China Outbound Investments Vol. 27


In a quarter dominated by news of volatility in Chinese stock markets and slowing GDP growth, Chinese outbound investment remained strong across all three components we track. While down from Q2 levels, aggregate Q3 outbound investment/pledges totalled USD 124.6 billion. 

The strongest performance by a single component in Q3 was M&A/equity investments, which saw both record volumes and aggregate amounts since we began publishing in 2007. The USD 36 billion in Q3 aggregate value was up 81% from the prior 6 quarter average of USD 20 billion, while the volume of 170 announced transactions was up 65% from the prior 6 quarter average of 103. 

The leading component again in Q3 was Government Agreements with pledged amounts of USD 73.5 billion, down 45% from Q2 pledged amounts. However, unlike Q2's pledged to signed contracts ratio of 20.3%, in Q3 this ratio lept to 68.0%, driven by hard asset purchases of US aircraft, contracts to build two reactors in Iran and specific loans as part of a much larger agreement with Kazkhstan. 

There were 19 Government Related Loans, representing USD 17.2 billion value. As in Q2, 90% of these loans were to countries part of OBOR: the only exceptions were to Venezuela and a credit facility to a UK domiciled company to finance Chinese shipbuilding. Where data was available, two loans had coupons in the 2.0-3.0% range, while two had 7.0%. 

Outside of the Policy Banks, we would like to continue our updates on China's other OBOR related funds, AIIB, the Silk Road Fund (SRF) and the newly formed Silk Road Gold Fund. In Q3 AIIB remained active in recruiting staff and developing lending policy. Management's prior experience in ADB and the World Bank will likely influence its thinking on structure and competitive advantages. SRF agreed to acquire a 9.9% equity stake in the Yamal LNG project from controlling shareholder Novatek (Russia) (SRFs initial investment was in Pakistan in Q2). 


M&A / Equity Transactions

 As noted above, Q3 announced outbound M&A aggregate value was USD 36.0 billion, an increase of 77.2% from the USD 20.3 billion in Q2 even though volume was flat (170 transactions in Q3 versus 167 in Q2). There were 8 transactions in excess of USD 1 billion, totalling USD 21.6 billion (versus 5 transactions with an aggregate value of USD 11.5 billion in Q2). Collectively, these 8 deals represented 60% of Q3 aggregate value. 

For the above reasons, average deal size (excluding 50 investments below USD 10 million with disclosed transaction value) rose from USD 201 million to USD 358 million in this 

quarter (€ 181 million and € 322 million respectively1). Without considering the largest transaction of the quarter, average deal size stood at USD 285 million (€ 256 million). 

Aggregate Value 

Financials led aggregate value with USD 17.2 billion representing 48% of the aggregate value. This sector recorded the largest deal of the quarter – the acquisition of an Ireland-based aircraft leasing company from Bohai Leasing Co. for USD 7.6 billion 2 . Among Financials, Real Estate saw 2 transactions in excess of USD 1 billion, continuing the trend for the past several quarters. Following Financials in aggregate value were Technology (19%) and Consumer (13%). Collectively, these 3 sectors accounted for 80% of Q3 aggregate amounts. 

Geographically, Europe ranked #1 accounting for almost 50% of aggregate value. It is the 4th time Europe led in the past 7 quarters. North America followed with 28% while Asia dropped from 32% to 18% of aggregate value. Collectively, these 3 Regions represented 95% of Q3 aggregate value. 


Technology, Consumer and Financials led also in terms of volume, accounting for almost 70% of total volume. Technology ranked 1st with 45 transactions (26%), followed by Consumer (24%) and Financials (18%). 

North America led again in volume with 67 announced transactions/investments (39% of volume), followed by Asia with 50 (29%). Similar to the last several quarters, North America volume was driven by investments in Technology (accounting for more than 40% of US volume). 

Government Related Loan Agreements 

In Q3, there were 19 Government Related Loan Agreements (down from 21 in Q2), representing USD 17.2 billion (down 12.5% from USD 19.6 billion in Q2). Similar to Q2, 17 of the 19 Government Related Loan Agreements were in countries along OBOR (90% volume correlation)3. The only exceptions were a USD 5.0 billion loan to Venezuela, which had the effect of lowering the Chinese average cost of bpd on prior contracts and a USD 690 million credit guarantee with a UK based investment company to provide funding for 10 container ships to be built for Jinhai Heavy Industry. 

Six loans were to African countries, totalling USD 3.5 billion. Most of these loans were to projects in countries which had signed much larger Government Agreements previously. Four loans, totalling USD 2.025 billion were to Kazakhstan as part of the much larger USD 23 billion Government Agreement signed in early September. There were three loans to Asian countries totalling USD 2.0 billion, one loan of USD 576 million to Pakistan, 

representing the first signed loan since its Q2 USD 46 billion pledge, one small loan to Belarus and a USD 1.884 billion trade finance transaction with VTB. The quarter closed with a USD 1.25 billion loan by CDB to Turkcell, Turkey’s largest mobile phone operator. 

Where data was disclosed, three of the loans had interest rates in the 2.0%-3.0% range; however, there were also two loans with 7.0% interest rates this quarter. 

Government Agreements 

While Q3 did saw a decline in total amounts pledged to USD 73.5 billion, from USD 134 billion in Q2 (down 45%), there were still major agreements with disclosed values with 5 major countries. 

The largest agreement, representing 52% of total value was with the USA. There were 4 specific transactions within this agreement, 2 involving the purchase of aircraft from Boeing (with amounts calculated from list prices) and 2 with Microsoft (no amounts disclosed). 

There were also important agreements signed with OBOR countries, Kazakhstan, Iran, Pakistan and Tajikistan. 

Finally, It is worth noting that China delivered on USD 4.5 billion of its Q2 pledge to Pakistan through the sale 

II. Quarterly Feature: Selected Countries Investments into Kenya and Ethiopia (2013 – 2015) 

In light of considerable press criticism this past quarter, we wanted to set out some hard facts related to Chinese investment relative to its peers in selected African countries – post President Xi. We feel that this analysis is timely in that it continues our efforts to track China's pledge versus actual funding ratio, occurred in a quarter when President Obama himself visited Kenya and addresses criticism by some pundits that the historical investment flows from China into Africa have slowed considerably over the recent past. 

We feel that the results of this analysis on Table 2 speak for themselves. China led in all categories when compared to its global peers; the USA and Japan. If these results, measured on aggregate amounts (10-1 on a combined basis), occurred in a Champions League match, it would be described as a drubbing. 

We recognise that this analysis is limited in scope (we have only compared results in two African countries and only over the past 2.5 years) but we believe that the facts within it still send a message to those who continue to question China's outbound investment commitment levels and delivery on pledges.