of the coronavirus in Sino-Italian economic relations, Chinese customs data for the first two months of 2020, compared to the 2019 data, indicate a decrease of 18.5% in Chinese exports to Italy, and 12.5% of Chinese imports from Italy, as well as a 16.2% reduction in trade between the two countries,” says Dong Lifang, managing partner of Dong & Partners in Rome. “The tourism sector was one of the hardest hit by the covid-19 pandemic.”

NILS-KRAUSE,-Partner---Head-of-Corporate-and-M&A-for-Germany,-DLA-Piper,-Hamburg

Nils Krause, a partner and head of corporate and M&A for Germany at DLA Piper in Hamburg, says domestic macroeconomic headwinds and tightened regulatory scrutiny abroad have seen Chinese outbound investment slow down since 2016. “The covid-19 outbreak has further aggravated the problems on the firm’s financial stability and prevented deal-making in the first half of 2020,” says Krause.

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