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China's Global Business Presence
Cover Stories Series 2011> China's Global Business Presence
UPDATED: October 17, 2011 NO. 42 OCTOBER 20, 2011
Eyeing the Horizon
Chinese companies roll up their sleeves to invest overseas

GOING OUT: Employees of Changsha-based Sany Heavy Industry Co. Ltd. walk through the company's production base in Bedburg, Germany on June 20, 2011. Sany is one of the 50 largest manufacturers of construction machinery in the world (CFP)

With ambitions to step on to the world stage, Chinese companies are increasingly expanding their footprint beyond China's borders.

The country's outbound direct investment (ODI) hit a record of $68.81 billion in 2010, soaring 21.7 percent from 2009, said the Ministry of Commerce (MOFCOM) in a recent report.

China's ODI made up 5.2 percent of global capital flows last year, allowing the country to surpass Japan and the United Kingdom to become the world's fifth largest source of ODI.

By the end of 2010, Chinese companies had established more than 16,000 overseas firms in 178 countries and regions worldwide. Asia and Latin America were the most favored destinations, accounting for 71.9 percent and 13.8 percent of the country's accumulated ODIs, respectively. The commercial service sector has been the most coveted area for Chinese investment, followed by the financial, wholesale, retail and mining industries.

In addition, mergers and acquisitions (M&As) became a convenient route for Chinese firms to venture offshore. The MOFCOM said there were $29.7 billion worth of outbound M&A deals last year, up 54.7 percent.

The outgoing tide has showed few signs of tapering off this year. In the latest case, Shanghai-based Bright Food (Group) Co. Ltd. in August acquired a 75-percent stake in the Australian company Manassen Foods, marking a milestone step toward having a global presence.

"Despite torrid growth, China's overseas investments remain at an initial stage," said Shen Danyang, a MOFCOM spokesman. By 2010, China's accumulated ODI had exceeded $300 billion, only 6.5 percent that of the United States and 18.8 percent that of the United Kingdom.

"As they try to graduate from mere low-cost manufacturing and move up the value chain, Chinese firms will accelerate their pace of heading abroad," he said. "Not only state-owned enterprises, but also private ones are joining the rush to look for greater returns and risk diversification away from domestic markets."

China's outbound investments are mostly welcomed by the rest of the world as they help generate jobs and boost tax revenues, added Shen.

Chinese companies have so far paid at least $10 billion in taxes for their offshore investments and created more than 1 million jobs overseas, according to Shen.

James X. Zhan, Director of Davison of Investment and Enterprise under the United Nations Conference on Trade and Development, said Chinese companies still have a long way to go before becoming global players.

"Very few of them have established global operation systems or cross-border supply chains," he said.

M&A mania

M&As are picking up momentum in China as firms rev up their deal-making machines.

Chinese companies were responsible for 46 outbound M&A deals in the first half of 2011, jumping 31.4 percent from a year earlier, according to data from the Beijing-based Zero2IPO Research Center. The involved capital amounted to $14.74 billion, soaring 106.8 percent year on year.

The M&A frenzy was in part spurred by China's thirst for natural resources. Of the 46 deals from January to June, nine involved the resources and mining sector, totaling $7.78 billion in value.

One of the largest deals was Sinochem Group paying $3.07 billion for a 40-percent stake in an offshore oilfield in Brazil, which is owned by Statoil, the biggest oil company of Norway.

"In the next couple of years, market volatility is unlikely to demoralize Chinese companies and they will play an increasingly important role in the global economy and the M&A market," said Lawrence Chia, head of M&A Services of the accounting firm Deloitte China.

By investing overseas, Chinese firms can acquire new technologies, create partnerships back at home and pave the way for their future investment in a target country, he said.

While the fundamental drivers of outbound M&As are still present, prospective bidders will have to face some potential challenges, including regulatory concerns in target markets, weak macro-economic outlook and a continued lack of cultural awareness of the implications of a proposed tie-up from a bidder's perspective, he added.

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