Currency controls aren't slowing China's foreign M&A

Last Updated Jan 15, 2016 7:38 AM EST

This past summer, as the China's stock market tanked and its economy slowed, Chinese central bankers responded by trying to prevent capital flight. They tightened currency controls and devalued their currency to make Chinese goods more attractive overseas.

Despite those currency controls, recently released data indicates that throughout 2015 China's billionaires and their corporations were on a major overseas shopping spree that got their cash out of the mainland and put it to work around the world. This outflow of Chinese capital has been going on for years, but it has come under increased scrutiny as China's markets become increasingly volatile. Still, some signs indicate it has accelerated and remains a robust global diversification for the world's second-largest economy.

The most recent deal is China's Haier Group, the world's biggest home appliance maker, buying General Electric Co.'s (GE) appliance business for $5.4 billion to expand its U.S. and global presence. The acquisition announced Friday comes as Haier tries to transform itself into a premium brand.

"Last year the Chinese set a record by spending $110.3 billion in overseas mergers and acquisitions, an 85.8 percent jump from the year before," said Tom Cane, with Mergermarket Group, a financial information and research firm that tracks mergers and acquisitions (M&A) worldwide.

"And from the information we have from our sources in China, the pace is not going to slow down as the Chinese press on with the global acquisition hunt," Cane told CBS MoneyWatch. He said Chinese investors were particularly active in the overseas energy, mining and utilities sectors in 2015, where they spent $48.5 billion dollars to close over a hundred deals.

Cane said Chinese deals in sectors such as industrial products, chemicals and technology aren't only about earning a rate of return in the short run but also are aimed to strategically give Chinese companies access to the latest technology so China can upgrade its industries and become more self-reliant.

"By 2025 the Xi Jinping administration is targeting that 70 percent of the core components used to make products in critical sectors like information technology, aerospace and power equipment be made in China," he explained.

An example of such a strategic move was last year's decision by state-backed Tsinghua Holdings to buy a stake in Western Digital (WDC) , the U.S. data storage company. Under federal law, the Committee of Foreign Investment in the U.S. (CFIUS) has to vet deals that involve foreign companies buying American companies to see if the tie-ups create potential negative consequences for national security.

China Daily puts the total for China's foreign M&A at $111.9 billion in 2015, the sixth consecutive record year. Europe was the top region for Chinese merger and acquisition activity last year.

In March 2015 Chinese state-owned China National Chemical Corp. made headlines when it spent $9 billion to buy Pirelli Tires, the 143-year-old Italian tire maker. According to the mainland-based China Securities Journal, Chinese investors have also invested heavily in Italian real estate and are teaming up with Italian investors to pursue deals in third countries in Latin America and Africa.

Guo Guangchang, the billionaire who disappeared only to resurface in New York City a few days later, leads $52 billion dollar Fosun International Trading, China's largest private company. Guo's recent global buying binge -- including Cirque De Soleil, Club Med, a trophy commercial property in lower Manhattan and a private bank in Germany -- broadened his brand well beyond the real estate, steel and pharma units it was built on.

Mergermarket's Cane said while China set records for outbound deals, the opposite was true for deals coming into China last year, where foreign M&A value fell to just over $10 billion, down almost a third from the previous year.

"I think that the Chinese authorities would think that clamping down on capital leaving the country would actually be disruptive and would lead to additional volatility, as well more panicky behavior as investors looked for ways to get their money out," Paul Wachtel, professor of economics at Stern School of Business, told CBS MoneyWatch.

"It's most likely that the Chinese will continue to be drawn to U.S. real estate, both commercial and residential," Wachtel said. "You're going to see many billions of dollars flowing into the U.S. as we remain the one safe haven compared to the slower growth in Europe and the considerable weakness in the emerging markets."

Perhaps a case in point is Alibaba (BABA) co-founder Jack Ma's $23 million purchase in June 2015 of over 28,000 acres of wilderness in the Adirondacks.

Yet, even as high profile transactions make headlines, researchers note that massive capital flows fly under the radar. Consider that according to a report released last month by Global Finance Integrity, a Washington, D.C.-based nonprofit, for the decade leading up to 2013, $1.4 trillion in illicit funds left China for other countries via fake commerce documents and tax avoidance. It said $1 trillion dollars in illicit funds are generated every year globally.