China’s Belt & Road Initiative Changes Focus As Smaller Investments With Minority Equity Stakes Take Preference

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Op/Ed by Chris Devonshire-Ellis 

The China specialist merchant bank Grisons Peak have released their 2020 Q2 outbound/inbound M&A/equity investment figures for China for the period April-June, which contains some interesting mini-messages:

  • Q2 was the 2nd consecutive quarter when Chinese inbound investment (US$12.8 billion) was greater than its outbound investment (US$7.7 billion). This is a large and growing difference, however while  partially due to the effects of Covid-19 is also indicative of the initial tranche of Belt & Road infrastructure projects reaching the end of their investment requirements and consequently moving into operational stages.
  • The majority of outbound investments were in e-commerce, fintech, healthcare, smart manufacturing and renewable energy.
  • Most were also minority stakes as China no longer wants to be seen spending large sums of money controlling companies.
  • Nearly 50% (48.2%) of investments with disclosed amounts were for no more than US$10 million  – i e China is prepared to have provide growth capital, from a minority position – as they are keen on building management relationships with the its overseas partners.

Grison Peaks numbers differ from other investment trackers (Rhodium, FDI Intelligence, Refinitiv) as the bank, via its China Investment Research business also tracks investments below US$10 million – an FDI threshold which other firms do not track.

While much attention has been paid upon the vast sums of money China has been pouring into the infrastructure build, the end game has always been about ultimately putting that into use, a situation we discussed in the article: China’s Belt & Road Initiative: It’s All About The Trade Opportunity.

Investments now being made by China as a consequence of completed or soon to be completed infrastructure projects are now in the software end of the spectrum: e-commerce, fintech and digital business solutions. Chinese businesses will invest in these and will provide hi-tech solutions, however it makes no sense for these companies or financing to take majority positions in overseas markets where local expertise is increasingly required.

This is also indicative of a new truth emerging from China’s Belt & Road, and a scenario we have been explaining for some time – that foreign investment participation comes from investing in exploiting the Belt & Road infrastructure.

Businesses in Belt & Road countries involved in trade facilitation and services should be looking at two scenarios: how to partner with Chinese investors in domestic projects, and the legal and business cultural issues involved, and to conduct market research into where investment opportunities arise as a result of infrastructure build as part of the Belt & Road Initiative. For investors across Europe, Africa, the Middle East, Central Asia, Russia and South America the possibilities are now ripe for investing in the soft technologies and builds – anything from shopping centres, to car parks to all types of trade utilization machinery and software are all among the new opportunities.

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