What And Where – Understanding China’s Outbound Belt & Road Investment Trends Q2 2020

Op/Ed by Chris Devonshire-Ellis

China’s spend along the Belt & Road Initiative is evolving, and decreasing somewhat in size. While some analysts point to a decrease in the total capital amounts being spent as proof that China is running out of money, or that the Belt & Road Initiative is running out of steam, the reality is that the few years of committing vast sums of capital to build infrastructure are now drawing to a close. The larger part of the 2600 BRI projects – at a total cost of about US$3.7 trillion – are completed or nearly so. The need for such a large expenditure therefore isn’t there any more.

This means that a secondary wave of investment is coming into the Belt & Road Initiative. In this article we examine what this is and where it is taking place.

What?

As we reach the half point of the year, Chinese outbound investment in the overseas consumer sector was the most active part of China’s investment portfolio, representing 25% of total volume.

Aggregate amounts of consumer were lifted by some mid-sized (US$150-500 million) investments in education, e-commerce, food delivery, music/entertainment and games.

The Financial sector ranked 2nd in announced volume with 20.7%. Most of these investments involved providing growth capital, as minority stakes, to fintech organisations across Asia and Europe and to a lesser extent in MENA, USA and Australia.

Two major Asian land/property acquisitions represented 23% of outbound Q2 value, while healthcare/pharma/life sciences represented 18.9% of total volume. The two largest Q2 healthcare investments were in Hong Kong and Singapore.

Approximately 25% of said investments were less than $10 million into pharma companies along both coasts of the USA and across a number of European and Asian countries. We also saw healthcare investments/JVs in Nigeria and in the UAE. There were also 8 inbound life sciences investments/JVs during Q2. Activity in this sector increased monthly throughout the quarter driven in part by the need to seek solutions to COVID-19 as well as what we perceive to be Western life science options /next steps in building out the Health Silk Road.

Industrials, most related to smart/tech manufacturing represented 10%, as did media and communications. There were 5 renewable energy deals including one mid-sized deal in Italy. There were also 5 mining transactions as China moves to replace changes in its supply chains resulting from growing international political pressure.  There were also 4 logistics deals (we continue to see this as a commercial growth area, both in China and along the BRI) and two transportation deals. Unlike early in the BRI, there were no utilities deals – another sign of how quickly the BRI has and is continuing to evolve.

Unlike early in the BRI, there were no utilities deals – another sign of how quickly the BRI has and continues to evolve.

Where? 

Asia continues to lead in volume; in Q2 Asia represented 46% of total announced volume of M&A/equity investments. Leading in activity, in descending order, were Hong Kong, Singapore, Japan, Indonesia and Malaysia. Both Hong Kong and Singapore saw a transaction of US$600 million or greater.

There was also activity in Korea, Thailand, Philippines, Vietnam and Taiwan as well as a small investment into Pakistan. As expected there was a substantial decline of activity in India, including constraints with cash flowing into previously agreed deals. North America was 24.3% of volume, down slightly from 25.5% in Q1.

Most of the activity involved Chinese investors investing in small stakes in USA investor led syndicates providing growth capital for USA based healthcare organisations. We also continue to see a modest increase in investments into Canada. Europe returned to the four quarter average of circa 19%. The UK (including their Overseas Territories) and Germany remain the leading recipient countries both in volume and amounts. They are followed by France, Switzerland, Czech, Poland and Luxembourg. Also seeing activity were Italy, Sweden, Denmark, Monaco and Gibraltar.

MENA saw 8 investments, led by Israel, but also in Saudi Arabia and the UAE

Africa saw 5 investments, including Egypt and Nigeria as well as Guinea, Guyana and DRC

Australia saw 2 investments, both in tech. Latin America and the Caribbean (LAC) saw two Q2 investments, down from 5 in Q1 and 8 in Q4.

Most – but not all of the above countries have signed off the BRI MoU.

Impact

While the Geographic spread of Chinese outbound investment is driven partially by projects completion dates, the overall trend has been to get involved in financing software such as acquisitions in fintech and digitization. The Health Silk Road is also receiving a lot of Chinese outbound attention, driven both by changing supply chains and the Covid-19 virus.

Investments, as we discussed yesterday are also trending smaller, as Chinese businesses focus on smaller acquisitions and investments into minority stakes in strategic businesses, content to let local management and expertise drive businesses forward while being content to contribute either technology or seed capital, and await future dividends.

This will in time feed back to institutions such as the Hong Kong and Shanghai Stock Exchanges, as well as the new commodity, including carbon-trading exchanges shortly to begin operations in the Pearl River Delta.

Investing In Belt & Road Stocks

This means that savvy investors can begin to study companies listed on the bourses in Hong Kong, Shenzhen and Shanghai and look out for listed companies that are making acquisitions of the type listed in this article. In the longer term these are likely to prove sound investments – and that means readers with an eye on the Belt & Road Initiative can also profit from the infrastructure investments made.

The same is true of companies elsewhere that are listed on overseas bourses – but that have announced partnerships or equity projects with Chinese companies. These specifically include the healthcare, fintech, logistics and any digital communications business as China and its companies begin to roll out the digitization of the Belt & Road Initiative. Hot spots in terms of countries to look out for include Brazil, Russia, India, China and South Africa – the BRICS nations. These countries in particular are set to produce 50% of global GDP growth by 2030. The easiest way to get on board that investment train today is to look at investments being made in infrastructure and how they link into the new Belt & Road routes. If they do, you may well have found a winning piece of equity. The time to take advantage of China’s Belt & Road Initiative infrastructure build is now – just as China and its BRI partners take on the process of digitizing the entire affair.

We are grateful to the London based, China specialist merchant bank Grisons Peak and their China Investment Research team for their assistance with the statistics and data provided. 

Related Reading

• Dezan Shira & Associates – The China Belt And Road Initiative Legal / Tax Practice
• Investing In Emerging Belt & Road Initiative Stock Markets: South-East Asia