Imagine a restaurant chain suddenly jumping ship to cloud computing technologies, or a fireworks manufacturer venturing into peer-to-peer lending. Those scenarios may come off as bizarre from the onset, but such has become a trend among Chinese companies veering toward rapid growth.
One such company is Song Liao Automotive--its name alone readily tells anyone of its involvement in manufacturing passenger cars and automotive parts. But as the Financial Times reported, the company also got itself involved in manufacturing medical instruments, food packaging, and even infant formula.
Song Liao's shifting business objectives have been driven by slow growth that has plagued China's manufacturing sector, which eventually led to the company's billion-dollar acquisition by a foreign entity that shifted its focus to film and investment, hence its name change to Cultural Investment Holdings (CIH).
Mergers and acquisitions (M&A) by foreign companies in China have featured such a pattern of changing from one slow-growing industry to an unfamiliar one that nonetheless promises rapid growth. Such as accounted for last year's $220-billion worth of M&As in the country, which doubles previous-year figures.
But now, those companies face obstacles in the form of current regulatory restrictions on capital outflows, which severely hampers the country's openness to foreign investment in favor of keeping the yuan stable, Yibada reported. That, apart from bankers' fears on industrial companies treading on unfamiliar territory.
The companies making the change make sure that they take over relevant high-returning assets as part of their transformation, ensuring that their transformation is not just limited to the name change involved. Yet, the outflow restrictions have discouraged banks from funding them, given the much higher risks.
Instead, local governments have become supportive of the corporate shifts, not least because of their potential to supplant slow growth in the local economy. But the viability of such deals remains questionable, given that the myopic attitudes of many of those companies threaten their sustainability.