China’s buying spree ends badly


China’s overseas acquisition streak seems to be coming to an unhappy end. Outward direct investment fell by 46% in the first-half of the year, due partly to tightened capital controls and partly to new restrictions on “irrational investments”. But the authorities should be asking a more fundamental question: Why do China’s companies struggle so much overseas?

Typically, companies that expand abroad — through either trade or investment — are the best and most productive in their industry at home. They offer better or cheaper products, make more money than their competitors, and have capital to spare expanding into new markets.

In China, this pattern doesn’t hold. Productivity and profitability often matter less than politics. The government regularly publishes a list of industries it wants companies to invest in, and multiple regulators must approve every aspect of a proposed deal, from the purchase price to whether firms can obtain foreign currency. Reliably, companies planning to invest in preferred industries get the most approvals. And when state- owned banks determine which deals get financing, they tend to favour those that will advance government objectives.

This process creates a range of problems. One is that the overseas targets often don’t make a lot of sense. In recent years, there has been a rush by Chinese firms to buy foreign football clubs — not because they’re particularly good investments, but because President Xi Jinping has expressed hopes that China would become a soccer powerhouse.

Another problem is that, the acquiring companies tend to be uncompetitive. At home, they benefit from a wide range of goodies, such as preferential access to capital and near-impenetrable protectionism. Overseas, they often find that the competition is much tougher, and that business practices that are commonly accepted in China — such as a relaxed approach to health and safety standards — simply don’t fly.

Similarly, companies that don’t compete for capital on the merits see little reason to offer shareholders and debt-holders a reasonable rate of return. One recent study of China’s outbound mergers and acquisitions found that