China’s mergers and acquisitions towards the Belt and Road : Still on the way
- China’s intrinsic demand for overseas expansion, especially in the form of mergers and acquisitions (M&A), seems to have come to a halt in 2017 after an extremely rapid growth in 2016. The main reason for such sudden stop is the Chinese government’s both explicit and implicit restrictions on M&A.
- To draw appropriate conclusions on future trends, it is important to note that the restrictions recently imposed by the Chinese government are not geared towards banning outbound foreign direct investment (OFDI) permanently but rather to pour cold water on the overheated “going-out” enthusiasm of Chinese corporates. This is especially the case for purchases of trophy assets without clear relation with China’ industrial policy both in terms of sectors and geographies. There are signs that such tight regulation on outbound M&A is likely to be softened soon but the redirection towards certain strategic (high value-added) sectors and certain geographies (mainly Belt and Road) should continue.
- Within the M&A activities in BRI so far, the focus has mainly been on ASEAN countries and, to less extent, Central Asia. The safest country in the region - Singapore - accounted for 23 percent of China’s M&A in the BRI alone since 2010. For higher-risk geographies, Chinese companies seem to prefer to engage in project financing than taking the ultimate ownership. All in all, we believe that neighbouring low-risk countries will still be the main target for Chinese M&A in the coming years.
- As far as sectors are concerned, energy and industrial sectors have been the most important targets for M&A within Belt and Road geographies, followed by financial services. In this regard, there is no fundamental difference between BRI and non-BRI economies.
- All in all, we do not expect the sudden stop in Chinese M&A to last long. However, we do expect a re-direction of the deals towards emerging markets, in particularly those within BRI. In the same vein, M&A will be increasingly redirected to sectors aligned with China’s industrial policy.
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7ySuch mergers and acquisitions can only be understood in the context of Xi Jinping's war on corruption, as large deals are the fastest way to get enormous sums of money out of the country. Thus, many restrictions are as temporary as anti-corruption measures will be. I find predictions to be precarious. I still remember articles predicting that Xi would consolidate his power until this year's Party congress, where he would announce unprecedented sweeping market reforms. Investors are waiting.
Economic and Financial Research on Emerging Markets
7yM&A will resume and most likely increase both in BRI countries as well as Asean, now that the Plenum is done