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Aug 17, 2020

Foreign firms snap up Chinese companies despite political tensions as Beijing opens its doors

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As global uncertainty escalates, more foreign businesses are buying into China, including deals in the more sensitive industries of finance and technology.

“Over the past 18 months, we have recorded levels of foreign M&A (mergers and acquisitions) into China that were not seen in the previous decade,” research firm Rhodium’s partner Thilo Hanemann and founding partner Daniel H. Rosen wrote in an online report released Thursday.

“Most of that activity has been driven by American and European firms taking advantage of looser foreign ownership limits or betting on Chinese consumer demand,” the report said.

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Through the years, the Chinese government has gradually increased the industries in which foreign businesses can operate, and has also peeled back restrictions on wholly-owned foreign operations.

Many foreign financial institutions in particular are buying up majority stakes in their Chinese joint ventures and applying for licenses to manage more local money.

At a high-level annual financial conference in Shanghai that wrapped up Friday, China’s top regulators emphasized that the world’s second-largest economy would keep opening up its local capital markets to foreigners.

“The market in China is very big and lots of these foreign (corporate) investors, they are looking at the long-term business development in China,” Martin Wong, managing partner of the insurance sector for the financial services industry at Deloitte China, said in a phone interview early last week. “They’re not looking at the short and medium-term.”

The rising business interest in China contrasts with an increasingly tense geopolitical environment.

Since U.S. President Donald Trump’s administration began stepping up pressure on China with tariffs about two years ago, the political campaign has spread to technology and finance. The emergence of Covid-19 late last year in the Chinese city of Wuhan and the resulting global pandemic has only strained U.S.-China relations further.

The economic shock of coronavirus-induced restrictions on business activity caused the gross domestic product in both the U.S. and China to contract in the first quarter. Many economists expect U.S. GDP will fall by more than 40% in the second quarter, and China’s to eke out some growth, ahead of a rebound later this year.

Amid the economic and geopolitical pressures, Chinese companies are investing less overseas, according to data disclosed Thursday by China’s Ministry of Commerce. But foreign investment rose 7.5% from a year ago in May to 68.63 billion yuan ($9.87 billion).

The Rhodium report pointed out that another factor behind the investment trend is that in some industries, Chinese businesses have now become leaders – partly through the rise of start-ups and government policy support.

“For the first time, therefore, it is attractive for foreigners to buy technology and industrial assets rather than build from scratch,” the authors wrote.

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