13 Oct, 2017
Say Goodbye to the China Bid (By Aaron Back)
China’s seemingly insatiable demand for foreign assets has driven up prices for everything from U. S. Treasury bonds to global companies to luxury real estate. Now, a combination of market forces and capital controls are choking off the flow of Chinese cash. Asset markets around the world will have to adjust.
As Chinese exports boomed starting in the early 2000s and foreign investment flooded into the country, the central bank recycled these inflows into foreign government bonds, mostly Treasurys, to keep the yuan from rising. The buying persisted for over a decade, driving bond prices up and driving yields down globally.
China moved to invest in other asset classes, buying stakes in Morgan Stanley and U. K. utility Thames Water via government fund China Investment Corp.
The form of China’s foreign buying shifted in 2014, when the U. S. began exiting quantitative easing and China’s growth slowed. Ordinary Chinese feared that the yuan, which had steadily risen for years, would fall as growth slowed. Both individuals and companies rushed to get money out of China, snapping up trophy assets and luxury real estate around the world.
This was the start of the era when Anbang Insurance Group, a Chinese insurer with murky ownership, paid nearly $2 billion for the Waldorf Astoria in New York and bid $14 billion for Starwood Hotels & Resorts before walking away from the deal. In February 2016, China National Chemical Corp. agreed to buy Swiss pesticide maker Syngenta for $43 billion, the largest foreign takeover by a Chinese company.
The China bid, or at least the expectation of one, sent prices of luxury properties soaring, fueled real estate bubbles from Vancouver to Sydney and pushed up prices of companies seen as desirable for Chinese buyers.
Alarmed by the outflow, Beijing began to tighten capital controls in 2015 and 2016, but the deal-making persisted until this year when the government cracked down on money transfers by individuals and discouraged companies from pursuing «irrational» deals abroad. So far this year, outbound mergers and acquisitions by Chinese companies are down 27% from the same period a year earlier, according to Dealogic. «The short bubble of China bids is over," says one M&A banker who has advised on Chinese acquisitions.
Now, pretty much the only thing the Chinese government encourages its companies to buy abroad are high-tech companies such as computer chip makers. But these strategic assets are precisely the kind that Western governments increasingly don’t want to fall into Chinese hands.
In real estate there is no way to say for sure how much Chinese buying drove up prices, but governments from Canada to Australia have moved to control foreign buying to rein in property bubbles.
Nor is China set to return as a big buyer of U. S. Treasurys. Indeed, if the Federal Reserve keeps tightening, China could be a seller of bonds as it fends off depreciation pressure on the yuan.
In the years ahead, financial markets around the world will have to live without the ever-present China bid. Whether China was a savvy investor or the dumb money, asset prices will likely be lower.
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