Drivers and policies affecting China's crossborder investments and financing in aviation
The drivers and policies affecting China's crossborder investments and financing in aviation can sometimes seem contradictory. Ahead of his presentation at the inaugural FINN Sessions at Farnborough Airshow next month, Professor David Yu helps make sense of the landscape.
There are constantly changing policies and other drivers that affect crossborder investments from China and its impact on aviation investments.
While some changes have more direct impact than others, these main drivers are the ones to watch going forward.
One of the major themes has been the explosive growth of Chinese outbound deals over the past five years, which saw outbound M&A volume rise 33% per annum from $49 billion to $227 billion in 2016, according to McKinsey.
More recent figures show that the number of Chinese company M&A deals has slowed, and decreased in both volume and value terms.
In absolute terms, the numbers are still enormous with many broad and sub themes behind the figures.
One of the major China policy drivers is President XI Jinping’s One Belt One Road (OBOR) initiative, which aims to link up the countries through land and sea along the old silk road through investment in infrastructure and increased trade.
First announced in 2013, the initiative has driven over $33 billion of investment in 68 countries, with a further $124 billion pledged. Importantly, in the aviation space, this has seen a surge of investment in airports, airlines, tourism activities and aircraft leasing.
Another major theme and driver are the series of supply-side reforms that have been taking place since 2015. All of these different components are the overarching policy directions which have large effects on aviation and crossborder investments.
The main sub-categories include cutting excess industrial capacity, deflating the real estate inventory and bubble, corporate deleveraging, lowering corporate costs (taxes, fees, etc.) and Made in China 2025. Some of these sub-themes are aimed at realigning the domestic economy and transforming it from the old to new while making the sources of growth to more sustainable.
Credit growth has intensified since the 2008-2009 global financial crisis and infrastructure spending and borrowing has been a key method to drive economic growth by local governments. Any slowdown will not dampen the growth of airports and related aviation infrastructure, especially in more western and underdeveloped regions in China which have continued to see steady growth.
China plans to build 74 new airports by 2020 and 136 by 2025 with the largest currently under construction in Beijing and Chengdu each handling over 90 million passengers annually.
This also doesn’t include the general aviation airports which currently stand at 310 with the goal of reaching 500 by 2020.
Made in China
The Made in China 2025 initiative is also part of the overall supply-side reforms. It has its roots in 2013 and focuses on the upgrade of Chinese industry, similar to the Industry 4.0 initiative in Germany. This initiative increases the competiveness of industry and encourages investments in high technology sectors. It has recently been given a renewed push.
In the aviation world, this would be focused on new bio-fuels and clean technologies implemented for airlines, aircraft and airports. This theme is sometimes combined with the OBOR initiative. This is the case with the domestic-made COMAC C919 and ARJ21, and aircraft leasing which are being rolled out under both initiatives.
As a result of these initiatives, the desire for more offshore assets – due to the exchange rate and the perceived difference in regional investment returns, crossborder investments in aviation and tourism – have rocketed, with Wanda and HNA Group, among the most acquisitive groups.
These high-profile deals have caused the CBRC to review the credit exposures for “systematic risk”. In addition, the government has stepped up scrutiny of both the convertibility of RMB to other liquid currencies and the transfer of funds to offshore locations. The aim has been to slow down and dampen the more frivolous offshore investments that is outside the scope of the main business competencies and refocus on more core policy driven investments still have government backing.
Recently, there have been more policies relating to the opening up of the domestic economy by foreign capital, including publication of a national unified negative list of industries for inbound investments which was previously more locally administered policies, as well as a pledge for the opening up of investments in the financial institution space along with asset management companies.
This provides more stability for foreign investors, especially in aircraft leasing and airlines, and also prevents retroactive unravelling of deals due to unanticipated policies. This has seen more foreign lessors establish local on-shore subsidiaries in China to attract more local customers.
These newer policies go hand in hand with the opening of the Hong Kong jurisdiction as a base for foreign and Chinese capital investing in aircraft leasing.
This special designation, under the most recent local revenue laws, was passed to coincide with the visit of President XI to Hong Kong in July 2017 to mark 20th anniversary of the handover which aims to make the jurisdiction more competitive, compared to Ireland and Singapore as a home for aircraft assets.
Many of these themes were reiterated with the election of the new government from the just concluded 19th National Party Congress in October.
Another change that has affected these policies is the sources of the funding in aviation and aircraft leasing.
Newer entrants providing both equity and debt capital have emerged, such as large private, regional and SOE conglomerates, insurance companies and more creative on-shore ABS-like financing structures.
These innovations will continue to drive along with the changing dynamics of the industry. In addition, the trend towards creation of new dedicated equity funds and the resurgence of sidecars and joint ventures has seen a significant portion of growth, especially involving Chinese companies.
While some of these policies and drivers can seem a bit contradictory at times, what is certain is the encouragement of technologies and growth platforms that enhance of the sources of GDP growth and composition, especially as China continues to emerge as a leading driving force in global integrated economy.
Aviation, including airports, leasing, technology and tourism, are still much favoured industries that are promoted not only because of the policy considerations but also the strong underlying stability and economics.
There will be continued challenges as these policies and drivers evolve to a changing global economy and industry. This bodes well for more opportunities for nimble and creative players.
Professor Yu will discuss the topic in more detail at the FINN Sessions at Farnborough Airshow.
[This article is a summary from a longer paper on the subject matter. You can contact the author for the manuscript].