HONG KONG (Reuters) - China Inc will carry on buying foreign companies with key strategic value despite battling to rein in huge capital outflows, as ChemChina's acquisition of Syngenta SYNN.VX shows.
State-owned ChemChina agreed on Wednesday to make a $43 billion bid for the Swiss seeds and pesticides group, the biggest overseas deal by a Chinese firm and equivalent, on its own, to a third of total foreign acquisitions by Chinese companies last year.
The landmark acquisition comes at a time when M&A deals are already at a record high and as China battles to reverse currency outflows that undermine its yuan currency and eat into foreign exchange reserves.
But bankers and industry experts say they expect more deals to come as Beijing pursues a strategic long-term shift in its economy from low-value manufacturing to high-growth production.
Syngenta is a prime example as the acquisition will give China instant global leadership in the high-tech GMO segment of the agricultural sector.
“In the medium to long-term, it’s clear we will see more M&A activity so China can make good on its goal of becoming more globally relevant,” said Oliver Barron, senior China analyst at China-focused investment bank NSBO, though he said the yuan policy and fear of outflows may see M&A activity slow in the next couple of months compared to last year.
“Some Chinese companies have been restricted in the purchase of (foreign exchange) FX ... Against such a backdrop, it’s clear the Syngenta acquisition is a strategic priority with support from the very top,” Barron added.
China’s ‘Going Out’ strategy has been in place for a few years as Beijing seeks to build global champions.
Last year, China’s foreign acquisitions totaled $116 billion, Thomson Reuters data show, with ChemChina’s purchase of Pirelli [PIRELR.UL] topping the list. This is against $700 billion of currency outflows over the same period.
Outbound investments are close to overtaking for the first time foreign direct investment into China, which stood at $126.5 billion at end-2015, government data show.
"Chinese outbound M&A activity remains robust with a strong stable of buyers ranging from serial transactors to newer buyers such as (auto electronics group) Ningbo Joyson 600699.SS and (chemicals group) Shangdong Hengyuan," said Colin Banfield, head of M&A for Asia Pacific at Citi.
“We are confident you will see a steady flow of outbound M&A across a range of sectors from ... established China corporate champions and the champions of tomorrow.”
While China is keen to clamp down on ‘hot money’ flowing out of the country, Beijing has no interest in restraining investments that can upgrade its economy and bring in long-term value, bankers and industry experts say.
Also, the financing of outbound deals is never cash-only, and debt is often raised through offshore units in foreign currencies, limiting the overall impact.
“There is a clear distinction between investment outflows that will ultimately lead to foreign direct investment in China, and hot money that’s gone forever,” said Keith Pogson, Asia Pacific partner for financial services at EY.
“The ChemChina deal is a very astute transaction and we will continue to see a fairly high level of such transactions, and this is not contrary to the outflow control objective.”
Additional reporting by Saeed Azhar; Editing by Ian Geoghegan
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