CHINA OFFSHORE JULY 2014

Transcription

1 CHINA OFFSHORE JULY 2014 /INSIGHT AND ANALYSIS OF CHINA S OUTBOUND OFFSHORE INVESTMENTS AND M&A ACTIVITY/ CONTENTS/ INTRODUCTION [2] CHINESE OUTWARD FDI [3] HONG KONG FDI [6] CHINESE M&A ACTIVITY [8] SPOTLIGHT ON JERSEY [9]

2 2 INTRODUCTION Welcome to this our inaugural report on China s outbound offshore Foreign Direct Investment (FDI) and mergers and acquisitions (M&A) activity. In this edition we set out an overview of the current available statistics in relation to flows of FDI and how this translates from an offshore perspective. James Gaudin Partner, Jersey China is on track to be the world s largest economy within the next decade, and with GDP growth averaging around 10% a year since 1978 we see a stable and thriving economic backdrop to these figures. China s business and regulatory environment continues to develop and evolve and it has matured and grown rapidly over the past decade. We believe that International Financial Centres (IFCs) such as Hong Kong, Mauritius, Cayman and Jersey for example, will continue to play significant roles in China s outgoing investment. In this edition we put a spotlight on Jersey and its mature, highly-rated and transparent environment for Chinese Investors. Ranked as the highest rated offshore jurisdiction in the Global Financial Centres Index, Jersey: has a mature, stable political and institutional framework transparent economic decision-making high fiscal flexibility; and a strong track record of product and service innovation Frances Woo Group Chairman & Managing Partner Hong Kong We hope that you find the information and analysis on the following pages of interest. As 2014 progresses and Appleby further develops its business with Chinese enterprises and others based in China seeking offshore legal and fiduciary advice and services, we hope to bring you further analysis. Please do not hesitate to get in touch should you wish to discuss anything further. Jersey July, 2014 Bermuda British Virgin Islands Cayman Islands Guernsey Hong Kong Isle of Man Jersey London Mauritius Seychelles Shanghai Zurich

3 3 IN BRIEF: FOREIGN DIRECT INVESTMENT (FDI) Foreign Direct Investment is an investment that acquires a significant and lasting stake in an enterprise, operating in an economy not of the investor. FDI is reported both from an inward perspective (i.e. which countries are investing into Country X) and an outward perspective (i.e. Country X is investing into which countries). FDI statistics measure two different concepts - flows and stocks: Flows: a measure of annual levels of investment; tend to vary significantly year-on-year. Stocks: a measure of the total value of investments by or in a country at year-end. These are therefore subject to changes in exchange rate and valuation in company accounts. CHINESE OUTWARD FDI FDI FLOW According to the World Investment Report 1 produced by the United Nations Conference on Trade and Development (UNCTAD), global foreign direct investment flows fell by 18% from USD1.65tr in 2011 to USD1.35tr in In contrast to this, China s outward FDI net flows in 2012 (the latest date available) reached USD87.8bn, increasing by 18% compared to the previous year. China s outward FDI flows have now achieved growth in 10 consecutive years, and the country has become the world s third largest source of FDI. Only the USA and Japan invested more in We believe that this level of increase is likely to continue; following the launch of China s 12th Five Year Plan in 2011 specific targets were announced including an increase in FDI outflows to USD150bn by end In November 2013, China s Third Plenum (the latest annual meeting of the Central Committee) highlighted deregulation and market openness to promote both inward and outward FDI. The Asian economies remain the largest recipient of Chinese FDI. Growth to other regions continues to increase as well, especially to the United States and Latin America, where investment in natural resources and infrastructure is dominant. REGIONAL INVESTMENT BY CHINA 2012 (USDbn) North America USD4.8 Europe USD7.0 Asia & M. East USD64.7 Total USD87.8bn Latin America & Caribbean USD6.1 Africa USD2.5 Oceania USD2.4 47% 1 Source: UNCTAD World Investment Report, 2013

4 4 CHINESE OUTWARD FDI cont d. Hong Kong is the largest recipient of China s Outward Direct Investment (ODI), accounting for USD51.2bn (58%) of the 2012 total. This is, of course, in part due to its role as an intermediary of flows between China and the rest of the world. It is extremely likely that further Chinese offshore investment continues to be routed through Hong Kong, which invests the vast majority of its own FDI into offshore jurisdictions and mainland China. Acquisitions by China that are conducted through outside regions like Hong Kong are not reflected in China s outward FDI. TOP DESTINATIONS FOR CHINA S OUTWARD FDI FLOWS IN 2012 Destination Amount (USDbn) Hong Kong $51.2 USA $4.0 Kazakhstan $3.0 UK $2.8 BVI $2.2 All others $25 28% 58% 3% 3% 3% 5% China s outward FDI flows have now achieved growth in 10 consecutive years, and the country is now the world s third largest source of FDI.

5 5 CHINESE OUTWARD FDI cont d. FDI STOCK By the end of 2012, China s accumulated outward FDI stock volume stood at USD532bn. As the development of China s outward FDI is fairly contemporary, its scale is far less than that of developed countries; only 30% of the UK s for example. Nevertheless, it is increasing rapidly. At 31 December 2012, China s outward FDI in the top four countries (or regions) had accumulated to USD384bn, accounting for 72% of the total. Hong Kong alone accounts for USD306bn, followed by the British Virgin Islands (BVI) and the Cayman Islands, each with USD30bn, almost double that of the United States which sits in fourth position. Offshore is also represented through Bermuda, with holdings of USD3.3bn. The Crown Dependencies of Guernsey, Jersey and the Isle of Man are not reported separately from UK data, so their share remains unknown. CHINA S TOTAL OUTWARD FDI STOCK (USDbn) $148 USDbn $17 $30 $31 Other United States Cayman $306 BVI Hong Kong By the end of 2012, China s outward FDI in the top four countries (or regions) had accumulated to USD384bn, accounting for 72% of the total. 47%

6 6 HONG KONG FDI The FDI figures for China highlight the importance of Hong Kong and its investment relationship with the Chinese mainland. HONG KONG INWARD AND OUTWARD FDI FLOW, 2012 (USDbn) To gain a full understanding of Chinese FDI requires the analysis of Hong Kong as well. FDI 26% FDI FLOW In 2012, total FDI inflow into Hong Kong amounted to USD70bn, 27% less than the USD96bn recorded in Mainland China was the major source of this FDI inflow in 2012, investing USD30bn. This was followed by the BVI investing USD25bn. Bermuda and the Netherlands continued to invest steadily but several other countries, notably the USA, reduced their investment levels from the previous year. FDI $25 $30 $38.2 $35.5 FDI In terms of sectors, investment and holding companies, real estate, professional and business services attracted the largest amount of the total FDI inflow to Hong Kong in The USD83bn of outward flow of investment from Hong Kong in 2012 was dominated by the Chinese mainland and the BVI, with the remainder mostly going to Bermuda, Australia and the UK. $9 $5 $1.1 $1.6 $3.6 INWARD Key China BVI Bermuda Netherlands Others OUTWARD Key China BVI Bermuda UK

7 7 HONG KONG FDI cont d. FDI STOCK At the end of 2012, the position of Hong Kong s FDI inward stock increased by 15% from a year earlier to USD1.2tr. This increase was mainly attributable to the rise in the total market values of Hong Kong enterprise groups (HKEGs) that had previously received FDI from abroad and also the positive FDI inflow to Hong Kong. HONG KONG INWARD & OUTWARD FDI STOCK, 2012 (USDbn) FDI FDI stocks have soared in Hong Kong since the late 1990s. The USD1.2tr held in Hong Kong compares favourably to the USD830bn held in China s mainland and USD680bn of stock invested in Singapore. Mainland China accounted for the largest share (USD460bn) of the total position reflecting the importance of China s investment in the region. The Mainland s investment covered a wide range of economic activities, including investment and holding, real estate, professional and business services; import/export, wholesale and retail trades; and banking. FDI $407 $460 $280 $127 $504 $473 FDI The other major sources of investment include the BVI (USD407bn), Bermuda (USD79bn) and Cayman (USD18bn). At the end of 2012, the position of Hong Kong s FDI outward assets increased by 13% from a year earlier to 30% USD1.1tr. Analysed by immediate destination of investment, the BVI was the most important destination, with a share of 43% of the total position, slightly ahead of the Chinese mainland. Analysed by major economic activity of HKEGs which had made outward FDI, those engaged in investment and holding, real estate, professional and business services took up the largest share, at 78% of the total position at end This was followed by import/export, wholesale and retail trades, at 6%; and banking, at 4%. $79 $18 $23 $34 INWARD Key China BVI Others Bermuda Cayman OUTWARD Key BVI China Others Bermuda Cayman FDI stocks have soared in Hong Kong since the late 1990s.

8 8 CHINESE M&A ACTIVITY According to the Ministry of Commerce of the People s Republic of China, in 2012 Chinese enterprises conducted 457 international corporate transactions, with a value of USD43.4bn. Further details of some of these deals have not been made publicly available. Transactions were carried out in ten principal sectors, including mining, electricity production and supply, culture and entertainment, manufacturing, transportation, construction and finance. While much of China s FDI remains focused in the natural resources sector, it is increasingly becoming more diversified. For example in 2012 FDI in the mining sector contracted, but grew rapidly in manufacturing, construction, and the financial industry. CHINESE OVERSEAS ACQUISITIONS There were 281 publically reported deals recorded in 2012, where China was the acquirer of a non-chinese company. The total deal value was USD26bn. In 2013, the number of reported overseas acquisitions remained steady (266), but the value increased by an impressive 57%, to USD45bn. China is also highly acquisitive within its own borders. Since the start of 2012, it has witnessed on average 774 internal deals each quarter, each worth approximately USD44bn. During 2013 and 2014 China conducted 340 international deals valued at USD52bn. By value, the largest percentage of these deals targeted the Netherlands but these were very closely followed by Australia, the Cayman Islands, Russian Federation and Mozambique. Unsurprisingly, Hong Kong also makes the top ten listing with USD3.8bn of deals during the two year period. TOP TEN CHINESE TARGETS BY VALUE Country (target) Deal value (USDmil) Netherlands 6,207 Australia 5,816 Cayman Islands 5,678 VOLUME AND VALUE OF CHINESE OVERSEAS ACQUISITIONS 2012 & 2013 Russian Federation 5,638 Mozambique 4, Hong Kong 3,811 Billion USD Italy 3,055 Egypt 2, Peru 2,600 United Kingdom 2,468 0 Q Q Q Q Q Q Q Q Q Deal value Number of deals

9 9 SPOTLIGHT ON JERSEY COOPERATION & EXCHANGE OF INFORMATION WITH CHINA Earlier this year the China Securities Regulatory Commission signed a Memorandum of Understanding (MoU) with the Jersey Financial Services Commission, providing another vehicle for China s enterprises to enter overseas markets. The memorandum will provide the basis for a framework of cooperation and exchange of information between the two sets of authorities in relation to securities and futures business. It will also boost inbound and outbound investments in several ways. In particular the MoU is heralded to be the first step in allowing Jersey-domiciled funds to participate in the Qualified Foreign Institutional Investor/Qualified Domestic Institutional Investor (QFII/QDII) programme. Currently, foreign and Chinese investors have only been allowed to invest cross-border by buying into funds regulated through either the QFII programme or the QDII programme, both of which are restricted by quotas. As such, the MoU will further enhance Jersey s reputation as a jurisdiction that can serve as a gateway for investing into and out of China. BITCOIN Jersey approved the first regulated Bitcoin fund in July this year. The move is related to Jersey s strategy of positioning the jurisdiction as a global centre for digital currencies. A regulated Bitcoin investment fund overcomes anonymity concerns about the virtual currency. The fund will allow major investors (including insurance companies) to invest in the emerging digital currency for the first time. JERSEY SERVICED COLLECTIVE INVESTMENT FUNDS AND SUB FUNDS AS AT 30TH OF JUNE OF EACH YEAR 1,800 1,600 1,400 1,200 1, JERSEY DOMICILED FUNDS MAIN ASSET CLASSES 2013 Asset Class USDbn Private Equity/Venture Capital 50.3 Property/Real Estate 38.2 Equities 18.4 FUNDS Jersey is at the vanguard of delivery of funds services. Its funds industry is very well-regarded with a reputation for having an appetite to innovate and accommodate new fund markets, whilst keeping regulatory standards extremely high. Over the last decade there has been growth in funds under administration and Jersey continues to attract top quality financial institutions. As of 30th of June 2013, total net assets were US$232bn. Alternative Investment 13.8 Exchange Traded Commodities 10.7 Mixed Equities/Bonds 7.9 Bonds 6.2 Fund of Funds 6.1 Fund of Hedge Funds 1.5

10 10 SPOTLIGHT ON JERSEY cont d. BANKING DEPOSITS Jersey s reputation as a stable, yet innovative jurisdiction gives it a strong international appeal. Banking deposits and investments held by the Island s 34 banks originate from institutions and private clients across the world, including approximately $10bn from the Far East. MERGERS & ACQUISITIONS In the first half of 2014, publically available deal information reveals that Jersey announced 83 deals worth over USD10bn. During this time, average deal size was USD126m, and there were five deals worth over USD1 billion each. The 83 deals announced during this period included: seven Initial Public Offerings (on the NASDAQ, London Stock Exchange Main and AIM markets) and 11 full acquisitions, the largest being the USD1.89bn takeover of Kentz Corporation, a Jersey-based mechanical engineering firm specialising in the oil and gas sector. The 83 deals were targeted at a wide range of sectors, with a particularly strong showing in Finance and Insurance. Jersey has also proved to be a popular jurisdiction for Commodity and Real Estate deals recently. There have also been 59 deals so far this year where a Jerseybased company was the acquiring party, worth a total value of USD4.1bn. These deals were spread across 21 different countries with the most popular targets being companies based in the United Kingdom, United States Of America, Canada, Sweden, South Africa, the Netherlands and Singapore. Almost half the deals involved companies based in the Information or Professional, Scientific, and Technical Services sectors. COMPANY INCORPORATIONS Since a peak in new incorporations in 2007, impacted briefly by the global financial crisis, activity levels in Jersey have remained extremely steady with approximately 2,500 incorporations per year. In total, there are almost 33,000 live companies on the Jersey register. There are several offshore business vehicles, the most popular being the Limited Liability Company. All Jersey companies, including cell companies are zero rated for Jersey Income Tax purposes. Limited Partnerships, Foundations and Trusts are other entities also utilised for efficient tax structuring. BANKING DEPOSITS FROM THE FAR EAST Billion USD Key Finance and Insurance Professional, Scientific, and Technical Services Mining, Quarrying, and Oil and Gas Extraction Real Estate and Rental and Leasing Manufacturing Others Q Q Q M&A JERSEY TARGETS - BY SECTOR, 2014 (USDbn) Q Q $1.5 NUMBER OF INCORPORATIONS Annual total , , , ,520 $1.0 Q $1.2 $1.6 Q Q $2.6 $2.2 Q , ,517

11 11 SPOTLIGHT ON JERSEY cont d. Shelf companies are not available in Jersey; however the formation process is quick and inexpensive provided that a new company does not intend to carry on business in Jersey itself. According to Jersey Finance, March 2014, Jersey has 188 companies listed on worldwide stock exchanges from London to New York and a combined market capitalisation of over 258billion. Advantages of using Jersey holding companies as Listing Vehicles include: JERSEY: AN ATTRACTIVE & STABLE ENVIRONMENT Jersey s strong track record of product and service innovation has been built on a foundation that includes a mature and respected legal system, progressive regulatory regime and professional workforce. The Island provides the global financial system with an independent financial centre close to the United Kingdom and mainland Europe, and is also well-placed to serve the needs of international investors based in the fast-growing economies such as China. Jersey is recognised as an approved jurisdiction for listing on 12 stock exchanges around the world, including the Hong Kong Stock Exchange. Jersey Companies benefit from 0% corporation tax. Listing Vehicles are free of withholding tax on dividends, interest and royalties. Shares in Jersey incorporated Holding Companies are free of stamp duty in Jersey. Jersey has three CREST-enabled share registrars (CREST is the UK share settlement system) and shares can be traded directly through CREST. A Jersey Public Holding Company is comparable to a UK PLC. Incorporated and Protected Cell Companies are available The Companies (Jersey) Law 1991 is based largely on UK Companies Law Jersey now has the provisions of the UK Takeover Code enshrined in legislation There are no applicable foreign exchange controls in Jersey restricting a company s ability to hold foreign funds or securities In May 2014, Standard & Poor s Ratings Services affirmed its AA+/A-1+ long- and short-term foreign and local currency sovereign credit ratings on the States of Jersey. Standard & Poor s determines the jurisdiction s rating on the basis of: Evidence of mature political and institutional settings, transparent economic decision-making, and high fiscal flexibility; A wealthy, market-oriented, and open economy; A stable outlook, reflecting Jersey s high wealth, as well as its strong public policy settings and government finances. Key facts: 1. Jersey is the highest rated offshore jurisdiction in the Global Financial Centres Index and remains one of the most highly regulated locations. 2. Jersey s appeal is enhanced by its relationship with the United Kingdom and the City of London, and its proximity to the European markets. 3. The workforce is substantial and made up of highlyqualified professionals, many of whom are employed by some of the world s leading finance and professional services organisations. 4. Jersey s unique constitutional relationship with the UK, independent government and neutral tax platform makes it modern and flexible, 5. The backbone of Jersey s financial services industry is the USD248bn of banking fund deposits held there by a cross section of leading international banking groups. 6. Jersey has a growing presence in China with Jersey Finance Limited having a manned office in Hong Kong and a Launchpad in Shanghai underway.

12 ABOUT APPLEBY IN CHINA As a result of Appleby becoming the first offshore firm to be granted a licence to provide offshore legal advice in Mainland China, Appleby s Shanghai office offers a fully integrated legal and fiduciary and administration service. The team here works alongside a global team operating from the BVI, Bermuda, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, London, Mauritius and the Seychelles. Our services include advising on all aspects of corporate and commercial law, litigation and insolvency and private client and trust. In addition our fiduciary specialists deliver services including company incorporations, fund administration, private client trust and wealth administration, employee share plans and captive insurance administration. Our Greater China team comprises 27 lawyers and other professionals including six partners who act for a broad range of private and institutional clients, including PRC-based and international fund managers, private banks, Hong Kong and China-based corporate service providers, Asia-based listed companies and high net worth individuals. Members of our Greater China team are conversant in English, Japanese, Cantonese, Putonghua and other Chinese dialects. For further information contact: James Gaudin Partner, Jersey jgaudin@ Frances Woo Group Chairman & Managing Partner - Hong Kong fwoo@ RESEARCH METHODOLOGY This report details international investment activity by China, using data published by the Chinese ministry, as well as other official sources. Figures are in USD. Hong Kong figures have been converted from Hong Kong dollars at the prevailing rate. Specific Mergers and Acquisitions data has been sourced from the Zephyr database, published by BvD. Deals included were all announced within the time period covered. Where necessary, deal values have been converted to USD at a rate set by Zephyr. Not all deals have a publicly known value. Not all deals are reported immediately, so the figures are subject to change as new information becomes available. Sources of national data: MOFCOM, Statistical Bulletin of China s Outward Foreign Direct Investment, Hong Kong Census and Statistics Department (C&SD), Monterey Insight, Jersey Finance and the Jersey Financial Services Commission. Appleby Global Group Services Ltd Published in the Isle of Man. All Rights Reserved.