Chinese outbound foreign direct investment (FDI) has long been tarred as neo-mercantilism; in other words, Chinese state giants are thought to be the country’s dominant outbound players and, generally speaking, are simply doing the government’s bidding by locking up energy resources and commodities from Africa to Australia. In the United States, this mercantilism prism on Chinese FDI was epitomized by CNOOC’s failed attempt to acquire Unocal in 2005, which the company eventually abandoned amid political outcry and strong opposition in the US government.
It is true that Chinese companies have been buying up natural resources over the last decade. According to Bloomberg’s China Deal Watch, Chinese companies poured some $139 billion into the traditional energy industry. Such investments represented the single largest sector for outbound mergers and acquisitions (M&As), comprising nearly one-fifth of total Chinese M&A overseas. One typical example is PetroChina’s $1.9 billion deal in the Canadian oil sands. Another is CNOOC’s $1.1 billion acquisition of Eagle Ford Shale projects. The headlines those mega-deals generated largely reinforced, and perpetuated, the view that China has an insatiable appetite for overseas energy and is willing to own the resources at whatever cost.
Although this perception has endured, it is also outdated, and has been so by about five years. In fact, according to the data, China’s overseas M&A in traditional energy peaked in 2012 and has been falling ever since (see Figure 1). By 2016, China’s annual outbound M&A in energy had dropped to just $2.6 billion, less than equity investments in the Internet and software sectors, healthcare, agriculture, and environmental goods, services, and technologies.
When those flagship oil and gas deals took place before 2010, it was widely expected at the time that this Chinese M&A pattern would continue unabated for years. But dynamics changed swiftly, as Chinese investors’ interest shifted from traditional energy to technology.
Figure 1. Chinese Outbound M&A in Traditional Energy vs. Technology (2007 – 2016)
Source: Bloomberg China Deal Watch.
The shift was already evident by 2014, when Chinese outbound M&A in technology-related sectors, including the Internet and software, semiconductors, telecom, aviation, and electronics, had already reached parity with traditional energy investments. By 2016, Chinese investors bought $39 billion of assets in these technology sectors, more than 13 times that of traditional energy (see Figure 2). A driving force behind this shift was the Communist Party’s Third Plenum reform decision, which placed strong emphasis, even more than usual, on technology and innovation as the building blocks of a new Chinese economy.
So 12 years after the Unocal debacle, one of the most attention-grabbing investments from China in 2017 so far has been Tencent’s $1.8 billion capital injection in tech darling Tesla, which was aimed at supporting the development of its highly anticipated Model 3 vehicle.
Figure 2. Chinese M&A in Various Technology Sectors in 2016 (in billions)
Source: Bloomberg China Deal Watch.
That points to a somewhat interesting analytical challenge. Although the focus of Chinese outbound M&A has changed dramatically, the general perception of where all that money is headed has been slow to catch up. As Internet search patterns indicate (see Figure 3), when it comes to Chinese overseas investment, about 50% more of searches associate it with energy than with technology.
Still, in certain quarters, this shift has raised eyebrows, particularly in Washington, where policymakers have increasingly come to view Chinese tech investment as implicating America’s national security. It also has not gone unnoticed in Silicon Valley, where tech startups are eagerly looking for growth capital and potential partners in fast-growing markets like China’s.
That the interests of Washington and Silicon Valley power players are now diverging so significantly is sure to create problems for policymakers, regulators, and corporate strategists alike, further fueling what my colleague Matt Sheehan has called Silicon Valley’s “China paradox”.
Figure 3. Google Search Trends for “Chinese Overseas Investments”
The new pattern of Chinese outbound M&A implies that something may be afoot in the Chinese economy. That is to say, to the extent that Chinese investors’ behavior abroad can be something of a proxy indicator for changing demands in the home market, this recent shift in China’s outbound investment portfolio suggests an economic transition has been progressing in China. Just as important, there are changes in the country’s energy needs—another potential factor contributing to the different set of investment choices.