It’s not often we get to say a government policy is the victim of its own success. But the contrasting fortunes of two recent cross border deals – Dalian Wanda’s failed $1 billion bid for Dick Clark Productions and Tencent’s $1.7 billion investment in Tesla – are evidence that this is the fate of China’s Going Global strategy. It is also the reason Beijing is shifting from its previously laid-back approach to the greater discipline of Going Global 2.0.
Going Global – also known as the Go Out policy - is the reason we see Chinese multinationals such as Tencent, owner of China’s most popular social network, WeChat, and property-based conglomerate Dalian Wanda operating in global markets in the first place. At the turn of the millennium, Beijing began to lift restrictions on outward foreign direct investment and urged homegrown businesses to buy abroad. China was keen to create multinational companies that were competitive on the global stage. Such companies would in turn contribute to China's economic competitiveness and growth. Although there had been state-led investments in sectors such as natural resources for decades, the first overseas commercial deal took place only in the early 2000s, with the purchase by TCL, an electronics business, of the TV and DVD division of Thomson Electronics of France. Outward FDI now exceeds $100 billion a year and China is a net capital exporter, investing more overseas than it takes in. But this flood of outbound investment headed increasingly to the US and Europe has become a macroeconomic problem. It is hampering China’s control of cross-border capital flows and its ability to maintain capital account restrictions while it reforms the state-dominated financial sector by opening it up to greater competition. If too much money leaves the country, that reduces China’s ability to manage the pegged exchange rate, for instance. It also whittles away the deposit base of the banking system. The capital controls are not the only shift in the policy. Beijing is increasingly strict about which sectors Chinese businesses may invest in. It is no longer enough for a deal to pursue the predilections of a particular tycoon; it must serve China’s economic goals. Dalian Wanda’s bid for the US company that produces the Golden Globes film and TV awards ceremony reflected the ambition of founder Wang Jianlin, one of China’s richest people, to expand his entertainment empire. He already owns America’s AMC cinema chain and has declared his intention to outflank Disney with his own amusement park complexes. Yet his acquisition of Dick Clark productions was reportedly nixed amid a regulatory clampdown on “irrational” investments - because he could not get $1 billion out of China. Buying an entertainment company does not comply with the goals of the Going Global 2.0 policy. So Beijing is using capital controls to scrutinise outward investment exceeding $1 billion - and to evaluate the economic benefits of those investments. After all, the Going Global policy was originally designed to not only create competitive multinationals but also to improve growth potential. That is increasingly important if China is to escape the middle-income trap, which is when growth in a developing economy slows before gross domestic product catches up with that of the west. Expanding the natural resources, services, technology and high-skilled sectors will be more use than snapping up entertainment companies. With the government increasingly concerned about external macroeconomic management, the days when the Going Global policy was applied in a relatively lax manner appear to be over. After all, Wang Jianlin had previously bought AMC Theatres in 2012. Tencent’s acquisition of 5% of Tesla fits the bill for Beijing. It might seem odd that a company known for a mobile messaging app is investing $1.7 billion in a business from a separate tech sector. But for big Chinese groups such as Tencent, the world's 10th largest company in the world in market capitalisation and the only non-US firm, tech is tech. Tencent has already invested in Shanghai-based electric car company Nio. It has taken stakes in Didi Chuxing, the Uber of China, and in Lyft, a US-based car service. Like other Chinese tech companies, it is growing so fast that diversification into a wide range of fields is more common than elsewhere. So for Pony Ma Huateng, the Tencent chief executive who co-founded the company 20 years ago, this is not an unusual move. Jack Ma’s Alibaba, the e-commerce company best known as the Amazon of China, has also invested in Didi and Lyft. Not to be left out, the third big Chinese tech company, search engine Baidu, headed by Robin Li, has also invested in Nio. All three billionaires, who frequently compete with one another at home and abroad, are eyeing the potential of driverless cars in China. Tesla might gain a foothold in the Chinese market with a Chinese partner. For Tencent, which has a market capitalization of $275 billion - dwarfing Tesla’s $45 billion – this is a relatively affordable way to steal a march on its domestic rivals. The tech tycoons’ sprawling spending habits are a good fit with the aims of Going Global 2.0 – which means Tencent’s $1.7 billion investment in Tesla and similar deals are agreeable to Beijing. So -- in this iteration, at least -- we should expect more Beijing-approved tie-ups from different parts of the tech sector and far less prestigious but macroeconomically useless trophy hunting. Our Chair contributes to the FT annual survey
1. Economic prospects How much, if at all, do you expect UK economic growth to slow in 2017? Please explain your answer. I expect UK economic growth to remain fairly resilient, supported by relatively optimistic consumer confidence, a slower pace of fiscal austerity, and a weaker Pound. The UK will still be in the European Union in 2017, so there will be no fundamental change to market access to the EU Single Market. However, growth may be weaker than in 2016 if businesses defer investment decisions as a result of the continuing policy uncertainty related to Brexit. 2. Brexit Compared to what you thought 12 months ago about the UK's long-term economic prospects outside the EU, are you now more optimistic or more pessimistic than you were? More optimistic than 12 months ago Feel about the same as 12 months ago More pessimistic than 12 months ago Please explain your answer. I feel the same. Access to global markets is the key to the UK's long-term economic prospects. So, on the positive side there is undoubtedly a renewed vigour for striking international trade and investment deals, especially in fast-growing parts of the world and in the trade in services. However, it is likely to take longer than the rather optimistic assessments of how quickly these negotiations can be done. 3. Inflation Inflation has started to increase in recent months. To what extent do you expect inflation to rise in 2017? I expect inflation to rise but not to the heights seen in the aftermath of the 2008 financial crisis as the driver is the weaker Pound and not global price pressures. But, as we have seen in recent months, some of these price pressures are likely to be absorbed into profit margins, so the pass-through into consumer price inflation may be weaker than expected. 4. Monetary policy In December, the Monetary Policy Committee said the next interest rate move could as easily be up as down. Will there be a shift in this monetary policy stance by the end of 2017? Please explain your answer. The chances are that the MPC will not increase interest rates in 2017. The impact of Sterling's weakness on inflation is likely to be viewed as a temporary issue and not a serious risk to the inflation target over a two-year horizon. Plus, with the ECB extending QE to the end of 2017 (albeit with a smaller programme) while the Fed may well raise rates again, the contradictory impact from the UK's major trading partners will also contribute to a wait-and-see tendency. 5. Immigration Immigration is likely to be central to the Brexit negotiations in 2017. How much do you think immigration will change and what effect do you think this will have on the UK economy? I don't see much change in immigration next year as the process for leaving the EU is unclear and likely to take some time, so freedom of movement will be unaffected for a while. Of course, as the UK may want to remain in the EU Single Market at least for certain sectors, much of the economic impact will depend on if the EU will insist on maintaining free movement of people for any such access. 6. Fiscal policy Philip Hammond is expecting government borrowing to fall in 2017. His new fiscal rules provide headroom for more borrowing than currently forecast. To what extent will he need to use it and why? If growth disappoints, or higher borrowing costs result from rising inflation, then the Chancellor may find he borrows slightly more than expected. But unless anything major hits the economy or the public finances, he will likely hold back from any significant change in fiscal policy in the next year and wait until the impact of Brexit is clearer. 7. Donald Trump How do you think Donald Trump's presidency will affect the UK economy in 2017? Trump may favour trade deals with similarly developed economies as those tend to have less of a negative wage impact, so the UK could find itself as one of the trading partners the U.S. is looking to forge a bilateral trade deal with. But, Trump's focus appears to be on withdrawing from trade agreements or renegotiating current America's current 14 FTAs. In any case, if any informal trade talks were to occur, it would boost sentiment with respect to the British economy. Otherwise, his fiscal stimulus is likely to boost the dollar which will contribute to a weaker Sterling, among other currencies. Of course, Trump will continue to add uncertainty to the world, and any change to global growth will also affect the UK economy in 2017. |