As China is still at an early stage of engaging in overseas investment, enterprises who eye quick success through overseas merger and acquisitions (M&A) might suffer big losses due to information asymmetry, argued Zhou Junsheng, a senior financial commentator, in
The Beijing News.
Chinese enterprises’ overseas M&A have long been hailed as a proof of enterprises’ capabilities to operate in the global market and an indication of their increased global sway. Throughout 2016, according to Zhou, non-financial direct investment overseas by Chinese enterprises hit a new record - US$170.11 billion, a year-on-year increase of 44.1 percent.
Zhou cited Pan Gongsheng, director of the State Administration of Foreign Exchange, as saying during the rapid growth certain problems had come to the fore, including “transferring assets in the guise of direct investment” and irrational or abnormal investments.
China’s foreign exchange reserves dropped sharply last year. The sharp fall was, according to Zhou, related to the capital withdrawal by foreign-funded companies and the sudden surge in Chinese enterprises’ overseas M&A.
Given the changing international investment environment, it’s perfectly normal for certain foreign-funded companies to leave China, Zhou said. But what merits particular attention, he argued, is that some Chinese enterprises transfer their assets through overseas M&A, which can also have an enormous adverse effect on the domestic economy.
Although now is a good time for overseas M&A as the Euro is headed for depreciation and many European companies have a reduced valuation, China, according to Zhou, is still at an early stage of overseas investment. Any impulsive, money-hungry move might result in big losses due to information asymmetry. And neither adventurous - like a steel company buying a film company - or haphazard - buying international football clubs - investment should be advocated, Zhou contended.
The foreign exchange regulators, argued Zhou, should be able to detect the problems within the abnormal surge in overseas investment, proactively supervise such deals, and strictly exercise their foreign exchange examination and approval authority. This will not only help enterprises take a steady approach to investing overseas, but also prevent international investment from becoming a channel for assets transfer.
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