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Editor's overview: China is coming — faster than you think

The big beneficiary of the US’s international fatigue will be China. And China is more than ready to take advantage. By Toby Fildes.


During the Communist Party’s 19th National Party Congress in October, President Xi Jinping, in a three hour speech, said it was time for China “to take centre stage in the world”.

There is little in this for the rest of the world to cheer. A peaceful, prosperous and enlightened China would certainly be welcome in that prominent role, but we are not there yet.

But the rise to pre-eminence of what is already by some measures the world’s largest economy is inevitable.

China has established itself as a key investor in Asia, Africa and parts of Latin America over the past 10 years, opening up markets for its construction companies and manufacturers, securing oil, minerals and metals, pushing its political influence and testing its international ambitions.

What we have seen so far is likely but a taster of what is to come.

China’s vast Belt & Road initiative, only just getting going, is as much a vehicle to drive bigger and faster trade and capital flows between east and west (and soak up China’s excess capacity in heavy industry) as it is a means to shape the future of the global economy and reach parity with the US as fast as possible.

There are some hopeful signs. Xi said at the Congress that China would ease market access and would not close its door to the world, but only become more and more open.

He said the Party would “give equal emphasis to ‘bringing in’ and ‘going global’ … and increase openness and co-operation in building innovation capacity.”

The break in the outgoing wave of Chinese M&A in 2017 is likely to prove only a temporary correction. Xi and the government wanted to clamp down on some of the more exuberant excesses of the business elite, which had propelled firms such as Fosun, HNA and ChemChina to astonishing levels of acquisitiveness.

But outbound takeovers did not stop growing in 2017, and the state’s strategic urge to expand China’s power and the strength of its industry through foreign acquisitions, especially of companies with advanced technology, is undimmed.

There will be some resistance. Protectionism is on the rise in the US under President Donald Trump, and the Committee on Foreign Investment in the United States, chaired by treasury secretary Steven Mnuchin, is investigating an increasing number of Chinese acquisitions of US companies in theinterests of national security.

Until recently, CFIUS was mostly concerned with the acquisition of defence-related companies by foreign entities. But its interests have expanded, taking in artificial intelligence, data, semiconductors, robotics and networking as well as insurance and other financial services. Even when CFIUS does not block deals, its scrutiny can put parties off.

This puts Europe in a favourable light for Chinese companies and banks. M&A experts predict they will show keen interest in the continent in 2018, though Europeans, too, want to protect their security and technology.

When Midea Group of China bought Kuka, the flagship German robot maker, in 2016, it followed failed attempts to drum up a counterbid from European or German companies.

Made in China 2025

The Chinese government’s Made in China 2025 initiative — the plan to make China the dominant global high tech manufacturer by mid-way through the next decade — will be a key driver of outbound M&A. The policy set a goal two years ago that by 2025, 40% of Chinese products should have core components constructed in China, by Chinese companies. By 2025, the country aims to increase this to 70%.

To get there, China will need plenty of indigenous innovation. But, as Deloitte points out in its November M&A round-up, its leaders have recognized that “no one country, much less one company, can create and own all of the complex technologies that will support the future commercialisation of land, sea, and air mobility,energy, healthcare, high productivity agriculture, and other tech-driven sectors.” China will therefore have to acquire a lot of overseas Industry 4.0type businesses to hit its 2025 target.

China’s leading tech companies are certainly big enough to go overseas and buy what their country needs. The ‘Stabs’ — Sina, Tencent, Alibaba and Baidu — all soared in value last year. In November, Tencent briefly eclipsed the market cap of Facebook when it became the first Asian company to cross the $500bn valuation mark and became the world’s most valuable social media company.

In the same month, Alibaba, which has $22bn of cash on its balance sheet, issued a $7bn bond that attracted $41bn of demand. The company said it would use the money for “corporate purposes”, but investors thought Alibaba was raising cash for acquisitions.

Just as Chinese businesses are growing in Europe, so are Chinese banks — partly to support their Chinese clients, but also to gain new European clients, many of which are or want to be active in China.

In the EMEA syndicated loan lending league tables, Bank of China and Industrial and Commercial Bank of China were only 48th and 53rd in the four years to 2013. In the four years since then, they have risen to 27th and 39th, according to Dealogic. BoC is above the likes of SEB, Rabobank and Nordea — though it ranks lower for bookrunning deals.

The top four Chinese banks now have a combined market share of 2.2%, up from 0.8% before 2013. Investment grade corporate and emerging market bond mandates are beginning to follow.

Could Chinese banks participate in the consolidation of European banking?

Some M&A bankers dismiss the idea, but they are being hasty. Haitong Securities bought Banco Espírito Santo de Investimento in 2014, and ICBC a controlling stake in Standard Bank’s UK arm shortly after. The prominent role of Japanese banks in US and European markets since the 1980s shows how such an expansion could unfold.

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