Global Merger & Acquisition (M&A) sharply declined especially in the first half of the year 2020 due to the unanticipated COVID-19 pandemic. The effects of this crisis led many dealers to stay put and slow down their investing powers. Chinese outbound M&A has declined for the first time in decades. On the good side, however, China’s inbound investments remained strong.
Have a look at our previous article on Foreign Investments Opening in China’s Major Industries
As economies begin to recover, the global M&A outlook for 2021 appears to be positive particularly in the Asia-Pacific region. Thus, China, among others, leads the recovery for mergers and acquisitions activities.
M&A in the Asia-Pacific region
According to a forecast of M&A deals in Asia Pacific, Japan, Taiwan, and China top the highest shares of domestic M&A for the year 2021. This means that these countries will focus heavily on M&A deals between domestic companies.
The signing of the Regional Comprehensive Economic Partnership in November 2020 also signaled more trade investments within the countries involved. The RCEP is trade cooperation among APAC nations allowing the integration of regional supply chains. Thus, more cross-border investment and M&A will take place in the future.
According to Nasdaq report for 2021 M&A, China will lead the Asia-Pacific in surpassing North America in terms of the M&A investments target. North America lost about 34 percent in deal volumes for M&A compared to 2019. On the other hand, Asia-Pacific has been the only region to show a year-on-year (YoY) increase in M&A investment volume in 2020.
An analysis of the global M&A market indicated that Asia-Pacific has recorded a phenomenal YoY increase of 1,000 percent in mega deal volumes for M&A. Furthermore, the continuous trend of increased M&A investments in Asia-Pacific may bring a major shift in the global M&A market, considering the economic crises beyond the COVID-19 pandemic.
The current political and economic turmoil between the U.S. and China will benefit Southeast Asia as investors find ways to become more dynamic in their M&A dealings. Outbound deals from developed economies are seen to increase M&A targets in the Middle East and Africa, Latin America, and Southeast Asia.
Foreign appetite for Chinese inbound M&A
While Chinese investors are bound to stay home due to the VIE structure set by the Chinese government on domestic companies and the decreased equity value in the U.S. and U.K, foreign investors to China remain resilient amid the COVID-19 economic downturn. China inbound investment surpassed the outbound M&A deals both in volume and value for the first time in a decade.
According to research on cross-border M&A trends, what drives foreign M&A into China include Chinese consumption, policy liberalization, and maturity of Chinese firms. While consumption in China reduced during the outbreak, it did not take long until business activities normalized. Chinese consumers remained confident, optimistic, and ready to spend. Moreover, Chinese consumption habits shifted to online shopping. For instance, in a survey conducted among Chinese, more than 55 percent of consumers were more likely to permanently buy groceries online. Respondents also expressed more intent to continue digital and low-touch activities. These may include:
- in-store self-checkout;
- online fitness;
- video chat;
- online streaming;
- remote learning;
- online games;
- grocery delivery; and
- restaurant delivery and curbside pick up.
In terms of policy liberalization, foreign companies are buying shares in their own joint ventures. This, as China started lifting foreign equity thresholds. Moreover, Chinese firms have matured toward becoming industry leaders. Thus, foreign investors are also now drawn to buying technology and industrial assets.
China’s shares of global growth especially in consumption ensure attractiveness for inbound investment deals. M&A activities in China are driven mostly by American and European firms that take advantage of the Chinese consumer demand and relaxed policies concerning foreign ownership. This is best exemplified by the new foreign investment law and narrowing of the Negative List of Industries.
The trend in M&A activities – rising sectors
As China shifts to domestic M&A, sectors such as construction, engineering, and industrial machinery, home improvement, and retail will be the highlights of most M&A deals. However, Chinese investors will continue to seek overseas opportunities through the Belt and Road Initiative. China’s State Council Information Office has reported increased BRI investments by 28.9 percent YoY, amounting to USD 10.27 billion in the first seven months of 2020.
The top industries for Chinese investments in the BRI regions include energy and utilities, transport, real estate, and metals. Furthermore, leading sectors under BRI also include:
- diversified industrial products;
- financial services;
- technology, media, and telecommunication (TMT);
- consumer products; and
Chinese companies will also remain focused on the high-tech industry as a targeted sector for M&A as they are looking to push for industrial upgrades. Meanwhile, consumer goods are increasingly becoming popular, along with the demand for better products.
Read our previous article on Consumer Goods in Light of COVID-19 in China
Foreign M&A deals in China will conduct most of their activities targeting real estate, financial services, and TMT. As China further liberalizes restrictions for foreign ownership and market access, it can expect an increased level of inbound investments, especially in the high-tech industries and service sectors.
The U.S. and China M&A markets have experienced their low point due to the protectionist policy imposed by then U.S. President Donald Trump against China. This brought difficulty for cross-border deal makings in general. However, this is expected to change with the election of Joe Biden who signaled a more conciliatory tone toward China.
The incoming Biden administration implies a more globalist approach to international and business relations. Thus, China M&A especially in terms of outbound investments is seen to come to relative normalcy in the future.
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