Chinese investors head to Southeast Asia for acquisitions as they face rising barriers in the US and Europe, Baker McKenzie says

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Chinese investors head to Southeast Asia for acquisitions as they face rising barriers in the US and Europe, Baker McKenzie says

Corporate executives in the Asia-Pacific region remain upbeat on international investments, ­although interest in Southeast Asia has begun to displace previously favoured destinations, ­according to a survey by law firm Baker McKenzie.

Destinations such as Europe, Britain and the United States have fallen out of favour, overtaken by Thailand, Vietnam and other Southeast Asian nations, according to the survey, which polled 600 executives in the Asia-Pacific.

About 63 per cent of executives based in mainland China said they expected to increase international investments by more than 10 per cent over the next two years. The survey included responses from 200 executives based in either Hong Kong or China.

Across all firms surveyed, 88 per cent of respondents said their firms were more interested in international expansion, be that acquisitions, investments or listings, over the next two years.

The report’s authors found that China’s “Belt and Road Initiative” remained important to the strategy of Hong Kong and ­Chinese companies.

“Chinese companies are still very active in making [belt and road] investments,” said Baker McKenzie M&A partner Bee Chun Boo.

“Southeast Asia remains a key region for {belt and road] investments, with infrastructure and power investments leading the way, followed by manufacturing, financial services and e-commerce. [Belt and road] investment is expected to be active over the next one to two years, covering more jurisdictions and more industries.

“In the midterm, three to five years’ time, we may start to see Chinese companies exiting from some of their BRI investments,” she said.

Other analysts said the sources of funding for such projects was expected to change over time.

“By 2030, we expect that a large proportion of belt and road-related projects will be funded not just by Chinese money but a mix of private capital, multilateral banks, export credit agencies and foreign lenders,” said Martin David, Asia-Pacific head of Baker McKenzie's projects group.

“That said, Chinese lenders are always likely to be a core component of every BRI project.”

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Chinese companies reduced foreign direct investment into the US by 83 per cent in 2018 on year, while Chinese investment into the European Union was down 70 per cent during the period, according to a January 2019 report by Baker McKenzie and the Rhodium Group.

The report noted that Southeast Asia offered good economic growth rates and substantial market size, as well as a degree of cultural affinity for Chinese companies that may not exist in the US or Europe. The survey found that gaining access to new markets was a major drawing card for international companies, while lowering production or labour costs was considered relatively less important. Asset valuation was also deemed more reasonable than in China or developed economies.

Munir Abdul Aziz of Baker McKenzie Kuala Lumpur said that Southeast Asia was expected to become the world’s fourth largest economy by 2030, and that multinational corporations were deepening their foothold in the region.

“Historically paternalistic practices are giving way to greater openness and more creative approaches that place consumers at the heart of business strategy,” he said.

However, Chinese companies will need to be aware of the importance of garnering trust when they expand into new markets in Southeast Asia.

A study by corporate advisory firm Brunswick Group released on Monday found Japanese, German, UK and US companies were perceived more favourably than Chinese companies throughout the region.

“Despite the geographic proximity and historical links to this region, Chinese companies should not underestimate the potential challenges to building their reputation and trust with the people of Southeast Asia,” said Sunitha Chalam of Brunswick Group.

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The Brunswick survey, which covered respondents in Singapore, Malaysia, Thailand and Indonesia, found that 76 per cent of respondents viewed Chinese companies favourably, compared to 94 per cent for Japanese companies.

“We see governments and large companies in Asia increasingly working hand in hand to further geopolitical goals through trade and investment, often in consortiums of small groups of nations with shared interests. Much of this interest now centres around Southeast Asia,” said Baker McKenzie Asia-Pacific chair Ai Ai Wong.

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