Regulatory scrutiny from US and Europe and tight funding conditions are to blame.
China’s outbound Mergers & Acquisitions (M&A) activities are forecasted to continue trending downwards in 2019 amidst escalating US-China trade tensions, according to a report by Fitch Ratings.

Increased regulatory scrutiny from US and Europe, tight funding conditions and a less supportive approach from the Chinese authorities were attributed as the main reasons for the projected decline. Overseas M&A activities from private-owned enterprises (POEs) are expected to decline the most due to their weaker access to external funding channels compared to state-owned enterprises (SOEs), the report noted.

China witnessed a surge in M&A activities between 2007 and 2016 driven by Chinese corporate´s globalisation strategies and the supportive political and financing conditions. As a result, total announced deals hit a record high in 2016.

However, things took a bitter turn in 2017 with activity crashing 50% as credit conditions tightened and the authorities sought to curb capital outflows by cracking down on acquisitions within the property, hospitality, sports and entertainment sectors.

The outbound M&A activities of SOEs and POEs declined more than 50% in value terms in 2017, but the slide was notably sharper for POEs in H1 2018 at 30% YoY compared with the 11.2% drop reported by SOEs.

“The downward trend continued last year with total value of announced outbound M&As falling 7.3% YoY in 9M18,” Fitch Ratings observed. “The impact of US-China tensions and heightened regulatory scrutiny under the Trump administration is evident in the disproportionate drop in acquisitions in the US which plummeted 78% in 2017 to $13.6b.”

As a result, Asia and Europe have overtaken the US as the top outbound M&A destinations, with Singapore as the most popular destination and accounting to 18.4% of total outbound deals in 2017.

The Oil & Gas and power & public utilities sectors were reportedly the largest industries in Chinese outbound M&A activity in 9M18, accounting to 37% of total transaction value. However, the report observed a shift away from these traditional targets towards the manufacturing and high technology sectors.

The overall manufacturing sector represented around half of acquisitions by value in 2017, a 22% increase from 2016, the report noted.

Meanwhile, China’s outward Direct Investments (ODI) in non-financial sectors linked to its Belt and Road Initiative (BRI) jumped 12.3% YoY to $10.8b in 9M18, the report revealed.

That being said, the BRI has been subject to both domestic and international scrutiny with questions about its lending terms and conditions, as well as the economic returns from its high-profile projects. “In addition, some recipient countries have come under the severe balance of payments pressure,” Fitch Ratings commented.

“The initiative still appears to be a priority for the Chinese government, but there is anecdotal evidence that it may be taking a more cautious approach and encouraging domestic banks to undertake stricter due diligence to limit damage to the programme’s international reputation and the risk of bad loads.”

According to the report, Fitch Ratings expects POEs’ outbound M&A deals to remain muted in 2019 on the back continued weak access to bank funding compared to SOEs amidst steps towards monetary easing.

Additionally, slowing domestic economic growth and continued liquidity pressures are forecasted to further weigh on POEs’ appetite for outbound investments.