Chinese cash is pouring into South Korea and the entertainment and real estate sectors are among the top beneficiaries.
The inflow is building as Chinese investment in the US faces a mixed reception. It’s also sparking as foreign investors withdraw from lackluster South Korean markets. But a Korean backlash is increasing as local businesses react to a growing Chinese presence.
On the entertainment side, much of the Chinese interest is being stoked by the success of “hallyu” or Korean wave TV dramas like 2014’s “My Love From Another Star” and “Descendants of the Sun” this year.
The pace of Chinese investment further quickened after Seoul and Beijing signed a landmark Free Trade Agreement in June 2015.
Chinese investments in Korean companies rocketed 119% in 2015 to $1.9 billion, spearheaded by deals in the insurance, technology, health-care and cosmetics sectors, according to data compiled by Bloomberg. Data from South Korea’s Ministry of Trade, Industry and Energy shows that Chinese investment in the entertainment industry surged to a whopping $86 million this year, from a mere $6 million in 2011.
A report by the Korea Trade-Investment Promotion Agency says the upsurge continues this year with an emphasis on the service over manufacturing sectors.
Chinese media and real estate firms are harnessing the soaring appeal of Korean celebrities and entertainment for their domestic and overseas markets. Korean pop culture and entertainment shows are getting huge traction with Chinese audiences who are also snapping up Korean made-products.
‘Descendants of the Sun’ likely to push up Chinese investment
In 2014, China’s biggest production company, Huache Media, took a 15% stake in South Korea’s Next Entertainment World (NEW), paying over $52 million, becoming the second largest shareholder. Hong Kong-based Huache is the investment unit of Chinese billionaire Fu Meicheng and family’s Zhejiang Huace Film & TV.
NEW produced K-drama “Descendants of the Sun,” for about $11 million. The cost was recouped quickly due to its massive popularity in China and other countries.
Episodes of Descendants, which was broadcast simultaneously in South Korea and China, have been downloaded over 2 billion times by Chinese viewers. It racked up a 38.8% Korea Nielsen rating for the last episode that aired last week.
Descendants spins the tale of a love affair between a young South Korean Army captain played by Song Joong-ki and a humanitarian doctor played by Song Hye-kyo. The drama is set in a fictional war-torn Mediterranean country named Uruk.
Companies like Alibaba, Huayi Brothers, and Dalian Wanda Group are among the other top Chinese investors in South Korea’s entertainment industry. SM Entertainment, Seoul-based K-pop talent agency, announced in February this year that it formed a partnership with Alibaba group. Under the partnership, Alibaba will buy about $30 million shares (a 4% stake) in SM Entertainment.
Huayi Brothers entered into a partnership with South Korea’s Showbox, leading film distribution company, in March 2015 to produce six films over the next three years. Dalian Wanda Group invested $10 million in South Korea’s Dexter in April 2015 to become the second largest shareholder.
China’s other M&A moves
The Chinese appetite for things Korean is being replicated in other investment areas.
Mostly recently, Chinese financial group Anbang Insurance agreed to buy German insurer Allianz’s money-losing South Korean business for more than $3 million. Anbang also acquired Korean life insurer Tongyang in February 2015 for $949 million. The combined M&As now make Anbang Korea’s fifth biggest life insurance firm.
Anbang struck the deal with Allianz soon after unexpectedly withdrawing from a $14 billion bid for US-based Starwood Hotels & Resorts Worldwide at the end of March.
With Beijing expressing concern about capital leaving the country, some Chinese companies may be parking cash closer to home — especially if the investment has a direct tie-in with China’s domestic economy in the form of entertainment, tourism and other areas.
In real estate, the China State Construction Engineering Corp (CSCEC) – one of the largest Chinese construction firms – was tapped earlier this month as the main builder for the $606 million “Dream Tower” project on Jeju Island, in South Korea. The project includes building a foreigner-only casino.
CSCEC’s involvement in the Dream Tower is the tip of an iceberg. The Korea Times reports that many Chinese investors and companies plan to build resorts and other leisure facilities on Jeju.
But Korea JoongAng Daily reports “the deal worried local contractors, who hardly wanted China’s No. 1 construction company to compete with them in Korea.”
Domestic builders fear they could lose a major part of the local construction market to Chinese firms who boast ample cash and competitive engineering and procurement capabilities. South Korean construction firms already compete fiercely against their Chinese counterparts in the Middle East and elsewhere.
Domestic builders are concerned that they could lose a significant portion of the local construction market to Chinese firms which are armed with abundant liquidity and improved engineering and procurement capabilities.
JoongAng says that one of the main drivers for Chinese investment in South Korea is that property prices in China’s major cities, including Beijing and Shanghai, have multiplied over five fold in the past decade. Rich Chinese also want higher returns on real estate investments than they can earn at home.
Chinese interest in South Korea’s property market has been building in the last few years. According to South Korea’s Ministry of Trade, Industry and Energy, Chinese invested $165.6 million in 81 real estate and foreign direct investment transactions in 2015. The figure hit an even higher $833.82 million in 2014 when speculative fever was especially high in prime areas in Seoul and Jeju Island. While 2014’s figure dwarfs 2015’s, property deals appear to be on another uptrend this year.
Chinese M&As are getting a chiller reception in the US. A key oversight agency, Committee on Foreign Investment in the US (CFIUS), blocked a Chinese-backed private equity firm’s proposed $3 billion purchase of the lighting unit of Philips in late January, citing “unforeseen concerns.” Other US-side Chinese acquisitions have been scuttled on worries that CFIUS would block the deals.
As more Chinese cash flows into South Korea, other foreign investors are retreating in the face of a slowing economy, restrictive regulatory rules and unfavorable currency swings. Market analysts have noted that the won’s slide deepened in February after” Franklin Templeton Investments, a leading investor in South Korean government bonds, outlined plans to reduce the balance of its investment in emerging markets.