Deals in China Are on the RiseAuthor: Kathryn Gaw
In mid-February, Thompson Reuters claimed that China’s inbound M&A deals were already worth $7.1 billion for 2017, doubling in just one year. This followed a record-breaking $46 billion in deals last year, while outbound acquisitions have fallen by more than forty per cent so far this year.
There’s no doubt about it, China is on a deal-making spree.
For decades, it has been a closed market with limited opportunities for foreign investment, but newly established rules are allowing for more foreign investment in the country’s vast consumer market.
This is a marked contrast to the country’s previous stance, where foreign companies were discouraged and investors were only able to access Chinese growth via mirrored indices and C-shares.
However, in response to slowing domestic growth, the government has taken a number of ground-breaking steps towards equalizing its economy and stimulating new growth opportunities. Along with the formalized phasing-out of the One Child Policy, China placed renewed focus away from unwieldy infrastructure and export led work – instead choosing to focus on goods and services – making it an ideal target for foreign buyers looking to expand into the market.
Despite its slowing growth, China’s economy has still been outperforming that of most developed and BRIC countries, making it a point of focus for western investors looking to mitigate domestic losses. This has caused inbound M&A figures to skyrocket over the past ten years, and the trend has continued as the government have reasserted their commitment to increased domestic consumption, stepping away from the export-led policy of the past and a drive toward meaningful economic growth.
This erosion to the old barriers to entry means that many companies are now considering China-based investments on scale which would have been unthinkable just ten years ago.
As these deals become increasingly commonplace, a few transactional trends have started to emerge. As a general rule, the new wave of inbound M&A deals are:
a) Larger in scope: With confidence in non-domestic M&A practice growing, China has shown that it is willing to take on larger and more complex acquisitions.
b) Diversified across ranges of industries: With a commitment to growth in key sectors and a movement away from areas that are perceived as being obsolete, it’s becoming easier and easier to attain grater spread across the board.
c) Targeting ‘troubled’ companies and industry leaders alike: Both successful and unsuccessful companies are being targeted, showing increased opportunism and a commitment to growth and investment.
This strategic opening-up of new sectors has been a deliberate move and, along with a loosening on the grip of regulation, China has earmarked seven key strategic sectors of key import. These sectors are quite well-known for virtual data room us and include:
• New energy;
• High-end equipment manufacturing;
• Energy conservation;
• Environmental protection;
• Clean energy vehicles and transport;
• New materials;
These key sectors have been publicly backed by the government under its previous and current five-year plan and incentives have been put in place to encourage foreign investment. It is also coupled with a newfound willingness to take the global stage, announcing a dramatic boost to its spending against renewable energy in the wake over the next four years, with $361 billion being earmarked for clean energy projects – a major step away from the country’s established reliance on coal and gas.
One of the key areas of interest for inbound investment is shoring up the new consumer market that has arisen in the last decade, and this is set to transform the world of consumer logistics through investments in warehousing, transport, and stabilized assets and storage.
With a broad consumer base and the growing importance of luxury, high-end and technological goods, the infrastructure is now safely in place to store delicate products. This burgeoning market was specifically targeted in the $200 million APG Asset deal with E-Shang and Shanghai-Yupei to construct and operate warehouses across China.
However, there is a risk that some sectors will experience a bottleneck effect, as investors pile in to take advantage of these favourable conditions before the notoriously unreadable Chinese government brings in any new regulations. As with any trend, the current increase in China-based M&A activity will dissipate at some point, and what is left will be a new, globally-facing China.