China Firms Have Never Been This Reliant on Foreign Revenue
(Bloomberg) -- When China released its key economic indicators on Tuesday, the statistics agency was quick to highlight how the country’s domestic consumption had propelled growth in the first quarter, offsetting external risks as trade tensions escalate.
Yet for the country’s publicly listed companies, foreign business has never been so important. The percentage of sales that mainland-listed companies get outside their home country has climbed to 13 percent, on a market capitalization-weighted average, according to Bloomberg calculations based on the latest full-year financial reports. The figure, which excludes banks, is the highest in Bloomberg data going back 10 years.
The shift underscores China’s incentive to shield itself from disruptions stemming from any U.S. trade war, and to focus its companies’ attentions on President Xi Jinping’s Belt and Road Initiative to deepen ties with economies across the Eurasian landmass. For investors, the rising share of overseas sales means that buying into China’s stock market isn’t solely a bet on the domestic side of the world’s No. 2 economy.
“The Chinese government is very clear on their desire to have large corporates participate in global markets as much as possible," said James Sullivan, the Singapore-based head of Asia ex-Japan equities research at JPMorgan Chase & Co. "One of the biggest impacts of the OBOR project is to drive a lot of the state owned entities offshore," he said, using another term for Xi’s initiative.
Recent events showcased the risks for some Chinese enterprises of ties with the U.S. ZTE Corp., China’s No. 2 telecommunications gear-maker, which gets almost half its revenue from overseas, was suspended from trading on Tuesday after the U.S. banned it from buying crucial American technology for seven years. More broadly, the U.S. Treasury is considering using an emergency law to curb Chinese investments in sensitive technologies.
Trade worries with the U.S. might also have had a hand in moves by policy makers to shield the financial system. China delayed the publication of asset management product rules, people with knowledge of the matter have said. The delay, coupled with a surprise cut in the reserve requirement ratio for banks on Tuesday, suggested that maintaining stability has become a more urgent priority.
Among some of the biggest companies that have increased their global exposure is China Molybdenum Co., which saw overseas revenue climb to 84 percent of the total last year from 49 percent the previous year after purchasing a Congo copper mine. China Communications Construction Co. -- an infrastructure powerhouse that’s a key BRI player -- is among those where foreign-sales exposure is at its biggest ever.
"From foreigners’ point of view, you want to go to China to buy China’s GDP story," which has two key indicators -- domestic consumption and fixed-asset investments, said Paul Chan, head of multi-asset and Hong Kong pensions at Invesco Ltd., which oversees about $938 billion worldwide.
Growing overseas revenue doesn’t always mean companies can’t be a play on domestic growth too. Foreign investors have piled in to Hangzhou Hikvision Digital Technology Co., which gets almost a third of its sales outside its home country, as they bet on the Chinese government’s growing demand for surveillance cameras.
But as China continues to open its domestic markets to overseas funds, it means potential buyers need to do more homework than just looking at the latest economic data. And if foreign operations keep growing in importance, some stocks may pose less of a diversification play.
"If the ratio of overseas earnings increase, that means it will be more vulnerable to overseas’ economies, and the shares may start to move more in lockstep" with those abroad, said Toshihiko Takamoto, a Singapore-based money manager at Asset Management One. "From an investor perspective it means there’s more noise."
©2018 Bloomberg L.P.