If the protests in Hong Kong persist much longer, Chinese overseas investments will suffer. Moreover, the perceived influence of Beijing on companies over the demonstrations may stymie Chinese companies’ business abroad.

About 60% of Chinese overseas investments go through Hong Kong, according to the government of the Asian financial hub. Since the protests began in June, the number of marchers in individual demonstrations exceeded 100,000 on some occasions. Protests at Hong Kong’s airport forced the cancellation of many flights on August 12 and 13.

So far, the demonstrations in Hong Kong should not have a major impact on Chinese outbound investments, said Thilo Hanemann, a partner at Rhodium Group, a US consultancy which tracks outbound Chinese investments.

“But further escalation of protests in Hong Kong could certainly worsen the economic and financial pressure that are at the root of the big slowdown of Chinese investment. Further deterioration of the situation in Hong Kong including a potential intervention from Beijing would certainly also amplify existing national security anxiety in many host countries, which could accelerate the trend toward a more defensive posture regarding Chinese capital,” warned Hanemann.

Elevated scrutiny

Chinese investments in Europe and North America fell 18% year-on-year in the first half of 2019 to US$12.3 billion, the lowest level in these developed economies since 2014, according to a report by Rhodium and international law firm Baker McKenzie released in July. During the first half, newly announced global mergers and acquisitions by Chinese firms plunged by 60% to $20 billion, as capital controls by the Chinese government remain amidst macroeconomic pressures as well as political and regulatory scrutiny abroad at elevated levels, according to this report.

“Looking forward, the deal pipeline does not give rise to much optimism for [the second half of] 2019. Chinese investment in Europe and North America is likely to stay at current low levels, with no major turnaround expected in [the second half of 2019],” said the report.

Chinese official data paint a somewhat more optimistic picture. Chinese outbound non-financial investment grew by a mere 3.3% to 432.9 billion yuan ($61.6 billion) in the first seven months of this year, according to China’s Ministry of Commerce. In July alone, Chinese non-financial outbound investment surged 25.5% year-on-year to 68 billion yuan, according to the ministry.

However, a Moody’s report on August 13 predicts growth in overseas investments by Chinese infrastructure companies will slow in the next two to three years. The slowdown is due to Chinese infrastructure companies becoming more selective in making overseas investments because of their increased awareness of the risks and the effects on their financials, said the international rating agency.

“This awareness stems from the lessons – sometimes difficult ones – companies are learning from the sector’s rapid expansion into emerging and frontier markets during the past few years,” said Moody’s.

Painful lesson

One Chinese infrastructure company, China Communications Construction Company (CCCC), learnt a painful lesson in Malaysia. On April 12, Malaysian Prime Minister Mahathir Mohamad announced the value of the East Coast Rail Link (ECRL) would be slashed by 32.8% to 44 billion ringgit ($10.5 billion). CCCC, listed in Shanghai and Hong Kong, is the prime contractor of this railway project which will link the east and west coasts of peninsular Malaysia. Mahathir, who was unexpectedly elected Prime Minister in May 2018, had complained his country could hardly afford the high cost of this project.

Jean-Marc Blanchard, founding executive director of the Wong MNC Center, a think tank on multinationals operating in Asia, agreed with Moody’s that the growth of overseas investments by Chinese infrastructure companies would slow in the next few years. What will cause the slowdown include increased sensitivities of other countries towards Chinese infrastructure projects and budgetary constraints in host countries, Blanchard said.

Although overseas investments by Chinese infrastructure may slow down, they continue to win overseas contracts, which is distinct from investments.

During the first quarter this year, CCCC reported 4.1% growth in new overseas contracts to $8.23 billion.

Projects in Africa

On August 6, China Railway Construction Corporation announced it won a $998 million contract to build 20,000 units of affordable housing in Ghana. On July 2, the Hong Kong and Shanghai-listed firm announced it won a 28-billion-yuan contract to build 50,000 housing units in Cote d’Ivoire. During the second quarter, the value of new overseas contracts won by the Chinese state-owned enterprise rose by 5.6% to 72.7 billion yuan.

Another Chinese state-owned rail builder, China Railway Group, announced on June 19 that it won a US$1 billion project to build a rail line in Hungary. During the second quarter, the Shanghai and Hong Kong-listed firm won 36.4 billion yuan of overseas contracts, an increase of 19.7 percent from the same period last year.

However, Chinese companies may possibly encounter suspicion as they try to win contracts and make investments in other countries, if Beijing is seen as having a heavy hand over the Hong Kong protests. The recent turbulence in Cathay Pacific are not helping overseas Chinese businesses. On August 16, Cathay Pacific announced the resignation of its chief executive officer Rupert Hogg and chief customer and commercial officer Paul Loo.

David Webb, a Hong Kong corporate governance activist, wrote on his website www.webb-site.com, “This is the most appalling kowtow to Peking, dressed up as a “flight safety” issue. What did the PRC Government threaten Swire and Cathay with to make these sacrificial offerings at this “sensitive time”, as they put it? CX [Cathay Pacific] says recent events have “put our reputation and brand under pressure” – but tonight’s shameful appeasement does far worse.”

CCCC, China Railway Construction and China Railway Group did not reply to questions.