China has been buying Irish: should we be worried?

Could Irish assets hoovered up by Chinese firms end up back on the market?

Trade between China and Ireland is currently at record levels. Photograph: Aly Song/Reuters

Trade between China and Ireland is currently at record levels. Photograph: Aly Song/Reuters

 

In Dublin’s gossipy stockbroking community, it was a wonder that the talks were kept under wraps for so long.

It emerged in early February that Goodbody Stockbrokers, the State’s oldest remaining securities firm which traces its roots back to the 1877, was in talks with a Chinese suitor. It is understood, however, that the two sides had been courting secretly for about a year by then.

The final deal, unveiled three weeks ago, will see the Beijing government-backed Zhongze Group lead a takeover of the State’s second-largest stockbroker, resulting in a €150 million payday for Goodbody’s 51 per cent shareholder, Fexco, and the firm’s management and staff.

As Goodbody’s chief executive, Roy Barrett, called the staff to a town hall on the day of the announcement, the 310 employees were told that their jobs were safe and that the Chinese were backing the firm’s “ambitious” plans in Ireland and Britain.

“This deal facilitates the creation of a bridge from east to west and vice versa for institutional capital seeking opportunities in both regions,” Barrett would say in a letter subsequently sent around to clients. “In light of Brexit and the acquisition by Euronext of the Irish Stock Exchange, an EU-based operator with a UK presence such as Goodbody offers the consortium the flexibility to achieve its strategic goals in the regions.”

Biologics to Tech

The tie-up counts among a slew of Chinese activity in Ireland so far this year. It includes Shanghai’s WuXi Biologics picking Dundalk for its first overseas facility, Waterford-based environmental engineering company FLI Group winning €10 million of investment from China Minsheng Investment Group, and State-run Ireland Strategic Investment Fund (ISIF) joining forces with CIC Capital Corporation for a €150 million technology investment fund in a follow-up to a similar venture in 2014. CIC is also part of the consortium buying Goodbody, subject to Central Bank approval.

With trade between both countries currently at record levels, airline Cathay Pacific moved in June to launch the first direct service from Dublin to Hong Kong, the former British colony that returned to Chinese control 21 years ago. China’s Hainan Airlines followed up weeks later, offering flights from Dublin to Beijing.

For Susan Barrett, chairperson of the Ireland China Business Association, which was set up in 2000 to foster co-operation between firms in both countries, the attraction of Ireland for Chinese businesses is obvious.

“Commercially, we are global, rather than an insular-thinking nation and Ireland will be the sole English-speaking country in the euro zone after the departure of the UK,” Barrett said, adding that Ireland stands to take advantage of the “uncertainty over trading, currency and political uncertainties in the UK” as China looks at Europe.

Chinese vice-president Xi Jinping kicks a Gaelic football as he visits Croke Park in Dublin in February 2012. Photograph: Peter Muhly/AFP/Getty
Chinese leader Xi Jinping kicks a Gaelic football as he visits Croke Park in Dublin in February 2012. Photograph: Peter Muhly/AFP/Getty

Ireland’s low corporate tax regime, support from IDA Ireland and the fact that overseas firms can get “good access” to Government departments have put the State firmly on the map for Chinese groups, according to Barrett.

However, there are mounting signs that China could be in the midst of its last big flurry of deal-making, four decades after its then leader, Deng Xiaoping, unfurled the country’s “open door” policy with the rest of the world and set in motion a series of reforms that would gradually transform it into an economic superpower.

Acquisitive companies from the world’s second-largest economy – typically owned by the Chinese state – are increasingly getting a cold reception abroad, nowhere more so than in United States, the largest economy. Both sides are locked in an escalating tit-for-tat trade war, slapping tariffs on $100 billion of each others’ goods – with the latest round kicking in on $16 billion of products on Thursday.

For its part, China, too, appears to be cooling on the rest of the world. Authorities there have been tightening restrictions in the past two years on “irrational” overseas investments, such as sports clubs, property and entertainment assets. Local companies are also reassessing their overseas ambitions as they grapple with a slowing domestic economy and a slump by as much as 10 per cent in the value of the Chinese currency, the renminbi, against the dollar in the past five months.

Some struggling companies, saddled with massive debt levels after an international deals binge, such as the Chinese owner of Dublin-founded aircraft leasing group, Avolon, are even putting assets up for sale.

Chinese visit

Investment and trading links between Ireland and China have grown strongly since then-Chinese vice-president Xi Jinping visited Ireland in 2012 – a year before assuming the presidency – and enjoyed red-carpet honours such as visit to the farm of James Lynch near Sixmilebridge in Co Clare, where a newborn friesian heifer had been named after him.

Total trade of goods and services between China and Ireland rose by 14 per cent to €12.9 billion in 2016, driven by Irish exports of computer microchips, milk formula, pharmaceuticals and services, according to figures from the Department of Foreign Affairs.

Two-way trade between both countries is estimated to have neared €15 billion last year – more than double the level posted in 2013, the year that Ireland exited an international bailout.

The surge in activity since then has included China announcing the lifting of its ban on Irish beef in 2015. Bord Bia is targeting that the world’s most populous nation – currently Ireland’s second largest market for pork and dairy – will become the State’s second billion-euro food and drink market, after the UK, by the end of the decade.

Chinese direct inward investment into Ireland peaked at almost $3 billion in 2016, according to data from US law firm Baker McKenzie, as Avolon was taken over by Chinese conglomerate HNA in a $2.5 billion deal, and China General Nuclear Power’s European energy arm acquired 14 Irish wind farms from renewable energy specialist Gaelectric for €400 million.

Even before Xi Jinping started to promote his “one belt, one road” initiative in late 2013 to establish Beijing as a champion of globalisation, Chinese money was seeking bargains in Ireland during the downturn.

The 500-acre Fota Island Resort in Cork Harbour was snapped up in 2013 by the Kang family for €20 million
The 500-acre Fota Island Resort in Cork Harbour was snapped up in 2013 by the Kang family for €20 million

Hong Kong-based billionaire Li Ka-shing’s Hutchison Whampoa entered a deal in June 2013 to buy the State’s second largest mobile phone carrier O2 through its existing Irish business ,Three Ireland. The €850 million deal – completed a year later – took advantage of pressure on O2’s former owner Telefónica to sell in order to shrink its debt mountain, as well as otherwise limited overseas interest in Irish assets at the time.

The 500-acre Fota Island Resort in Cork Harbour – developed by John Flemming – was snapped up in the summer months of 2013 by the Kang family, which originated from the northeastern province of Hebei. They paid the National Asset Management Agency (Nama) €20 million for the asset and went on, within months, to acquire the Kingsley Hotel on the banks of the River Lee in Cork city for €6 million.

Last year, the Bank of China set up a Dublin branch of its UK subsidiary, aimed at funding and working with the growing number of Chinese companies operating in Ireland and Irish groups with interests in China. It already had a presence in the State, through its BOC Aviation (Ireland) aircraft leading company, which was set up in 1995 and had almost $3 billion of assets at the end of last December.

With Ireland already the domicile of more than €2.5 trillion of international fund assets, the Irish Funds Industry Association is increasingly targeting China. The body is currently focused on promoting Irish-domiciled funds as a way for global investment managers to put money to work in Chinese assets as well as encouraging Chinese fund managers, or their Hong Kong subsidiaries, to establish regulated funds in Ireland, from where they can raise capital across the European Union.

Taoiseach Leo Varadkar TD and Bank of China chairman Tian Guoli in June last year as the bank announced the opening of its Dublin branch. Photograph: Maxwellphotography.ie
Taoiseach Leo Varadkar and Bank of China chairman Tian Guoli in June last year as the bank announced the opening of its Dublin branch. Photograph: Maxwellphotography.ie

“With rising wealth in China, we also see a longer-term opportunity for Irish-domiciled funds to be used by Chinese investors to put their savings to work in Europe or elsewhere,” said Pat Lardner, chief executive of Irish Funds.

Meanwhile, a spokesman for Bórd na Móna, which plans to cease using peat to produce electricity by 2030, told The Irish Times this week that it is continuing to investigate the feasibility of developing a large pumped hydroelectric station at Silvermines, Co Tipperary with Power China Resources.

“The proposed development will store energy at periods of low demand and generate electricity at times of high demand,” said the spokesman of the planned 360 megawatt station, which was first mooted in early 2016 and would cost €650 million to build. “The plant would also be capable of providing a range of ancillary services to the grid and in doing so will help improve the overall flexibility of Ireland’s electric power system and assist in the wider drive to decarbonise the economy.”

China General Nuclear Power’s European energy arm acquired 14 Irish wind farms from renewable energy specialist Gaelectric for €400 million. Photograph: Keith Arkins
China General Nuclear Power’s European energy arm acquired 14 Irish wind farms from renewable energy specialist Gaelectric for €400 million. Photograph: Keith Arkins

While Ireland’s pharmaceuticals landscape remains dominated by US giants, WuXi Biologics announcement in April of plans to invest €325 million in a facility in Dundalk, its first overseas site, is seen as a signal of more Chinese investment to come. The plant is expected to lead to the creation of 400 jobs over the next five years.

Chinese interests have also stepped up to back what’s hoped will be the first Irish oil prospect to deliver black gold. Oil and gas explorer Providence Resources said in March that it has agreed to sell a 50 per cent stake in its Barryroe project to Beijing-headquartered APEC.

A previous farm-in agreement for Barryroe – which was found in 2012 to have more than 300 million barrels of recoverable oil – fell through in 2015 after the chosen partner, Sequoia Petroleum, failed to raise the necessary funds to participate.

Grandiose plans

Still, some grandiose ideas of co-operation between the former Celtic Tiger and world’s ultimate dragon economy have failed to deliver. A lofty plan – launched at the height of the recession in 2012 – to develop a €175 million Euro Chinese Trading Hub on the edge of Athlone in Co Westmeath has so far come to nothing. The initial blueprint envisaged the building of two “mega” exhibition halls, nine trading halls, an underground car park with space for 1,300 vehicles – and even an international airport for the region by the end of this year.

And while there was much speculation that China General Nuclear Power would quickly follow up on its Gaelectric assets purchase in 2016 by mopping up more Irish wind farms, sources say there is little or no sign of the company in bidding rounds for a number of portfolios that have come on to the market since then as consolidation of the industry continues at pace.

Elsewhere, two Chinese companies that spent much of last year circling Dublin-based oil and gas explorer, San Leon Energy, had walked away by the start of 2018. Still, the company has nothing to do with the Irish economy, with its main asset composed of an indirect stake in a Nigerian onshore oil field.

US investment slumps

There are numerous signs globally of how the Chinese assets grab is easing off. Chinese investment has slumped in the US in the past 18 months as Beijing has been a key target of President Donal Trump’s protectionist rhetoric.

The first half of this year saw Chinese firms’ focus pivot dramatically towards Europe, where they announced $22 billion of mergers and acquisition deals, from North America, which registered just $2.5 billion of transactions, according to a report published last month by Baker McKenzie and research firm Rhodium Group.

Minister of Agriculture, Food and Marine Simon Coveney with Chinese vice-president Xi Jinping during a visit to the Lynch Farm at Sixmilebridge, Co Clare, in 2012. Photograph: Maxwell Photography/PA Wire
Then minister of agriculture Simon Coveney with Chinese leader Xi Jinping during a visit to the Lynch Farm at Sixmilebridge, Co Clare, in 2012. Photograph: Maxwell Photography/PA Wire

However, Chinese companies are also increasingly getting a cool response in Europe, amid growing political concern that the country is trying to get access to sensitive technology, or increase its global clout by snapping up key infrastructure such as ports and electricity networks.

The UK government outlined plans last month to give it powers to block deals in an effort to prevent security-sensitive industries falling into foreign hands – with China widely reported to be in the sights of Theresa May’s administration.

It prompted Chinese foreign ministry spokesman Geng Shuang to say that the UK should be taking “actual steps to promote trade and investment liberalisation and convenience” and “oppose any form of trade and investment protectionism”.

Meanwhile, a growing German backlash against China’s advance on its assets saw the Berlin government direct state-owned investment bank, KfW, in the past month to take a 20 per cent stake in 50Hrz Transmission, a power network operator, to thwart an investment attempt by a Chinese firm. Elsewhere, Canada blocked a proposed purchase earlier this year of a construction firm, Aecon Group, by a Chinese suitor.

For the moment, at least, there is little sign of concerns in Irish officialdom about China’s growing interest in the economy.

“Current investments into Ireland from China are focused on the medical and pharma, education, fintech, tourism, agri and environmental protection sectors – none of which pose a security issue,” according to the Ireland China Business Association’s Barrett.

But could some of the Irish assets hoovered up by Chinese firms in recent years find themselves back on the market as the country’s economic growth continues to ease and with corporate defaults predicted to rise?

HNA Group, which swooped on Avolon as part of an aggressive acquisitions spree that included big stakes in Deutsche Bank and Hilton Worldwide Holdings, has sold more than $17 billion of assets this year. Earlier this month, it emerged that the Chinese conglomerate is in talks to sell a minority stake in Avolon in a bid to slash one of corporate China’s largest debt loads.

The flow of money on Xi Jinpings’s “one road” is no longer one way.