China’s overseas investment is expanding, led by M&As. According to the UNCTAD World Investment Report, Chinese overseas M&A has been growing rapidly compared to greenfield investment. In 2016, Chinese overseas M&A reached a record high of US$92.2 billion, a 60 fold increase from 2007. As a result of the expansion, China’s share of global cross-border M&As also expanded significantly, reaching 18.9% in 2017, making it the world’s leader in M&A execution.
   With the rapid expansion of China’s overseas M&As and shift in acquisition targets to companies with cutting-edge technology, high-end brands, and top-level market shares, regulations on Chinese companies’ M&As are tightening, especially in advanced economies such as the United States and European Union. In particular, the U.S. is keeping Chinese companies in check by mandating a stricter reviewing process by the Foreign Investment Review Committee (CFIUS) to stop high-tech leaks and national security threats.
   The overseas M&As of Chinese companies are facing a new phase in the wake of internal and external obstacles and Belt & Road initiatives of China. As of 2017, overseas M&As of Chinese companies showed a significant decrease in size overall, but M&As to Belt & Road countries showed an increasing trend. However, major M&A industrial sectors showed different patterns in different countries. In Kazakhstan, in particular, all of China’s M&As have taken place in the energy sector. On the other hand, M&A projects conducted in Israel were led by the high-tech sector. Meanwhile, in Singapore, where China has executed the most M&As among all Belt & Road countries, it was clear that the M&As had been executed in more diverse industrial sectors than Kazakhstan or Israel, spread across industrial goods, finance, real estate, consumer goods, etc.
   If we look at the characteristics of Chinese companies’ M&As through a case analysis of Chinese companies, first of all, it can be seen that Chinese companies’ overseas M&As have been affected by the Chinese economy’s overall level of development and China’s foreign investment policy based on Chinese national strategies. In addition, while most global M&As are based on commercial incentives of companies, there are quite a few cases of M&As in China that are based on strategic motivations rather than the commercial motives of companies, and it likely that there will be more M&As in line with China’s Belt & Road initiative and China Made 2025.
   In recent years, China’s foreign investment policy has reached a turning point. China has imposed restrictions on foreign investment in sensitive industries such as real estate and hotels since the end of 2016, while the 19th Party Congress held in October 2017 aggressively promoted overseas expansion of Chinese companies in pursuit of the Belt & Road project. In particular, China emphasized innovation in the field of overseas investment and established a network of global trade, investment, production and services. In addition, the 13th National People’s Congress, China’s largest annual political event held in March 2018, announced plans to: promote stable development of foreign investments; construct Trade Cooperation Zones; and promote the convenient use of RMBs in global trade and investment. Therefore, China’s overseas investment will be focused on Belt & Road projects, aimed at establishing a global production network and building overseas economic and trade cooperation zones.
   As a target for Chinese companies’ overseas investment expansion Korea remains but the 13th among all other targets in priority, but its importance is expected to grow gradually. Although Korea does not account for much of China’s total investment, Chinese investment in Korea has been on the rise in recent years, and corporate investment is on an upward trend as well. The recent expansion of China`s investment in Korea reflects the impact of its policies and changes in its consumer market. For example, the manufacturing sector has accounted for an increasing portion of China’s overseas investment since 2015, while Chinese investment in Korea in this year also expanded in machinery and equipment sectors such as mold casting and mold manufacturing machinery and machinery for semiconductor manufacturing. This trend has become more pronounced in recent years. When considering how the Chinese government is planning to increase the portion of overseas investment by the manufacturing industry during the 13th Five Year Plan (2016-2020), it is likely that it will be able to attract investment from South Korean companies that have technological advantages in areas of interest from China in the future. Moreover, Korea is geographically close to China and can expect to enjoy tariff benefits and the alleviation of trade barriers by signing FTAs with major countries such as the U.S., Europe and Australia, which is why China is interested in Korea as a manufacturing base. China’s M&As are mainly centered on ICT and game-related industries or the financial sector, all areas in which Korean businesses are considered highly competitive. Recently, Chinese capital investment in insurance and science & technology-related industries in Korea has expanded, which is also explained by 13th Five Year Plan which promoted the advancement of China’s companies to overseas in the areas of industrial equipment, technology, standards, services, insurance, etc. In addition, as we see a change in China’s economic growth paradigm recently, the scope of overseas investment has also been diversified into IT services, consumer goods and distribution sectors, which can be seen as linked to China’s recent expansion of investment in Korea.
   This report presents some policy implications based on the analysis of China’s overseas M&A characteristics and outlook. First, we cite the need to redefine perceptions of Chinese capital and seek a win-win solution. Overall perceptions toward Chinese M&A have not been positive in the past, as seen in the cases of Ssangyong Motor Co., Hynix Semiconductor Inc., and the tightening of regulations by advanced economies such as the United States and Europe against China’s aggressive M&A. However, Chinese capital has already emerged as a big hand vying for the first or second place in the global M&A market. In addition, in the case of a leading global company acquired by a Chinese company, it protected shareholders’ interests through a high premium and provided a new opportunity for entering the Chinese market. These developments indicate that a win-win structure can be formed by selling and investing in future industries that need to be nurtured. Accordingly, Korea and China need to come up with measures to utilize Chinese capital in a mutually beneficial way through a shift in perceptions toward Chinese capital.
   Next, it is necessary to come up with measures to prevent leakage of core technologies and attract selective investment. As advanced economies such as the U.S. and EU tighten regulations on M&As by Chinese companies for fear of national security threats and high-tech leaks, Chinese companies are expected to aggressively pursue M&As for Korean companies with global competitiveness and high technological prowess. Up to now advanced countries have refrained from intergovernmental involvement as much as possible by accepting global M&As as market behavior, but now they are viewing these M&As as a part of China’s national-level industrial development strategy and have begun to tighten regulations. According to the analysis of this study, most of such cases of limiting investment occurred in the semiconductor industry. Given that most of the world’s leading companies that China acquired in the past actively pursued these M&As at a time when business conditions in the semiconductor industry were deteriorating, while semiconductor equipment manufacturers are currently enjoying a good period due to the booming global semiconductor market, we can expect Chinese capital to aggressively pursue M&As with Korean semiconductor equipment manufacturers should the market economy slow down in the future. Outside of the semiconductor sector, the U.S. and EU’s tougher regulations on M&A investment are likely to lead to an increase in China’s interest in Korea as a partner in its Made in China 2025 initiative and attempts by Chinese companies to merge with or acquire Korean high-tech companies. The cases we see of upgrade in the industrial structure of China’s private companies pose a potential threat for Korean business, against which institutional safeguards should be established to prevent the leakage of Korean technology and guarantee managerial control and job security, but at the same time they present opportunities for further cooperation in new industries. In addition, selective attraction of Chinese capital is needed. Although the attraction of Chinese capital may help create jobs and improve corporate financial structures, a thorough verification process on the financial structures of the Chinese acquirers will have to precede in order to avoid the risk of worsening financial status after takeovers, being lured by high premium offers, as shown by cases of reckless expansion or reliance on excessive borrowing regulated by the Chinese government.
   Third, it is expected that future M&As of Chinese companies will be carried out in conjunction with China’s Belt & Road operations. In particular, we can expect to see more Chinese M&As in the areas of finance, transportation infrastructure construction, culture and electronic commerce. Korea has agreed to cooperate with China by linking China’s Belt & Road initiatives with Korea’s New Southern Policy, and should seek opportunities to jointly advance into the markets of countries participating in the Belt & Road initiative, based on strategic partnership with China that draws upon Korea’s development experience and technological prowess. As part of China’s measures to utilize Belt and Road M&As, it proposes to secure a joint route into the target country’s market by first attracting Chinese companies’ M&As to Korea based on Korean companies’ comparative advantage in the ICT area, and then joining China’s drive for digital silk road construction projects in the future. In addition, the Chinese government is pushing to build overseas economic and trade cooperation zones, or overseas industrial cooperation complexes, for the stable development of overseas investment. Bilateral cooperation at such overseas industrial cooperation complexes has recently been the subject of discussions between Korea and China as part of their joint advances into third countries. Beijing proposes a way for South Korean companies to participate in industrial cooperation complexes built mostly by China in Southeast Asian countries, which should be conducted in the form of two-way cooperation between the two countries, meaning that cooperation can continue between the two countries in Korean industrial complexes built abroad as well.
   Considering the advantages that overseas M&As offer, such as revitalizing the domestic market, expanding new investment in the industry, creating more jobs and securing a path to overseas markets, it is necessary to review China’s pursuit of preemptive and active use of M&As, a trend which is likely to expand in the future. Implementation measures include identifying China’s demand for M&As in Korea, providing consulting services related to M&As, and providing platforms where suitable companies in Korea to be acquired are introduced. In addition, it is necessary to select target companies for 12 promising new industries emphasized by Korea, such as the bio, semiconductor and robot industries, which are related to the Fourth Industrial Revolution and offer high value-added and job-creation effects, and to establish an online platform that can match Chinese investors with domestic companies. Finally, it is necessary to consider establishing a monitoring system aimed at looking at the Chinese government’s overseas investment policies and investment trends, so that we can closely analyze and prepare for changes in the Chinese government’s overseas investment policy stance.