Belt & Road or bust for Chinese outbound M&A

Ambitious Chinese companies need to be smart and stick to sectors and countries in which Beijing encourages M&A.

Chinese outbound M&A will continue to grow although buyers need to pick their battles carefully, according to bankers and private equity professionals based in Asia.

Growth in the world’s second-largest economy will continue to fuel Chinese acquisitions of technology and brands around the world, even as some fail, they said.

“Outbound Chinese capital flow will become the most important financial flow compared to anything in a few more years,” said Kevin Lu, chairman of Asia at Swiss-based private markets investor, Partners Group, at the Milken Institute 2017 Asia Summit.

Many companies around the world are eager to partner with Chinese buyers, not only because they have capital but also because many are the future leaders in their fields, especially in the new economy.

“Sellers demand much higher deal protection to address execution and regulation risk but they don’t shy away from Chinese investors,” said Wei Sun Christianson, co-CEO of Asia-Pacific and CEO of China at investment bank Morgan Stanley during a panel discussion at the Milken Summit.

The Trump factor
Roadblocks abound, not least in the US where US President Donald Trump killed a $1.3 billion purchase of US chipmaker Lattice Semiconductor by a Beijing-backed private equity house, the White House said on September 13.

“In Washington the debate is no longer about 'should the US impose more regulation'; that has passed and the consensus has already been built on that front. The question is how they’re going to do it,” said Christianson.

Probably the biggest obstacle for many ambitious Chinese companies is their own government.

After explosive growth of outbound Chinese M&A in 2015 and 2016, reaching around $200 billion, the Chinese government stuck a pin in the ballooning volumes of deals.

In November, Beijing clamped down on certain types of M&A it considered irrational such as acquisitions of overseas sports and entertainment companies, while promising to thoroughly vet all deals over $10 billion.

As a result, outbound M&A volume has slumped by about 44% year-on-year so far in 2017.

“Even though in the first half of this year outbound investments have slowed from China we think the desire of Chinese companies, both private and SOEs, to expand overseas continues,” said Jing Ulrich, vice-chairman of Asia Pacific at US bank JP Morgan.

In August China's State Council released guidance that further clarified what kind of M&A it would restrict, but also encouraged acquisitions in sectors such as high tech and agribusiness.

It also gave the green light to deals in countries along its development Belt and Road Initiative.

“The One Belt One Road policy will continue to drive a lot of transactions, especially in those areas where China can export capacity in certain industrial sectors,” said Morgan Stanley's Christianson.

There have been about $120 billion of Chinese acquisitions in non-China Asia according to Morgan Stanley. 

Chinese buyers should also bear in mind for those that can raise funds offshore with no recourse to onshore assets the regulation is a straightforward approval process.

“As geo-political tension eases I think we will see a pick up in volumes of cross-border M&A,” said Christianson.

For information about our forthcoming supplement “Belt & Road - Driving Asia’s growth”, please contact Keith Frith on [email protected] or (T) +852 2122 5266. 

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