THIS year, China M&A deal value in Belt Road countries picked up by over 70% year-to-date (YTD), despite an overall contraction in China outbound M&A following regulatory restrictions. The uptick in Belt Road M&A suggests the regulators may have helped put the initiative on track by redirecting capital to Belt Road countries.

In 2016, Chinese investors were big spenders, acquiring everything from hotels to football clubs. Fosun International bought the Wolverhampton Wanderers for £45 million (US$59.4 million) and HNA Group acquired a 25% stake in Hilton Worldwide Holdings for US$6.5 billion in 2016. Total outbound deal value soared to US$209.2 billion.

This spending spree led to action from Chinese regulators, stating that they would closely monitor and review overseas investments. During an industry forum early this March, Pan Gongsheng, minister of State Administration of Foreign Exchange (SAFE), said, “cross-border M&A by Chinese corporates is generally beneficial. However, some irrational investment activities such as M&A deals involving unrelated companies have been noted by SAFE.” The regulators said they would clampdown on “irrational” investments, and encourage investments in line with the Belt Road initiative, including in logistics, energy and infrastructure.

In 2017, total outbound deal value dropped significantly, to US$110.9 billion YTD. However, outbound China/Hong Kong M&A in Belt Road countries was up 73% YTD 2017, compared to the same period in 2016, now standing at US$37.8 billion in 2017 for completed deals, according to Mergermarket data.

This is a positive sign for China as it tries to steer domestic capital towards the original goal of the initiative: to improve infrastructure and enhance connectivity along the ancient Silk Road. Chinese entities have been active in areas such as logistics and energy. HNA Group recently acquired Singaporean logistics firm CWT and China’s sovereign fund plans to buy a portfolio of solar and wind projects from Equis Pte Ltd. for US$3.7 billion.

With the conclusion of China’s 19th party congress, Chinese President Xi Jinping has reaffirmed the country’s commitment to the scheme having it enshrined into the Communist Party’s constitution. In the inaugural Silk Road Summit this May, President Xi pledged US$124 billion for the Belt Road initiative.

However, this has to be kept in the context of the bigger picture. According to a recent report from Natixis, there has been no clear change in the importance of Belt Road geographies as a destination for Chinese M&A, when comparing total M&A deal value before and after the strategy was announced in late 2013, despite the recent uptick in 2017.

Moreover, North America and Europe still dominate the M&A market, dominating the top 10 destinations for outbound Chinese M&A. This is with the exception of Singapore, which itself accounts for 23% of all outbound Belt Road M&A since 2010. The focus on Belt Road M&A has also been on Asean countries, followed by the Middle East and then Central Asia, suggesting Chinese corporates still choose to invest in stable economies.

“For higher-risk geographies, Chinese companies seem to prefer to engage in project financing than taking the ultimate ownership. All in all, we believe that neighbouring low-risk countries will still be the main target for Chinese M&A in the coming years,” says the Alicia Garcia Herrero, chief economist, Asia-Pacific, at Natixis.

“We do not expect the sudden stop in Chinese M&A to last long. However, we do expect a re-direction of the deals towards emerging markets, in particular those within Belt Road initiative countries. In the same vein, M&A will be increasingly redirected to sectors aligned with China’s industrial policy,” Herrero concludes.