• AIBC 2019 Research

M&A in China - China flexes its financial muscle amid pushback

The past year proved to be a roller-coaster ride for M&A deal-making in Asia, especially China. While much-awaited reforms in the financial markets initially drove an increase in foreign-led acquisitions, increased trade tensions with the US in the ongoing US-China Trade war and alleged technological theft dampened the acquisition interest of buyers at home and abroad. These issues are set to continue affecting the outlook for M&A in the rest of 2019.


Financial reforms drive foreign-led acquisitions

A much-touted financial investment law (外商投资法), which eases restrictions on foreign investment in China, will be approved by the end of March following the conclusion of the annual National People’s Congress, where a slew of new laws are approved by Chinese legislators for the coming year.


This new law pledges to “uphold equal treatment for” foreign and domestic investors and ban local governments in China from forcing foreign businesses to transfer technology to local partners in exchange for access to the Chinese market.


This move comes on the heels of previous attempts by the government to ease restrictions on foreign investment in China, especially in the banking, automotive, and agriculture sectors.

Foreign ownership of brokerages and life insurers are now capped at a 51% ownership stake, and the caps will be abolished entirely by 2021. Restrictions on ownership stakes in key industrial sectors like passenger car manufacturing, passenger railway transport and shipping manufacturing will be eased by 2022 as well. Previous rules limiting a single foreign financial institution’s stake in a Chinese commercial bank to 20% were also abolished.


Foreign players have already moved to fill the gap in liberalised sectors like finance. European banks like UBS have moved successfully to increase their stakes in local securities. Major global banks including JP Morgan and Nomura have also followed in their footsteps and sought regulatory approval to open securities firms in China, with plans to increase their stakes as restrictions ease.


New opportunities and old concerns

With a growing middle class seeking new avenues to spend their disposable income, foreign firms will be eyeing opportunities to plant stakes in growing sectors like the automobile sector, where government drive to promote green technology like electric cars have driven growth among domestic car manufacturers. Foreign insurers will also potentially eye new acquisitions in the domestic insurance sector, as concerns about China’s overburdened healthcare system and ageing population start to dominate the agenda.


It remains to be seen if this optimism will last. Critics are already pointing to troubling ambiguities in the investment law that allow the government to take “corresponding measures” in response to prohibitive or restrictive investment practices by foreign countries.Foreign firms looking to increase their stakes in Chinese companies will hence continue to be at the mercy of Chinese regulators. New acquisitions in China may be threatened by retaliation, especially with continued trade tensions between China and the US. Acquisitions in other lucrative consumer industries like tobacco production also remain closed off to foreigners.


Moreover, it remains to be seen if the assurances of the government will be enough to remove the daunting obstacles for foreign firms in China, like the domestic advantages local companies still have in terms of government subsidies and preferential treatment by local governments. Foreign insurers, for example remain fenced in despite seeking a firmer foothold in China by the resistance of local governments to their expansion plans.


For now, foreign players are expected to adopt a “wait and see” attitude, in the hope that US-China trade negotiations yield positive results. Increased political goodwill in China and the potential of further reform in such a scenario, will likely reduce barriers to foreign acquisitions further and motivate firms to take the plunge.



China-led global acquisition spree hits roadblocks

Unlike foreign efforts, Chinese-led acquisitions declined in 2018 after facing serious pressures both at home and abroad, a trend that that is set to continue in 2019.


On the international front, the effects of a global backlash against Chinese investments, coupled with trade tensions, have hindered Chinese acquisition efforts overseas. While some high-profile deals like the 9.7 percent stake Chinese automaker Geely took in German carmaker Daimler AG did go through, other acquisitions have encountered serious political headwinds.


This sentiment is embodied in the ongoing spat between the US and China over the alleged role of Chinese mobile technology company Huawei in carrying out spying activities for the Chinese state. Some countries have moved to scrutinize contracts with Huawei to build up national 5G networks, while others have barred the company from such deals. However, others like the UK and Germany have continued to allow Huawei involvement.


Such sentiment is reflected in the M&A sphere. Increased restrictions and even outright bans have been imposed on Chinese acquisitions in Europe and the US, in areas where national security and strategic interests are at stake.


One of the highest profile M&A deals announced last year by Chinese power company, Three Gorges - a proposed 9 billion euro (US $10.3 billion) takeover of Portugal’s largest electricity producers, EDP-Energia de Portugal - have stalled after talks between EU regulators and the Chinese state-owned power company broke down. Speculation has mounted that this is due to EU concerns about the acquisitions impact on Europe’s security.


Although there has been speculation that acquisitions will increase in countries targeted by China’s One Belt One Road initiative (Belt and Road initiative - BRI), a campaign to build economic ties with developing countries across the globe. Despite the challenges, Chinese companies continued to focus on acquisition efforts in western economies in 2018, whereas acquisitions in areas covered by the BRI actually fell.



This suggests that new restrictions are unlikely to deter Chinese firms from targeting developed economies in Europe and the US, where acquiring established companies provide ideal opportunities for firms seeking to expand beyond China and gain new technological expertise. In the long-term, western governments and firms may eventually conclude that they can stem but not stop the increasing tide of Chinese capital.


Chinese firms turn acquisition arsenals inwards

Chinese firms also face the challenge of increased scrutiny and restrictions on capital transfers at home, with noticeable effects on Chinese appetite for foreign investments.


China’s ongoing crackdown on domestic companies, especially insurance companies that have been aggressive overseas deal makers such as HNA, Dalian Wanda and Anbang have affected overseas deal-making. New currency restrictions on the outflow of Yuan have further dampened overseas acquisitions. Two insurance companies called off Hong Kong deals worth a combined $1.4 billion, with Reuters reporting that Chinese suitors struggled to move funds offshore.


This has pushed companies to turn inwards, where domestic consumer sector deal activity remains active. Companies are seizing on new opportunities and demand for consumer goods and healthcare products, as well as the rising potential of FinTech as the government promotes its use in day to day transactions. This has led to a boom in the value of acquisitions as domestic healthcare and technological players seek to enhance their national presence.



For now, many big players are holding its cards close to its chest, like Ping An Insurance, one of China’s largest insurance companies. It has publicly ruled out acquiring foreign interests, despite the firm’s high market capitalization at $170 billion dollars. It is likely that such domestic arsenals will drive domestic dealmaking in the months to come.

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