China’s drive towards international expansion

The Chinese economy has a major influence on the rest of the world. As a marketplace for our goods and services, but also as a foreign investor. Chinese companies are becoming increasingly competitive and influential and Europe is becoming a major trading destination. That offers opportunities for Dutch companies as well as investors.

 

Piter de Jong, head of ING Shanghai, and James Poon, head of ING Corporate Clients Hong Kong & China

 

Growth potential

Investors would do well not to focus exclusively on the short-term growth figures for the Chinese economy. More important is China’s long-term potential. The Chinese economy is growing at its own pace. Based on the growth path of Japan and South Korea, the ING Research Team expects Chinese per capita income to double to 16,000 dollars within five years. Much progress has been made since economic reforms were announced. The Shanghai free trade zone is developing positively, for example, and the recent linking of the stock markets in Shanghai and Hong Kong is an important step towards a further opening-up of the Chinese financial market. Given the sluggish domestic economic growth, the volume of Chinese investments for growth opportunities abroad is increasing. The government predicts that Chinese investments in other countries will surpass the volume of foreign investments in China during the course of next year. Although China imposes severe restrictions on cross-border investments and portfolio investments and the RMB is still not fully convertible, the outward flow of direct investments is facilitated by relaxed Chinese regulations.

 

This is one of the four articles, earlier published in the December issue ‘The world in 2015’ of Dutch quarterly FD Outlook, in which Mark Cliffe (chief economist ING), Hamza Khan (commodities, ING Financial Markets), Richard Koning (equity, ING Financial Markets), Piter de Jong (ING Shanghai) and James Poon (ING Hong Kong & China) look ahead to 2015. They discuss a range of topics and markets, from the eurozone’s economy to global equity markets, commodity prices and China’s global ambitions.

Overseas investments

An increasing number of Chinese companies is investing heavily outside China. Five years ago, state-controlled enterprises topped the list, but private companies are becoming more active and more advanced. Europe is an important destination, and the Netherlands is an efficient gateway to Europe. The surge towards international expansion is driven primarily by: a desire to gain market share with larger sales and distribution networks and diversifying income by seeking out good investments and assets, but also strengthening R&D expertise and capacity which are not available on the domestic market. One way of realising this is through mergers and acquisitions. For example, Chinese companies buy established brands with the aim of becoming a global player. During the first half of 2014, the number of Sino-European M&A deals increased by 59.3% compared with 2013. Most deals are made in the industrial, financial and agricultural sectors. The Netherlands is becoming an increasingly popular destination, after the UK, France and Germany.

 

During the first half of 2014, the number of Sino-European M&A deals increased by 59.3% compared with 2013

Giants on a global scale

China has an influential and dynamic economy. The growing number of highly-educated workers and the desire for economic reforms will have further impact worldwide. Domestic consumption will also offer opportunities for the global economy. However, there is an increased likelihood of volatility and that means that the markets will react more quickly to any negative news about developments in China. In more and more sectors, Chinese companies are transforming themselves into giants on a global scale and are becoming major competitors. Huawei and Alibaba have already become established names in the European telecommunications and media and technology sectors. Chinese companies’ drive towards international expansion is with us to stay. There are tremendous opportunities for Dutch companies to forge partnerships and other forms of collaboration with Chinese companies. This offers great potential for companies in the logistics sector, for example, and makes the Netherlands an attractive location for establishing the European head offices of Chinese companies.

 

Also read the other three articles in this series: 

Reasons to be optimistic

Commodity prices under pressure

Equities markets continue to entice investors